'Our choices will shape the markets'

The Budget 2016-17 will be crucial, as the Fiscal Responsibility and Budget Management target of 3.5 per cent fiscal deficit to gross domestic product has to be maintained, notes Nilesh Shah

After a disappointing 2015, equity is poised to be at the lower end of its fair value. The following events will influence its direction over 2016.

China is having a 'Rahu effect' on the Indian economy through dumping, as the Chinese have to utilise massive surplus capacities across many commodities.

The 'Ketu effect' is through foreign institutional investor outflows, as the Chinese market fall drags down emerging market fund performances, triggering redemptions. Stabilisation of China is critical for the recovery of emerging market flows.

Unless the pace of the US Fed rate increase is more than what is factored in by the market, any correction due to this will be an opportunity to buy.

The Budget 2016-17 will be crucial, as the Fiscal Responsibility and Budget Management target of 3.5 per cent fiscal deficit to gross domestic product has to be maintained.

On the other hand, Seventh Pay Commission recommendations and the One Rank, One Pension scheme costing about Rs 1.1 lakh crore has to be provided for.

The Budget has to provide for capital expenditure (capex) on roads, railways, defence and other infrastructure sectors to support investment revival.

The Budget has to provide for recapitalisation of public sector banks, considering the prevailing non-performing asset situation. If the Budget raises taxes and borrowing, equity will weaken.

If the Budget monetises assets such as the Specified Undertaking of the Unit Trust of India holdings, the market will strengthen.

The choice we make on balancing the capex and consumption need with fiscal prudence will influence the economy and the market for the rest of the calendar year 2016.

India has never suffered a hat-trick of below-average monsoon.

La Nina augurs well for a good monsoon in CY16, which should support the revival of rural economy.

Passage of key Bills such as the bankruptcy code, the goods and services tax, labour reforms and land acquisition, along with administrative reforms to increase the ease of doing business, will support the market uptrend.

India has to repay $30 billion of foreign currency (non-resident) (banks) deposits in September 2016.

While we have adequate reserves, a large outflow can impact the rupee.

A sharper depreciation of the rupee will have an adverse short-term impact on interest rates and foreign institutional investor flows.

The tenure of the current Reserve Bank of India governor is coming to an end in October 2016.

An extension of his tenure will be viewed positively by FII investors.

The revival of corporate earnings will be the biggest driver for markets.

Earnings revival is likely to be slow and gradual, but it should happen through adequate provision of liquidity, reduction in borrowing cost, good monsoon, and increased government spending.

Currently, large caps having absorbed FII selling are better placed than mid- and small-caps.

We expect CY2016 to be a year of bottom-up stock picking.

Within that limitation, sectors that are linked to urban consumption such as auto, consumer durables and affordable housing, to public spending like construction, capital goods and cement, should outperform.

The dark horse for CY16 could be rural economy-related sectors if the monsoon turns out to be normal.

Domestic investors have supported equity markets by investing about Rs 72,000 crore (Rs 720 billion) in equity mutual funds in CY15.

They have got much lower return than their expectations. Their faith in India growth story will shape market movement.

Nilesh Shah is managing director, Kotak Mahindra AMC

Image: Stock traders. Photograph: Reuters