India’s macroeconomic environment is improving, but it is still not past the point where it can ignore the developments in the global markets
Indian markets have seen some heavy selling in the first week of 2015, spoiling the market's bullish mood seen in the second half of 2014. Most of the selling in India was on account of the turmoil in global economies. But with FII money driving Indian markets, investors will have to look keenly at these developments along with those in India.
As Ridham Desai, managing director and head of India Research, Morgan Stanley said in an interview to a TV channel, India’s macroeconomic environment is improving, but it is still not past the point where it can ignore the developments in the global markets.
We take a look at five signs in the global and Indian market that can decide market direction in 2015.
Oil prices are perhaps the biggest worry in international market. Low oil prices have already disturbed the financials of oil producing countries. Chances of a default by Venezuela is high as the country earns 96 per cent of its foreign exchange by exporting oil which is used to finance everything it imports.
The same is true for all commodity producing countries. Countries like Brazil, Australia, Malaysia and Indonesia will continue to feel the pressure. UBS in a strategy report on Asia Pacific region says that subdued commodity prices should help margins and will be a key driver of stock performance as margins and earnings upgrade come through.
US interest rate hike:
Every time the US Fed meets, world markets turn volatile. Reversing of the interest rate cycle is perhaps the biggest event that will be watched by market participants across the globe. UBS says that US rate hike will be a challenge for SE Asia and Hong Kong. But it also goes on to add that monetary divergence and monetary independence will be a key theme. UBS sees the scope for policy easing in China, India, Japan and Korea helping equity markets in the respective countries.
Inflation and interest rates:
For Indian markets, a key event which will decide the market direction is RBI policy on interest rates. Analysts have built in an interest rate reduction ranging from 50 basis points to 75 basis points by the central banker. RBI on its part will be closely monitoring core inflation to decide on its policy of interest rates. The central bank will also have to closely monitor the US interest rate policy as far as timing is concerned.
A US interest rate hike if it corresponds with an interest rate reduction in India will be disastrous for the currency market as foreign money will flow out of India on account of lower arbitrage opportunities. Morgan Stanley in a report on events that will drive the market says that the recent emerging market turmoil may delay it to the end of the quarter or even to the next.
Growth indicators and economic data points:
There is some level of anxiety in the market over the pace of reforms as the announcements made have not yet reflected on corporate earnings or from the data coming from the government. Morgan Stanley says the government policy assumes great importance, with several announcements around the coal auctions, the GST bill, fiscal deficit target, divestments, infrastructure spending, launch of direct benefit transfer, the subsidy bill and several other pieces of legislation, including the recent land ordinance. But perhaps the most important piece of sound byte that the market will be waiting for is the promised ‘big bang’ budget by the finance minister.
Euro zone and quantitative easing:
Global markets are curiously watching the Greece elections where the left inclined Syriza party is expected to win the elections. The party wants a renegotiation of the terms of its bailout which is opposed by Germany and France who prefer a Greece exit from the Euro zone rather than a bailout. Either event is expected to increase volatility in the market.
Members of the Euro zone will be meeting three days before the Greek elections to decide on the path of further quantitative easing. With US restricting itself from carrying out further easing, policies emanating from Euro zone, Japan and China will be keenly watched.