Demonetisation impact, earnings growth, central bank policies will get attention, reports Puneet Wadhwa.
Illustration: Dominic Xavier/Rediff.com
It has been an eventful year for the markets, which took most of the global and domestic events in their stride.
Internationally, events such as Brexit, the surprise victory of Donald Trump in the US presidential election and the rate hike by the US Federal Reserve (US Fed) impacted sentiment.
On the other hand, the government's clampdown on black money through demonetisation, the amendments to the Indo-Mauritius tax treaty, the passage of the GST Bill in Parliament, the surgical strike on Pakistan and Raghuram Rajan's exit as Reserve Bank of India governor were some domestic events that the markets reacted to.
Though the markets saw a sharp rally after the Union Budget in February, the fall has been equally precipitate.
As a result, the benchmark indices -- the S&P BSE Sensex and the Nifty 50 -- have moved up just 2% so far in calendar year 2016.
Here are five key events that the markets will keep a tab on in calendar year 2017:
Demonetisation impact and corporate earnings: Given the policy move by the government, experts have revised downward their estimates for GDP growth in FY17 and FY18 and recalibrated their earnings forecasts for India Inc.
Credit Suisse, for instance, recently lowered its FY2016-17 GDP growth forecast to 6.9% (consensus 7%) from 7.8% earlier on demonetisation-led supply-side disruptions in the third and fourth quarters of the current financial year.
Analysts say the markets are factoring in the possibility of things returning to normal in the next three to six months.
'We expect Sensex earnings growth of 2.5% and 18% year-on-year (y-o-y) in FY17 and FY18, respectively. The relative valuations of equities to bonds are the best after the 2013 low. We expect the markets to deliver 14% returns in 2017,' a recent Morgan Stanley report points out.
Donald Trump’s presidency and the US Fed: The markets will be keenly watching key appointments under Donald Trump, his policy initiatives once he assumes office in January, and how the US Fed responds to these initiatives amid a gradual pick-up in its economy.
The moves will also impact how the dollar and bond markets play out, which can have an impact on flows to emerging markets, including India.
A brisk pace of hikes by the US Fed will dent flows into emerging markets, including India.
Assembly elections in key Indian states: Uttar Pradesh, Punjab, Uttarakhand, Goa, Manipur, Himachal Pradesh and Gujarat are going to the polls in 2017.
Of these, experts say, the markets will be eyeing the outcome in Uttar Pradesh and Gujarat.
The market is pricing in continuity in economic policies past 2019. However, the UP and Gujarat election results will be an influence here, and a BJP victory will have a positive impact on the markets, analysts say.
RBI policy: With the RBI maintaining the status quo in its last policy review, most analysts expect the central bank to cut rates in the next policy review in February.
By then, they say, the RBI will have had ample time to assess the impact of demonetisation and the absorb shocks, if any, after the hike in rates by the US Fed in December.
'We grow more confident of our 25 basis point (bps) RBI rate cut call for February 8 (and 50 bp by April) after November consumer price inflation (CPI) surprised at 3.6% (4% BofAML estimates; 3.9% consensus). Second, industrial production, reported recently, contracted 1.9% in October. It also appears that the demonetisation shock will spill over to January," points out a note from Bank of America-Merril Lynch (BofA-ML).
Oil prices: For the first time since 2008, the Organisation of Petroleum Exporting Countries agreed to limit the range of production to 700,000 barrels per day and drill between 32.5 million and about 33 million barrels per day.
According to Goldman Sachs, the deal should add $7 to $10 to oil prices in the first half of next year.
This could be a sentiment dampener for India, which imports nearly 70% of its oil requirements.