India will do well in short term, the markets may not

As you would have seen today, the markets threatened for quite some time to crack 7800 on the Nifty in a decisive manner. However, by the end of the day some kind of normalcy was restored in the markets and the final cut for the day was not something cataclysmic. As I have written in the earlier posts, this is likely to be the pattern in the medium term, maybe for the next year or so. We will have a market which is likely to be range bound and the bias will be largely negative. A canny investor should be in cash and wait for the right levels to buy, whether it is stocks or Mutual funds.

There are many who are saying that the markets will do badly because the governance is going to be dispirited after the Bihar loss and the Economy is going through challenging times. While I agree with the conclusion I definitely do not agree with the premise. Let me try and explain the factors that will be responsible for the country doing well:-

  • It is wrong to think that BJP will think of the Bihar elections as anything but a minor setback. The opposition won the elections based on caste arithmetic and the only way to defeat that in the future will be to develop the country in such a manner that all castes get the fruits of development. There are enough smart people in the BJP to understand this.
  • Despite the noise generated this Parliament still has more than 3 1/2 years to go. There is enough time to complete the agenda that the government came to power with, as long as the party does not get distracted.
  • One of the greatest distractions in governance is the myriad state elections that we have. Fortunately there are no real elections in 2016 that the BJP can remotely hope to win. Thus, for a change, the focus will really be on governing the country which is a real good thing.
  • BJP will be forced to show some humility and this will ensure that Parliament functioning is relatively smooth. Sometimes there is a need to concede a battle to win the war and this realization will dawn on the party now.
  • All the deals that were signed with different global powers will start taking off in 2016 and this will create an environment of increased activities, job creation and economic impetus.
  • Corporate earning will probably show improvements in Q3 and Q4 and this will be led by the consumption story. Sectors such as Auto, Banking, Construction, Pharma, IT , FMCG etc willstart doing well as we get into the next FY.
  • Even today, our GDP growth is the highest in the world and we will continue to do better than China in the next few years. With corporate earning improving tax collections will rise and this will facilitate growth even further.
  • By the time the term of the present government ends in 2019, India will improve it’s credibility greatly in terms of being a place where the ease of doing business is high.

Does all of these mean that the markets will be on the way up soon and get to new highs? Unfortunately, that is very unlikely to happen. Even today the markets are really controlled by the FII money inflow and outflow. In the present context it is almost a given that FII money will flow out of India and flow in to China, given the far more attractive valuations available in the Chinese markets. As the money flow cycle takes some time to change course and it needs a strong trigger to do so, I do not think that will be possible before the budget. Here too, it will only happen if the budget is exceptionally good and is seen to be leading to industry growth in a big way. Passage of key legislation like the GST is also key.

Prediction of market range over a long period is tough and risky, but I still do not see Nifty crossing 9500 or so by end 2016. On the downside 7500 will probably be a very safe level even though Nifty very nearly tested it in the recent past. A more likely range will be 8000 to 9000 and the Nifty will probably be in this range for much of 2016. At the start of this year, most experts had said that a Nifty level of 10000 was a possibility in this FY but here we are struggling to meet 8000.

Normally markets run ahead of the real economy but this time it will be different. I think India will start doing quite well, at least relative to other countries, in the next FY. The markets will catch up eventually but this will mostly be in the financial year 2018 only. What does this mean for you as an investor? Simple really – put as much money as you can when the markets are range bound with a negative bias. Once the bull run resumes in earnest, take a break from equity and put money into debt. No timing the markets etc, just dealing with a modicum of common sense and investment logic.

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2 thoughts on “India will do well in short term, the markets may not

  1. There are many factors left out in this analysis – stated slow pace of Fed rate hike, bottom line improvement due to input cost savings with no improvement in top line, FII money pull out is due to middle east oil dependent economies and not for reasons of any change in MSCI allocation, Chinese govt is investing in Indian bonds, Bihar election results can lead to populist budgets, growing US economy, etc. etc.

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