BackIndian markets: 15 things that will be different in new fiscal year
Here is a look at a set of factors affecting the economy, companies and markets that will play out differently in the new fiscal year.
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The new fiscal year is expected to see the highest economic output growth in recent years. The Economic Survey has it at 8.1-8.5%, while the International Monetary Fund’s (IMF’s) 7.5% and the Asian Development Bank’s 7.8% have India growing faster than China. For the equity markets, much of the improvement has already been priced in. Indian equities are expensive. Will the markets be supported by earnings growth in the new fiscal year? Here is a look at a set of factors affecting the economy, companies and markets that will play out differently in the new fiscal year.
Corporate earnings rebound
While the new gross domestic product (GDP) series is projecting a bounce in growth, corporate earnings have been dreary. Projects are stuck, balance sheets are over-leveraged and demand is not increasing. In FY 2014, the Nifty 50’s combined profit grew just 6.6% while in FY 2015, it is projected to slide to 2.3% as per Kotak Institutional Equities estimates. But consensus earnings growth projections in FY 2016 hover around 15%. That may likely be revised down, but analysts are betting on low inflation leading to a fall in interest rates that will boost expenditure. At the very least, there will be margin improvement as inventory losses narrow.
No political pressure or premium
The parliamentary elections of 2014 were a watershed event for the markets. With policy paralysis being the buzzword in the last days of the previous government, there were huge expectations that a new, strong government will embark on reforms. This got built in to the huge premiums which Indian stocks are commanding over other emerging market peers. But there’s not much more to be said about the political impact on markets, unless the government pushes through dramatic reforms, which looks unlikely. The only state election in the coming fiscal year is Bihar, an important one no doubt, but the one which is not expected to have much bearing on the government’s policy making.
Expect exports pickup
Data till February shows that India’s exports grew a measly 0.88% in dollar terms in fiscal year 2014-15. While competitive currency devaluation has played a part, a cyclical growth slowdown in the world economy and a slump in commodity prices are responsible as well. But FY 2016 could well be different if world economic growth picks, according to IMF projections. Both the US and the European Union (EU) are expected to see stronger growth which will lead to a 1.2 percentage point increase in the world trade. India could be a gainer even as the base effect kicks in.
Lift-off in the US?
FY 2014 had taper tantrums (markets throwing a fit as the US Fed signalled it will scale back bond purchases) while FY 2015 was more sedate with many markets, especially Indian, ploughing through a period of dollar dominance. With the US going to finally hike rates this year, expect a small period of turbulence in portfolio flows. Note that the Indian and the US rates will move in opposite directions narrowing the interest rate differential. While the EU’s monetary easing might help, the US policy typically has a larger impact on emerging markets. A prolonged period of dollar strength also spells trouble for a lot of Indian companies with their overseas debt, mostly dollar-denominated.
A stimulus boost to combat China slowdown
China’s slowing economic growth was a key worry in FY 2015. Being a large producer and consumer of commodities, especially metals, slow growth has meant rising exports of these metals. That has depressed global prices further. That is a nightmare for Indian producers. But the talk of a Chinese stimulus—some monetary measures have been announced—is giving hope to investors. If that happens, commodity prices should get some support.
Inflation gives a bottomed-out signal
FY 2015 can be called the year when inflation was tamed. But it has again stuck its tail out as recent data suggests it may have bottomed out. A small spurt in consumer inflation and in rural wages, coming at a time when agricultural output is at risk due to bad weather conditions, poses a risk. While comfortable food grain stocks may curb prices, fruit and vegetable prices may see some increases. If consumer inflation rears again in FY16, it may pour water over rate cut expectations.
Bonds yields: Tale of two triggers
The benchmark 10-year government bond’s yields fell 1.22 percentage points in fiscal year 2015. The reason: monetary easing and strong foreign institutional inflows. But much of the gains seem to have already been captured. At best, bond yields are expected to fall by another 50-70 basis points in FY 2016. That too is based on two hopes: inflation continues to keep its head low, a tricky matter which depends on various things ranging from monsoons to exchange rates, and the US rate hike is pushed as far back into the fiscal year as possible. One basis point is 0.01%.
Fire crackers in the primary market?
The recent run-up in India-listed companies’ shares was not matched by new listings and capital raising activities. New share sales were only 5% of equity market issuances in FY 2015. Still, equity raising doubled to ₹ 58,801 crore. In FY 2016, expect more primary market activity. The government is planning one issue very month to meet its divestment target of ₹ 69,500 crore. A freeing up of foreign investment in insurance is likely to lead to some new listings. The market regulator has, meanwhile, proposed new norms for initial public offerings by start-ups.
Coal auctions done; now over to tariffs
Power companies have secured coal supplies, but at a stiff cost. In FY 2016, demand for power will determine if power companies can pass on higher coal costs. The power buyers, mainly state electricity boards, may have the last laugh. Adequate availability of power supply due to fuel availability may result in lower tariffs.
Roads cleared for digging
Mining output is bound to increase in FY 2016 as most policy bottlenecks hindering mining have been cleared with the passage of key bills. Mining companies will benefit from higher volumes though profitability could come under strain due to low commodity prices, higher royalty and payments for an exploration cess and contribution to the district mineral foundation.
Farmers look to rains for cover
In recent years, the rural growth narrative has seen farm output cede space to factors such as non-farm employment and remittances. But weak economic growth has shifted focus back to the farm. After two poor harvests, all hopes are pinned on normal south-west monsoons to ensure a good kharif crop. A poor monsoon can hurt rural incomes and demand, in turn affecting sectors such as fertilizers, tractors, two-wheelers and consumer goods.
City consumers ripe for a picking
In FY 2015, slow growth in urban markets was a big miss for the sector, as the after-effects of high inflation and slow economic growth hurt buyers irrespective of their income levels. Discretionary demand was under stress. Rural markets did relatively better. In FY 2016, urban markets are expected to regain some of that form, as improving consumer confidence, low inflation and falling interest rates, and economic growth come together to make a good recipe for better demand conditions.
Aviation set for a smoother ride
Falling crude prices will add to profits for aviation companies. Fuel costs account for a lion’s share of operation costs for airlines. Domestic passenger traffic growth is expected to improve in FY 2016, as the economy recovers, resulting in more tourists and business travellers taking flights. Though competition remains tough, conditions appear better compared with FY 2015.
Oil
Oil enters uncharted waters in FY 2016, as the question on everyone’s lips is if it will fall further. One view is that it can, what with the prospect of an increase in Iranian oil exports if sanctions are eased. On the demand side, slowing economic growth in China and Europe will mean that drivers for demand aren’t too big. But a recent Kotak Institutional Equities research report points out that the supply-demand balance is slowly turning in favour of higher oil prices. But it does not expect prices to firm up for the next 6-9 months. Nevertheless, oil prices are very unlikely to do a repeat of last year’s plunge.
Banking on a growth rebound
With the economy expected to do well, it stands to reason that the banking sector has to improve. Bank credit growth is expected to rebound to 14% in FY 2016 from around 11.8% now, the consensus says. The push is expected to come from a fall in lending rates and increase in investment demand that has to accompany a rebound in economic growth. Of course, there are niggles. State-owned banks lack capital and the legacy costs of stressed assets will continue. But if they overcome these problems, then the valuation gap between private and public banks will also narrow.
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