The Budget indicated the policy focus has already shifted to pander to rural voters. That is not a good signal, says Devangshu Datta
Is the market likely to fall below the lows established on the Budget day?
The National Stock Exchange’s Nifty hit a 21-month low of 6,825 on the day and has since risen by roughly 10 per cent.
Investors would naturally like to know if the bearish conditions of the past 11 months are likely to recur.
My sense is those lows could indeed be revisited at some stage. While some positive developments are visible, there are also many potentially negative developments in the offing.
It is not easy to quantify some of these because we’re talking about geopolitical and political risks.
In the long term, stock prices are largely driven by future expectations, and by liquidity.
Expectations have improved.
Liquidity is good and expected to improve. While earnings projections for 2016-17 are not strong and the Budget will not provide major impetus for growth, earnings should improve simply because 2015-16 was a horrible year for companies.
Liquidity is good at the moment and is expected to get better, as interest rates drop.
Government borrowings will not rise if Budget projections are adhered to.
Bond yields fell on the Budget day, as investors responded positively to the news that the quantum of government borrowing would not rise.
However, those positives could be balanced off by many negatives.
On the domestic front, there are a series of Assembly elections scheduled over the next 18 months.
The Budget indicated the policy focus has already shifted to pander to rural voters.
That is not a good signal.
A weak showing for the Bharatiya Janata Party would hurt investor sentiment even more, as it would reduce chances of getting traction in the Rajya Sabha.
The inability to pass legislation by normal means has already led to some loss of credibility for the government.
Passing the Aadhaar Bill and amending the Reserve Bank of India Act through the back door by introducing these as Money Bills would not set a good precedent.
The important Goods and Services Tax Bill cannot be passed as a Money Bill because of the constitutional implications.
The Budget was silent about the Goods and Services Tax.
In effect, if the GST doesn’t pass in this financial year, the BJP will probably give up pushing for it.
These potentially negative possibilities have been discounted to some extent though not totally.
The really big, and hard-to-assess risks are external. For better or worse, India’s market valuations are dependent on foreign capital inflows.
Those inflows are predicated on the assessments of international investors influenced by many different global factors.
The global economy is fragile now.
It continues to face both long-term and short-term issues.
Japan is headed for near-permanent recession as its population ages.
China is in the middle of a sharp economic transition from investment-driven and export-oriented to being driven by internal consumption.
There are obvious hiccups along the way.
The economic risks are overridden by the political risks in the case of the European Union.
The EU is struggling to cope with serious deflation, but it also faces direct existential threats.
If the UK decides to exit, it could set the stage for copycat referendums in other countries.
Coping with the Syrian refugee crisis has placed massive strain on the open borders within the EU.
The ease of movements of goods and labour within it is a major reason why it has worked.
If that common market breaks-down, the currency union might collapse.
The US seems to be doing alright on the economic front at the moment. But, an unpleasant election is due this year.
The most likely presidential candidates are both polarising and divisive figures.
What is more, the policy stances of these two on many issues are unclear.
The Wall Street will, very likely, be unhappy with the next US President, whoever it may be.
In the meantime, turmoil continues in West Asia. Brazil, Indonesia and South Africa are struggling due to the commodity collapse. Russia will also struggle until such time as oil prices recover. If oil prices do recover, India will be in trouble.
There is already some nervousness in India at the 30 per cent rebound in crude prices in the past two weeks.
Several of the above situations could trigger global sell-offs.
As of now, the Indian market is trading 10 per cent above the Budget-day bottoms.
That 10 per cent rise came in five sessions.
A reaction of similar dimensions could be set off easily.
Systematic investors might not care much but the momentum ones should be wary about going ‘all-in’ and betting on a big bull market.
