The month of January saw Nifty and Sensex giving decent returns of 3.8% and 4.6% respectively.

This was primarily on back of expectations of a sop-filled budget, containment of FII selling (many now predict a stronger US economic growth under President Trump) and Q3 numbers being better than consensus estimates.

Though it is still early to write-off demonetization as an aberration, fact is that Q3 results show that analysts were overly pessimistic about the impact of the event. We had already highlighted that more often than not, such big events are opportunities in disguise. But still, situation will be more clear when 4th quarter results are announced.

Budget 2017

The Budget was a key trigger for the markets in run up to the new Budget Day of 1st February. Interestingly, there were expectations of a bold budget given demonetization’s backdrop. But it seems that the government decided to take a tough call and presented a budget balancing the need to simulate demand and to walk on path of fiscal prudence.

At a macro level, the allocation to capital expenditure has been increased by almost 25%. Another step taken to create a ripple effect in demand, is by fixing the agriculture credit at record levels of Rs 10 lac crores.

But surprisingly, there was no cut in corporate tax rates (for companies with sales > Rs 50 Cr). The government has earlier committed to delivering on its promise of bringing down the rates to 25% by 2019-20. But this seems tough now as it would require making some really bold moves in coming budgets.

On individual level, the tax rates have been reduced from 10% to 5% for income between Rs 2.5 and 5 lacs. This is expected to leave some extra money in pockets of low-income category. But then, the surcharge of 10% has been introduced on individuals earning income between Rs 50 lac and Rs 1 Cr.

For real estate sector, the government built up on the good announcements it made on new years’ eve (of giving interest subsidy of 4% and 3% to housing loans of up to Rs 9 lac and Rs 12 lac respectively). From now on, the holding period for qualification as long term capital gains on sale of property is 2 years (earlier it was 3 years). In addition, the base year for calculating indexation benefits has been shifted from 1981 to 2001. Both these moves are expected to help people save money on real estate transactions. Also, the affordable housing has been given the infrastructure status and definition of affordable housing too has been broadened.

Luckily for stock markets, the fear of introduction of taxation of long term capital gains did not materialize.

All in all, the budget was disciplined and focuses more on long term,sustainable and inclusive growth of the economy.

State Elections

Most experts will agree that in short term, there is a definite link between politics and market performance.

So as 5 states go to poll for 690 legislative assembly seats, markets is expected to take a cue from the election results in coming weeks.

The results of these state elections will be taken by market as an indication of trends for 2019 general elections. Market and investors want BJP to win as it has increasingly taken pro-economy steps. So a strong BJP showing (especially in UP) is bound to cheer the market. On the other hand, a weak result for BJP would dent market’s perception about BJP’s ability to return to power in 2019. It will also put forward a lot of questions about whether Mr. Modi’s policies have any acceptance among the people of the country now.

R&R View on Economy

As already mentioned, Q3 results more or less show that major parts of the economy are recovering faster than what majority expected (due to demonetization). But this hypothesis will be verified only once Q4 results are out.

The economy’s macroeconomic position is likely to stay good for next year or two, barring any knee-jerk announcements by the new US President. Low inflation, low-interest rates and an under-control fiscal position point towards the inherent strength of the economy.

Going forward, the key triggers for the economy remain state elections, global developments (including US Fed’s adherence to stated stance of hiking rates) and Q4 results. One should also keep an eye on crude oil prices that can surprise by a sudden spike due to supply cuts by OPEC nations.

R&R View on Markets

Our view on overall Indian market continues to be governed by our understanding of macroeconomic factors.

We expect India to do better than other emerging markets as fundamentals have improved considerably in last couple of years. So even though the economy is not completed insulated from negative global developments, it is in a good position to absorb the impact of any external shocks.

Also, India’s growth going forward will be fueled more by increase in domestic demand and productivity growth.This fact in itself is expected to keep India on the radar of FIIs. It is possible that this multi-decade growth story might be interrupted by short term events like demonetization, etc. But when that happens, it provides a good opportunity for long term investors to participate in India’s growth at a reasonably priced entry points.

On that note, we end this newsletter and as always, we appreciate you for taking time to read this message. Do share your views/comments by email/comment section below.

Regards
Team Research & Ranking