Indian markets bid adieu to 2017 on a positive note. December saw good gains with both indices delivering close to 3% gains on the back of the results of Gujarat and Himachal Pradesh assembly elections.

The year 2017 itself turned out to be a great one for investors. Sensex and Nifty delivered a stupendous 28% and 29% respectively during the year. In fact, with each passing month, it seemed increasingly clear that markets had moved on from the demonetization shocker of 2016 and had taken the mega rollout of GST in its stride.

YID Returns

Despite certain sector-specific hiccups, the year would be remembered for the big reformative steps taken by the central government – like GST, PSU banks Recapitalization program, RERA reforms for real estate.

Markets gave big thumbs up to all these reforms and the frontline indices kept scaling new lifetime highs throughout the year.

The Upcoming Budget Trigger

It’s the time of the year when thousands of people try to predict what would be in store in the coming Budget. This time too it wouldn’t be any different.

But this being the last full budget before the general elections next year, the finance minister has this extremely difficult task of balancing prudent economics with pre-election populist measures.

The jury is already out and debating heavily as to what side the budget will tilt.

But it’s clear that prolonged distress in the agri-linked rural sector and an irritating and stubborn delayed recovery in growth would be the major factors at play.

The government wants to increase rural income. But this may not happen just by walking down the populist route and making provisions for farm waivers or higher farm subsidies. What is needed is that government brings reforms in the existing agri-schemes and reduces the role of middlemen first. Once this small but critical aspect is taken care of, more money can be funneled into existing schemes and structures already present. But this is not going to be easy given the nature of the rural economy.

To some extent, the lack of recovery in growth can be attributed to the twin shocks of demonetization and GST implementation. But to be fair, the government would wish that economic growth picks up before coming state and general elections.

It will be interesting to see how this aspect of the budget is addressed. We will refrain from making any predictions here and we still believe in India’s long term growth story.

GST Completes Half Year

One of the biggest reforms in Indian economic history completed 6 months. Given the gargantuan scale of the exercise and its impact, 6 months is too short a period to judge such a step.

But in the long run, we believe it will be a game changer. It was an idea whose time had come and the current government showed guts by going for its implementation in the face of a politically ambitioned opposition.

Given the size of the economy and its diversity, GST has subsumed more than a dozen central and state indirect taxes and reduces the compliance burden of the taxpayers in a big way.

There have been initial hiccups in implementation. But it’s been heartening to see the nimbleness of GST Council to take quick decision to address the concerns of various sectors. The rationalization of slab rates, removing ambiguities, minimizing classification disputes, etc. has gone a long way in tweaking the regime to reflect ground realities.

Mega economic reforms like GST will take time to stabilize and are usually works-in-progress for many years. But what has been achieved in last six months is indeed commendable.

Crude Oil is Rising Again

For the first time in last 3 years, crude oil prices have crossed $70 a barrel. Indian economy remained untroubled and in fact benefited from low oil prices since 2014.

But given the recent price & momentum trends and stances taken by oil producers, a high price scenario cannot be ruled out. A price shock can also result as a ripple effect of the ongoing geo-political tension between the US and North Korea.

This is a clear indicator that if this scenario is to play out, it will have inflationary pressure on the Indian economy. So the boost that India got from low oil prices is slowly vanishing. This means that government needs to look at other factors that can contribute to its aim of higher GDP growth going forward.

It is difficult to assess incremental impact of higher global oil prices on the Indian economic growth on an immediate basis. But according to some estimates, the prices sustaining above $65 for some time can lead to inflationary pressures building up very quickly.

R&R View on Economy& Markets

2017 was a good year for the stock markets. And that was in spite of (to some extent) growing disconnect between economic realities and market movements.

Despite obvious challenges being faced both internally and externally, we believe that Indian economy is relatively resilient to external shocks on account of improving macroeconomic stability, higher foreign exchange reserves and stronger balance sheets.

In the near term, the Union Budget is expected to set the tone of the markets for sometime. But key monitorable would be the revival of corporate earnings. This would set the pace for next round of market returns in our view.

As always, we still believe that macros should be monitored and be aware of. But as long-term investors, the focus should be on bottom-up stock picking. Just like a healthy person would remain disease-free in both summers and winters, fundamentally strong businesses would do well in all scenarios (read why?).

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

Regards
Team Equentis