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Alpha Edge, January 2017 - Robin Hood, Ahoy!

With 2016 gone by, we had another forgettable year for the Nifty which delivered ~3% for the year, this, after a year of -4% in 2015. 2016 was the year which saw significant volatility and had to bear brunt of many events that came through, which saw Nifty ranging from 6800 levels at the beginning of the year to touching high of 8900 towards the end. 2016 was definitely a forgettable year for the consensus predictions that were made as most of them were more wrong than right. Be it Brexit and its predicted aftermath in markets, Fed rate hike rattling the markets, earnings recovery in India, US markets not to do well, or the aftermath of Trump being elected as the US president to name a few. Well, one thing to note from this year would be markets are always ready to surprise everyone.

As far as global economy in 2017 is concerned it would be dominated by political uncertainty as markets adjust to new realities of Trump as president and Brexit. For the near term, in the US better economic growth is expected where President-elect Trump is likely to deliver tax cuts and infrastructure spending, which is evident as markets pushed the bond yields higher in anticipation. However, will he be able to walk the talk considering the fiscal implication it could have due to a higher debt to GDP ratio. If he walks the talk then we may see quicker rate hikes by the Fed, which may not bode well with the markets and would have longer term ramifications. Also, Fiscal stimulus is likely to be a global trend as politicians move away from austerity.

Back home, the demonitisation has started to adversely affect the people on the ground. The PM’s decision to attack black money through demonetisation may have been well-intentioned but the constantly changing narrative showcase the lack of preparedness of RBI & the government. Only ~50% of the old notes have been printed by RBI, this has led to massive crunch in a predominately cash based economy. Yes, the impact of such a move in the longer term would be positive for the economy with higher direct and indirect tax collections, the short term economic cost of scraping 85% of cash in circulation has started to show the adverse effect on the early numbers that have trickled in. The cash crunch is starkly visible especially in the rural and semi urban areas. 2017 would be a nervous start for the Indian economy as businesses that would be reeling under the aftermath of demonetization, would have to deal with the new GST law that is scheduled to be implemented by April 2017. Historically, even though beneficial, GST implementation have resulted in disruptions in the shorter term for the economy.

W.r.t. equity markets, valuations still remain high. We have seen a constant struggle between investor optimism and ground realities. Considering the negative impact of demonitisation on the earnings (Which were anyways languishing), valuations which were on the expensive side, look even more stretched. We have seen too many quarters of high earnings expectations and lower earnings growth. Valuations have this far managed to sustain, however, for how long is the question.

 

With this years’ budget being presented on 1st Feb which is coinciding with UP elections, there is a fair possibility that we might see a populist budget. The populist note was also visible on the 31st Dec 2016 PM’s speech which announced schemes for the poor and lower-middle classes, farmers, pregnant women, senior citizens and small entrepreneurs, this could have been a teaser to the budget. Robin Hood, Ahoy!

 

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