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Alpha Edge, February 2017 - De-Mo a Nemo?

The year started off on the back of 2 main themes, demonetization and US elections. As people were trying to find grounds with respect to both, markets surprised all and staged a strong rally for the month. All eyes were on a good budget that was expected, and the decent set of results of the companies that came about parallel.    

For the global economy, January month was dominated by political headlines, with Donald Trump taking office followed by a flurry of orders and memorandums. The range of policy announcements have been wide, from immigration to trade, to indication of building of “Wall”; however, the immediate market implications of such actions have been hard for investors to interpret. So far the new President is looking to make good on his pledge of “America first:” An important thing to note is that Trump’s policies are pro-business but may not be pro-markets, as such protectionist policies may benefit existing companies and probably, only in the short term. 

As far as the Indian economy is concerned we witnessed the Indian government unveiling a budget which was a well-balanced one. The Finance minister recognized that there could be demonetization linked slowdown in the economy, which could mean a reduction in GDP growth estimates of FY17 when compared to 7.9% of last financial year. Three key takeaways from the budget would be, relaxing the fiscal deficit norm marginally for FY18 (keeping it at 3.2% instead of 3% of GDP), reduction in income tax rate from 10% to 5% (in the lower income slab of Rs2.5-Rs5 lakh) to give consumption a push and increase in capital expenditure to support demand where private sector Capex is yet to pick up. An important thing to note is that the revised estimates this year are qualitatively less reliable as compared to earlier years due to advancing of the budget presentation by a month and also due to lack of clarity in terms of effect of demonetization on growth. It is quite possible that as more accurate information becomes available, we may have to revisit the numbers again. Looking beyond the budget, it is important to note that 2017 is the year of inflection as we look forward to a new digital economy and long awaited implementation of GST.

Capital markets welcomed the budget, sending stocks and bonds broadly higher on promises of tax cuts and a lower fiscal deficit. Another factor that led to the rally was the lack of the bad news that markets were expecting, relating to changes in taxation – No bad news continues to be good news. The baton now moves to results season where result have been better than expected. This has led to markets sensing that revival is underway and also, people thinking, that the demon that we all saw in De-Mo is indeed a ghost not any bigger than dear Nemo. This could lead to markets melting after reaching new highs.


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