The world seems be engaged in a frenzy of economic and geopolitical activity. While concerns around high inflation and global economic slowdown are still not behind us, looming general elections in India and the US are adding to the uncertainty. Geopolitical conflicts in Ukraine and West Asia are also nowhere near settling down.
In this article, we shall touch upon the recent major developments, and discuss their impact on the stock markets.
Domestic headwinds
The latest development on the domestic front has been the RBI’s move to increase risk-weights on unsecured consumer lending and bank loans to NBFCs. The context behind this move was the accelerated growth seen in these segments recently. The RBI governor was of the view that irrational exuberance of any sort should be curbed, especially in the light of rising delinquencies in these segments. Some sections of the market even suggest that such loans, where there are no regulations on purpose, were being used for speculative trading in stock markets. In response to the RBI’s move, banks and NBFCs dropped during the week even as Nifty 50 closed in the green.
Meanwhile, the undercurrent of upcoming elections has also resulted in jittery nerves. State elections are expected to see the ruling party lose ground, while the general elections are hoped to continue the NDA’s tenure in the interest of political continuity.
Global concerns
Globally, we have a mixed bag of developments. US yields which had fallen amidst expectations of a rate cut being delivered sooner than expected have started rising again. Of course, time will tell if the recent reversal has been just due to short-covering ahead of holidays abroad, or if the rate-cut hopes were exaggerated. If US yields continue to trend low after the holidays, it would spell good news for emerging economy assets including Indian equities, as wider yield spreads versus Indian treasuries draw FIIs back.
Europe’s economy has been stagnating for a year now, held back by high energy costs, high inflation, high interest rates, and falling consumer demand. The latest shock came when Germany recently froze public spending, thereby casting a deeper shadow over the prospects of the economy. Elsewhere, while the UK is expected to sidestep recession this year, its GDP growth forecasts have been slashed for the next two years. In fact, the standard of living in the UK, as measured by real disposable income is expected to climb back up to pre-pandemic levels only in 2027-2028.
Japan’s exports have also been slowing down even as persistent inflation and mellow wage-growth have kept domestic demand in check. Geopolitical conflicts are not behind us either. While the Israel-Hamas war has been escalating, peace talks between Russia and Ukraine have led nowhere so far.
Reasons to cheer
Domestic inflation has been retreating for two months now. While the favourable base effect is expected to reverse this month onwards, the RBI can be expected to slash rates around the middle of next year. Reduced interest rates are expected to push up consumption demand which has already proved to be quite resilient. Urban demand has been going from strength to strength even in the face of headwinds introduced by the pandemic and then, by aggressive monetary tightening and global headwinds. Rural demand too has started showing signs of picking up, as food inflation gives away. Upcoming elections are also expected to provide a fillip to demand as well as investment.
On the global front, China’s better-than-expected economic indicators in October bode well for the global economy, particularly metals. This is expected to provide some support to global export demand, such as from Germany and India. The US economy has also provided to be resilient as it grew by almost 5% in the three months ending September. The Indian IT sector has picked up in response, rallying by more than 6% in a month.
The broader Nifty too has been on an upswing this month, appreciating by more than 4%. DII support has ensured that Indian equities have performed well despite continued FII selloff. Barring a few days when low US yields led to some FII buying, FIIs have been net sellers of Indian equities throughout this month. But in spite of FII selloff to the tune of Rs 7,700 Crore so far in November, DII buying worth more than Rs 9,500 Crore has lent support to Indian equities.
What does this mean for stock markets?
In such a scenario of ever-evolving circumstances, it becomes crucial for investors to keep tabs on the developments and stay in sync with the fast-changing market sentiment. It was only in September that the market was testing its all-time highs before correcting to a 5-month low towards the end of October. And now, again, it is testing the crucial level of 19,850 which determines whether we are at the cusp of a rally back to all-time highs, or in the midst of a temporary bounce-back before a larger correction.
Ananya Roy is a fund manager. Twitter: @ananyaroycfa. Views are personal, and do not represent the stand of this publication.
