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US Fed Rates, Muted Growth May Lead Stocks to a Turning Point

Published: 11th March 2015 06:06 AM  |   Last Updated: 11th March 2015 06:06 AM   |  A+A-

MUMBAI:The Sensex plunged to its lowest level in a month after the US payroll data indicated the pickup in employment numbers, triggering expectations that the US Fed will begin raising interest rates closer to June than September as earlier forecast. Sensex on Tuesday lost another 134.91 points in addition to 604 points on Monday. The rupee too fell further to Rs 62.68 per dollar.

Actions by US Federal Reserve remain the most significant factor in global financial markets, and refreshes memory of the plunge in Indian rupee to a record low of Rs 68.85 per dollar on August 28, 2013.

For a market that’s banked decisively on foreign funds to grow, how much of trouble could any reversal mean?

us fed.JPGAndrew Holland, CEO, Ambit Investment Advisors expects US will raise rate from June, and outflows could hurt emerging markets more than other countries. While India has its domestic growth story yet growth in corporate earnings remains muted and one looks hopefully at  Parliament debating to convert ordinances into laws.

“Between hope and delivery, we’ve got to see some delivery on the ground,’’ said Holland. “Yes, we could be at a turning point,’’ he replied, implicitly suggesting a change in the direction for stocks.

With Nifty trading at price-earnings of around 15-16, and there is little to justify trading at a higher levels, he said. Based mainly on domestic factors, Nifty could trade between 8,500 and 9000 as some investors may move to defensive stocks. But if external forces too come in to play Nifty could test levels below 8,500. Nifty closed at 8,712 on Tuesday.

Nirmal Jain, chairman of India Infoline Ltd, says that while the budget is growth-oriented and market-oriented there is nothing in it that’ll put the market on fire.

“I think if the government can act on the ground it will be positive for the market and I look forward to a positive momentum in 2015,’’ said Jain.

“We believe at the end of FY16 equity earnings will revive. If the government continues its economic reforms on ground there are likely many positive turning points ahead.’’

Compare today’s situation with that of 2013, when on June 19 Federal Reserve announced its intention to begin withdrawing the economic stimulus.

There was a sharp outflow of funds that pushed up local yields and weakened the rupee to a record Rs 68.85 per dollar.

Yet, Jain says global funds will allocate higher share to India as the country is in a stronger position - with lower prices of crude oil and other commodities, stronger government, and a pro-reforms agenda. Also, with the experience of 2013, and higher foreign exchange reserves the RBI is better prepared to deal with the situation.

A key handicap is that two major events - budget and two rate cuts by the Reserve Bank of India - that had the potential to drive markets are over. Investors don’t have too many positives to pin their hopes on, barring any fresh positive developments from the government, say analysts.

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