Financial markets are driven by greed and fear. There is always that hunger to make more profit, plus the fear of loss. Sentiments are often a manifestation of things we see and perceive. A lot of money riding in the stock market today is driven by an expectation of future profit growth. This affects your personal wealth too. The growth in your equity and debt mutual fund net asset values depend on how well businesses and the economy are run.
As an ordinary investor, a lot of information comes to you throughout the day. Then there are newspapers and television channels giving sermons on things you could look at for investment in case ‘this happens’ or ‘that happens’. If you have a financial advisor, he or she is likely to directly act on your behalf or simply tell you to buy or sell something. Here are a few things for you to perceive as headwinds, without really having to dive deeper.
Quarterly results & markets
Most listed companies have announced corporate results for the quarter ended March 2018. Over the past one month, benchmark indices like the Nifty and the Sensex have remained flat. However, midcap and small cap shares have shed 8-10 per cent in value. This is an indicator of market expectations. The aggregate data for the quarterly financial performance indicates that large companies have done better in the March 2018 quarter than smaller ones. Most analysts are blaming the poor performance of banks. While most private sector banks did better, public sector banks reported widening losses. The inability of banks to present a clear picture on non-performing loans is worrisome. Financial markets do not like uncertainty. Banks and financial services account for over 41 per cent of the Sensex value. Since this sector is reeling, a significant recovery is unlikely. As an ordinary investor, you need to focus your reading on trends in the financial services sector going forward.
Economic headwinds
Inflation is the biggest enemy of investments. Any indication of consistent price rise means your investment value gets eroded. The surge in international oil prices has led to a significant rise in petrol and diesel prices in India. Since the government does not offer any subsidies, retail fuel prices move in line with the international market prices. The cascading impact on the consumer price inflation may push the Reserve Bank of India to consider hike in borrowing rates in future.
When RBI announces the credit policy later this week, the outlook on inflation is broadly expected to be ‘hawkish’ instead of ‘dovish’. This means, the RBI is going to watch inflation closely and continue raising borrowing rates. There is also tremendous pressure on the Rupee. It is among the worst performing currencies in Asia. High oil prices lead to a higher import bill for the Indian economy. India’s current account deficit as a percentage of the Gross Domestic Product stood at 0.7 per cent in 2016-17. This is set to reverse and hover around 1.7-1.8 per cent, according to most experts. A rising current account deficit leads to a weaker rupee value against the US dollar. As an investor, you may want to watch out the crude oil price trend.
Every $10 per barrel increase in oil prices leads to a 0.5 per cent increase in the current account deficit. This is bound to keep the rupee value low against the US dollar. Since India is a net importer, a weaker rupee adds to the overall inflation.
Political headwinds
If the recent Karnataka elections and the subsequent bye- elections are anything to go by, the Bharatiya Janata Party is unlikely to see any cakewalk in the next general elections scheduled for May 2019. Current stock prices, according to most experts, assume Narendra Modi becoming Prime Minister again. A dramatic surge in the opposition unity and an erosion of vote share for the BJP would lead to investors pulling out of Indian equity markets.
The impact of a political reversal in the past has been significant. In 2004, when UPA I came to power, share prices tumbled sharply. As an investor, you need to track the political trend over the next one year. Among political parties, you need to look at noises politicians make on the economy. When the election outcome is uncertain, you may want to listen to these noises to get a handle over the future course of the Indian economy. If you are a short-term investor, you need to be aware of rising market volatility going forward.
(Author is publisher and founder at Simplus Information Services
Pvt. Ltd.)