Category: Markets

Does the Stock Market Rally Suggest a BJP Election Victory?

The stock market has been on a tear recently. It is tempting to conclude that this is based on the market’s expectation of a BJP victory in the current State elections. However, the evidence is not as clear cut as it seems at first sight. Although market participants probably do expect a BJP victory, much of the recent rally can be attributed to global factors, and not to expectations about the election outcome..

The NSE Nifty 50 Index fell to a low in late Dec, and since then it has recovered sharply and gained more than 1000 points, i.e. almost 13%, in about 10 weeks. This could be due to expectations of a victory for PM Modi and the BJP in the current State elections, which would be a market positive event, since it would strengthen the government’s hand and probably allow it to follow a reform agenda. An electoral defeat here will weaken the government substantially, since it would be interpreted as a popular repudiation of major government policies such as the note ban.  The 13% run up in the Nifty seems to suggest an expectation that there will be a stock market friendly election outcome on Mar 11.

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Indian Stock Market Is Being Driven By Global Factors

The Indian stock market has rebounded in Jan-Feb from its late Dec lows. A comparison with its global peers suggests that both the downturn in Nov-Dec and the rebound in 2017 were driven by global factors and not by the note ban and other domestic factors.

The chart of the Nifty 50 Index above shows that it reached a high of about 8900 in Sep, weakened in Oct, and saw a sharp downturn in Nov and Dec. However, the market has rebounded in Jan and Feb, and seems to show no worries about either the lingering effects of the note ban or the impending Trump trade wars.

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Indian Equities Modestly Lower, Suggest No Recession

Indian equities have declined since Nov 8, although as we reported earlier, much of the down move has coincided with a worldwide move from emerging markets to U.S. equities. In addition to the global emerging market decline, there is a modest down move specific to India, but it is not nearly enough to suggest a recession in 2017.

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As the chart above shows, the Nifty 500 Index of Indian stocks has declined relative to the Global Emerging Markets Index since Nov 8. However, the net decline is only about 5% from the high, and about 2% from Nov 8. The absolute decline in the Nifty 500 Index since Nov 8 is about 5%. These are modest declines, in line with a moderate slowing in growth. Since the interest rate decline is probably going to be limited to about 50 basis points, the Dividend Growth Model suggests that the growth slowdown expected by the stock market is about 75-100 basis points.

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Global Shift Towards U.S. Stocks Driving Indian Market Decline

Stock markets worldwide have pivoted towards the U.S. in the wake of Donald Trump’s election victory. Indian stocks have also declined during this period, but less than other emerging markets, suggesting that the decline is driven by Mr. Trump’s victory, not currency demonetisation.

Since 8th Nov, the S&P 500 Index of U.S. stocks has risen, while the MSCI ACWI ex-USA Index has declined. The brunt of the adjustment has fallen on emerging markets, with the MSCI EM Index down much more than the MSCI EAFE ex-US Developed Markets Index. In India, the NSE 500 Index is also down, but less than the EM Index. in a previous post we found that the Rupee’s decline against the U.S. Dollar in Nov has also been driven by anticipations surrounding Mr. Trump’s victory.

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The Rupee Is Plummeting! Or Is It?

The decline of the Indian Rupee (INR) in Nov has caused much lamentation among the financial cognoscenti, perhaps with a dash of schadenfreude in certain quarters. On closer inspection, however, it turns out to be an illusion that disappears when you tilt the picture the right way.

We start with a picture of the fall, the Dollar/Rupee (USDINR) exchange rate in Nov 2016. The down trend is evident and the total decline is almost 3%, a pretty big one-month move for the currency. (Data from investing.com)

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Indian Bank Stocks Are Getting Crushed

The Indian stock market peaked on 10 Nov, two days after the announcement of the demonetisation program. Since then, the benchmark Nifty 50 Index has declined 6.6% between 10 Nov and 24 Nov, and the Nifty Bank Index has declined substantially more, 9.6%, during the same period. Since many have claimed demonetisation would be a bonanza for banks, and that they would profit handsomely from the surge in deposits, this market move seems a bit odd.

banknifty

In order to understand this, we start with the question, why should we expect increases in deposits to be good for a bank? After all, deposits are not bank assets, they are bank liabilities, and they cause a money outflow in the form of interest payments. Nevertheless, under normal conditions, an increase in deposits is, in fact, good news for a bank, since it allows the bank to grow its loan portfolio, usually by an amount that is considerably larger than their new deposits. Since the bank lending rate is higher than the deposit rate, this leads to higher net income for the bank.

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