Post the implementation of GST, a very clear trend that is likely to emerge is the higher participation of organised business and shift of business from unorganised to organised sector.
After a decline of 9 percent in 2015-16, the Indian equity market (Nifty) delivered 19 percent returns in the next financial year. Over the last 24 months, the index has come back full circle, crossing 9,000 after first touching that level in March 2015. The Midcap index has delivered 35 percent returns in FY17.
FII flows had a good recovery at USD 7.8 billion in FY17 (outflow of USD 1.5 billion in FY16), while DII flows were healthy at USD 4.5 billion (USD 12.1 billion in FY16). In terms of sectoral performance trends in FY17, metals (up 57 percent), PSU Banks ( up 54 percent), media ( up 54 percent), oil (up 48 percent) and NBFC (up 41 percent) were the top outperformers.
Technology (down 9 percent) and telecom (down 6 percent) were the only sectors with negative returns in FY17. Interestingly, metals, PSU banks and NBFCs were among the worst performers in FY16.
The movement of the Indian equity market in FY17 was not one way. It did have its share of usual ups and downs. While it moved almost one way up in the first half (after the sharp fall in January and February 2016), market took a sharp downturn on November and December, mainly led by demonetisation. Post that, it again had a sharp one way upward movement in last quarter of FY 17.
The rally in the fourth quarter seemed to have been led by better than expected December 2016 quarter numbers by corporates, which were in the backdrop of demonetisation and that was expected to have led to a sharp slowdown. However, the results did not turn out to be as bad. This was followed by the presentation of the Union Budget 2017-18 which was perceived to be quite positive.
The other follow-up events were the Assembly election results of five states and passage of the GST bills by the parliament. Moderate inflation and steadily rising exports were reasons for optimism as well.
Going forward in the new FY (2017-18), there are a number of events that are lined up which can act as triggers to give direction to market both on the upside as well as downside. The first and foremost is the implementation of GST which will start happening somewhere around July if all goes as planned by the government.
While there is no denying the fact that GST will be quite positive for India over the longer term, what kind of disruption it can create in the short term is difficult to comprehend? It is likely this could cause some kind of lack of clarity thus affecting corporate performance in the short term. The medium-term impact of demonetisation will only get gradually known as the time goes by.
Even then, it might be difficult to say about any impact as to how much of that can be attributed to demonetisation and how much to other developments, the recent example being the fire sale of automobiles led by the Supreme Court order banning all the old vehicles.
Despite progress over so many years, the Indian economy continues to be rain dependent and the progress of monsoon will be another key mentionable. Some parts of South India are already reeling under drought.
The two major benefits that were available to corporate sector in FY17 may not be available any more. These were savings owing to continuously falling interest rates and also due to falling commodity prices, though last few months of FY17 already witnessed the commodity price upward movement.
The government has been having continuous focus on rural populace through the budget as well as through other schemes. This is likely to leave a lot more disposable income in the hands of rural population, resulting into increased and for products and services from such areas.
The second half of FY18 is likely to be much better in terms of growth compared to first half as by then, the impact of GST, residual impact of demonetisation and monsoon are likely to be over. The benefit of various govt schemes is also likely to be felt more towards the second half compared to first half.
Post the implementation of GST, a very clear trend that is likely to emerge is the higher participation of organised business and shift of business from unorganised to organised sector. The impact of various initiatives of government investment into infrastructure is likely to lead to lot more growth opportunities in the capital goods sector.
The risk is that India will have to watch out for will be the currency movement. If the Indian rupee continues to strengthen then it might affect our export growth. The interest rate action of US Fed will be other mentionable as that will decided the direction of global fund flows. Oil price movement is always a key for oil import dependent countries like us. In terms of domestic risks – a prolonged slowdown imparted by implementation of GST wold be something to watch out for. Impact of less than normal monsoon will be another challenge.
Taking all this into account, the sectors that could turn out to be outperformers in FY 18 could be Capital Goods, Roads and related infra, Automobiles, rural plays and consumer demand-oriented sectors.The author is Executive Director and Chief Investment Officer at Centrum Wealth Management