How events of 2016 will shape markets in 2017

Akash SinghaniaDHFL Pramerica Asset ManagersUndoubtedly 2016 has been an eventful year with a tumbling mix of key economic developments both globally and in India with implications yet unclear. I believe ‘a wait and watch with cautious optimism’ approach may sum up the current state of events leading us into 2017.Events in retrospect and implications in 2017:1. BREXIT – A significant development that can lead to a disintegration of the Euro Zone and Euro as a currency. While UK has put across its decision to exit from the EU, the actual process of leaving the European Union will be long drawn. The announcement has spelled out more uncertainty for now which is expected to continue with the invoking of the Article 50 and as and when the real negotiations take place in 2017. This would at least take a couple of years to shape up. Therefore, the actual ramifications will become clearer in the long run when a tangible working model of the UK-EU relationship is drawn out and established. With Britain moving out, there are talks about Italy too heading similar way. Subsequently, the European Central Bank has extended a stimulus of Euro 80 Billion till March 2017 and now extended to December 2017, indicating that global fundamentals continue to be quite challenging and international markets have been supported by stimulus to ensure liquidity.UK has been a valued economic partner for India and the decision to leave the European Union has created some amount of ambiguity for the Indian businesses and a tighter outlook for global growth.2. Unexpected victory of Donald Trump in US elections – A Republican victory not anticipated by the markets that are still guessing the nature of policies on trade tariffs, protectionism, fiscal expansion and deficit to be implemented by the President-elect. The general consensus in the US anticipates a tax cut and a fiscal boost in terms of fiscal expansion, stimulus and spending which are quite contrary to a monetary stimulus.Although we are seeing a monetary stimulus in Europe, we can expect monetary tightening in the US with the Fed hiking some rates during 2017 and more infra spending by the government. We also anticipate some protectionism to the local US industry, immigration controls for workers and tariff wars. Once again, clarity is possible only post January 21 when the President-elect formally assumes office. 3. Domestically, the most impactful event has been the currency purge or demonetisation. The impacts are still unclear and the consensus as we know has been ‘short term pain for longer term gain’ with the intention of removing the parallel economy to widen the mainstream tax base. The short term however, is contending with a dip in earnings and GDP growth over the next 3 to 6 months, with a slowdown in consumption and discretionary demand. This move has definitely impacted the wealth effect with a blow on untaxed money but the income effect is still unclear and could remain unchanged. As far as implications for 2017, within the local economy we will continue to see a slowdown in real estate, housing and construction sectors and discretionary spending. We believe that from April 2017 or second quarter of the calendar year, we are likely to see normalcy returning, demand growth coming back and economic growth heading towards pick up with productivity and taxes being drawn in to the mainstream.. 4. GST – Another key structural reform that India awaits. Although the GST bill has been passed, the uproar around demonetisation has diluted its focus in the December parliament session. It is likely that GST be considered in the January 2017 session with its implementation likely to be deferred to August or September 2017 instead of the April 2017. Once implemented, we anticipate a near term phase of hiccups over 2 to 3 months due to destocking and a change in regime. 5. Dampening corporate earnings growth – Over the last 3 years, every year has been marked by a key event - in 2014 was the impact of crude in commodity prices, 2015 saw the banking clean-up and asset quality recognition, 2016 grappled with demonetisation, while 2017 will contend with GST implementation. Such one-off events have continued to have an adverse impact on corporate earnings – an event we simply have to get used to yet again! Some additional issues that are likely to have a bearing on market outlook include: Surgical strikes - although no escalation has been seen by both countries, any unexpected movement at the border is likely to have a negative effect on capital markets. Although not of immediate concern it continues to be a key flag. Another noteworthy development is the p-note regime change and the Singapore and Mauritius Tax Treaties through which FIIs will be liable to pay capital gains tax from 2017 which is likely to have some impact on equity markets. With FIIs facing tax liability owing to the short term capital gains tax, some businesses like p-note and arbitrage businesses may see a dip in volumes. The long term impact is expected to be positive, but the short term impact could be felt in equity markets with sluggish volumes. Largely, over 2017 corporates need to brace themselves for longer term reforms and near term challenges of transition, with the mid to long term India story continuing to be positive, led by several efforts that are headed in the right direction. The improving domestic macro, GST implementation and declining interest rates are key catalysts for our capital markets and positive signals for investors to continue to invest with a medium to long term perspective.