US President-elect Donald Trump’s unexpected win took the markets by complete surprise. Although the initial response was negative, equity markets strongly recovered but bond yields moved up in the three days post the election. There were a slew of positive core economic data releases and continued strong consumer spending. In a sign that the US economy is gaining speed, revised third quarter US GDP came in at an annualised rate of 3.2%, up from a previously reported 2.9%. Two major shifts are expected as a result of President elect Donald Trump’s victory, firstly a possible shift from debt to equity as the Fed hikes rates and Mr Trump attempts to rationalise corporate taxes in the US – a positive for US earnings. Secondly, a move from monetary stimulus to fiscal stimulus as pre-election speeches by Mr Trump emphasised on the need to re-build America. This has been positive for commodities in the hope of higher demand emanating from the US. Improved probability of a US rate hike has led to a strengthening of the currency which has been a dampener for emerging markets.
In November, European equity markets remained broadly flat in local currency terms. The Japanese equity market ended the month higher in local currency terms, buoyed by a weakening of the yen versus the US dollar post the US election.
Back home, Prime Minister Modi made a surprise announcement on 8th November to de-monetise high denomination (Rs500 & Rs1000) bank notes. The purposes were three fold – i. A war on the black economy in the country, ii. An attempt to reduce corruption and iii. hitting the counterfeit currency racket which is largely on the high denomination notes. Temporarily, this has meant a stifling of liquidity for the markets and is expected to be negative for growth. There would be longer-term benefits like improved tax-to-GDP, an expansion in ‘reported’ GDP as parts of “black” economy turn “white” and an improvement in the debt/GDP ratios. The pace of reinfusion of new notes of smaller denomination and the new Rs500 & Rs2000 notes will dictate the magnitude and tenure of the liquidity throttle. At this point, it is difficult to draw an accurate estimate on the growth impact though it appears that growth may be impacted atleast for the current and the next quarter. Some part of demand may be deferred which could rebound sharply in early FY18.
Nifty lost 8% in the month of November on account of concerns emerging over demand slowdown in the economy due to demonetisation of high denomination bank notes and portfolio outflows from Emerging Markets post US President-elect Donald Trump’s win in the US Presidential election. Domestic consumer discretionary, financials and industrials were amongst the underperforming sectors whereas Telecom and Utilities sectors were outperformers for the month. Foreign Portfolio Investors (FPIs) were sellers of Indian equities to the tune of around US$2.6 bn in November, Domestic Institutional Investors bought around US$2.7 bn of equities.
From a portfolio perspective, given the historic demonetization move, the investment teams are keeping close tabs on the trade channels across sectors to guage when liquidity returns and where demand stabilizes. Overall, there is a preference for B2B businesses where extent of cash based transactions are low and on low end consumer businesses which are sticky on demand. Large cash based sectors e.g. home improvement products, residential real estate etc. may witness sharper near-term demand contraction.
Fixed Income Markets
RBI announced temporary hike in Cash Reserve Ratio (CRR). The move is to address the large surplus liquidity in the banking system after the demonetization move by the Government.
Consumer Price Inflation (CPI) declined sharply to 4.2% (year-on-year) during October. The deceleration was led by decline in food inflation. The WPI also came in at a 4-month low of 3.39% v/s 3.57% in September led by benign food inflation.
Real GDP grew by 7.3% year-on-year in July-Sep'16, slightly lower than consensus estimates of 7.5% with consumption remaining the main driver for GDP.
Fixed Income markets eased substantially in the month of November as demonetization drive aided falling yields. Yield on the 10-year benchmark moved lower to 6.25% from 6.79% easing by 54 basis points. Indian Rupee weakened by 2.4% during the month due to outflows by FPIs and general appreciation of the US dollar.