InvestorQ : Can you quickly explain how the various macro factors ranging from rupee to inflation to interest rates to global macros impact the stock prices?
Bhavik Nehru made post

Can you quickly explain how the various macro factors ranging from rupee to inflation to interest rates to global macros impact the stock prices?

Niraj Mehta answered.
3 years ago

That is a very complex task but we shall nevertheless attempt to explain these points to you in greater detail. We have taken the key events of 2016 as the benchmark and that is being used as the trigger for understanding how various actions can impact markets. But why did we choose year 2016 for our analysis? Year 2016 was tumultuous to say the least. It began with the global markets meltdown and traversed through the uncertainty of BREXIT and a Chinese slowdown. Towards the end of the year, demonetization in India and the election of Donald Trump in the US promise to be the big game-changers. Here is a quick recap of the highlights of the year 2016! We have captured all the impact analysis in a tabular form with the events for simple understanding and analysis. Read on!

Key Event

Why the event was important

How it impacted Indian markets

What does it imply for your finances

Union Budget 2016 focused on rural spending and control over fiscal deficit (February 2016)

This will ensure growth in India without inflation or weakening of the Indian Rupee

The Indian markets rallied sharply post the Union Budget even as bond yields came down sharply after the budget on fiscal deficit discipline

Mid-Cap and large cap equities were among the best performing asset classes in the first half of the year. Debt mutual funds gained from falling yields

Indian Rupee falls below 68/$ during the year, close to its all time lows in 2013 (March 2016)

Rupee weakened as it is already overvalued and hence a cheaper rupee will help exports

A weaker rupee will be positive for Indian exports, although it may be negative for capital flows

Investors need to fine tune their investment strategy to include dollar defensives in their portfolio. Stick to diversified funds but weight them more in favour of export driven stories

Oil prices doubled during 2016 from the lows of $26/bbl to $51/bbl (June 2016)

The rally in oil happened after supply fell as wells became unviable. OPEC deal will further boost oil prices

Strong oil prices are generally positive for markets due to the high weight that oil related companies have in the index. Also a sign of growth.

Equity as an investment has done better during high oil prices. Positive for long term investors in equity as it brings GDP growth hopes.

GST Bill Passed in both houses of Parliament (August 2016)

It will create a single tax across India and reduce the legal costs of business in India

GST is likely to add 2% to GDP growth each year i.e. nearly $50 billion of additional income

This move will be positive for equity as an asset class since companies will become more efficient, lower costs and thus enhance profits.

Retail Inflation sustains below 5% and food inflation drops lower (September 2016)

The RBI takes decision on interest rates based on the inflation outlook

Weak inflation will mean the RBI will cut rates further bringing down debt market yields to lower levels

Lower rates will be positive for equity valuations. For debt funds, falling yields will mean capital appreciation and will result in higher profits

After 2 years of drought, India had a normal monsoon in the calendar 2016; rain shortfall of 3% versus 15% in 2014 & 2015 (Jun- Sep)

Good monsoon resulted in a bumper Kharif crop this year resulting in lower food prices.

Lower food prices are the key to controlling inflation and food inflation has now fallen below the CPI inflation

The RBI can continue its lower rates strategy. Both equities and debt will benefit from lower rates as it will result in capital appreciation

Growth in IIP dips into the negative territory at (-1.9%) (October 2016)

This is likely to delay the recovery in the capital goods sector and lead to weak corporate results

This will mean that the GDP growth for the year could be lower than the 7.5% that was originally anticipated and will also gap with China

Investors need to be cautious in their choice of assets. Don’t focus too much on old economy funds that depend on capital investment. Stick to diversified funds

Government launches demonetization of 500 and 1000 INR denominations to absorb $200 billion worth of notes (November 2016)

This will suck out liquidity in the hands of people but also bring out the black money from evaders

As black money comes back, it will boost the GDP. It is fair as the tax base will get expanded and more tax will be collected

Individuals can expect tax rate cuts as the tax base gets widened. Also sucking out black money will dent the price of houses and make it more affordable to people

Demonetization gives a big push to digitization in 2016 (November 2016)

There was a surge in the usage of cards, online payments and wallets like Paytm as cash became scarce

Using digital money reduces black money and is therefore advantageous to the honest tax payer. It also reduces cost overall

Individuals benefit with an automatic trail and record of all their transactions. Budgeting finances becomes a lot easier

Government cuts EPF rates by 0.10% to 8.65% for 2016-17 (December 2016)

EPF rates were out of sync with falling rates and this was necessary to keep cost of borrowing low

EPF distorts markets due to higher interest and additional tax benefits. This will permit the emergence of broader and deeper debt markets

Look at ELSS more seriously as a tool to save tax and to create wealth. Also be prepared for gradual withdrawal of 3-stage exemption on provident fund, small savings and Life Insurance products

US Federal Reserve hiked the Fed rates in December by 0.25% after a gap of 1 year (December 2016)

Hiking rates is a sign that the US economy is growing, and this is likely to pick up after Trump assumes charge

A growing US economy is positive for many sectors like IT, pharma and auto ancillaries. It also opens up big business opportunities for Indian companies

Higher rates in the US will mean that foreign investors will be selling in India to buy in the US. That is negative for your holdings in equities and in equity mutual funds