Hitting the Chinese Wall: What Else Does 2016 Hold for Us?
GST will test the government’s mettle of delivering on the growth front as promised in 2014, writes Shishir Asthana.
US equity markets logged their worst start to a year since 1932. The same is true for most financial markets. World markets were hurled against a Chinese wall of bad news almost as soon as 2016 started. Indian markets too couldn’t escape the turmoil.
2016 is being termed as an important year for the Narendra Modi-led government as it touches the mid-point of its tenure during this year. Come next year, the government will face crucial state elections, and chances are, it will turn more socialist from 2017 as it prepares for the 2019 general elections.
2016 thus is an important year for the economy and markets. Let’s look at various challenges that the market is expected to face during the year.
- China’s crashing markets take the world by surprise once again, India will tread cautiously with state elections looming large.
- Chinese yuan will be a decisive factor for the global economy as the country tries to boost exports.
- For India, another challenge would be winning over foreign investors who’ve waited far too long for certain issues to be resolved.
- GST undoubtedly will be an acid test for the government.
Global Markets: On Viral Fever
Despite being the fastest-growing economy in the world, India’s equity market recorded the weakest closing in 2015. The key reason – a lot of equity market movement, especially in bigger companies is driven entirely by foreign money. With emerging markets beset with domestic issues, money started moving from that basket to US markets as rising interest rates suggested better times ahead for the world’s biggest economy.
India is also part of that list of emerging markets which saw money being withdrawn by foreign investors. While most emerging markets are dependent on commodity (especially crude) exports for their growth, India is a net importer of crude. Commodity prices will thus play an important role in asset allocation to emerging markets globally this year.
China: A Panting Dragon
2016 will be the year when global markets and economies will watch China with bated breath. Its chopstick method of handling its equity markets have not enthused global markets. But the most important factor to watch is its currency. China has pegged the yuan to the markets for the first time and has been consistently pegging the currency lower to boost exports. Its domestic economy, however, is refusing to pick up despite a series of measures adopted by the country.
In doing so, China is pushing countries like India to adjust their currency in order to stay competitive. It has also fuelled speculation that 2016 will see a currency war between countries as everyone tries to protect their currency in search of growth and employment.
Oil Prices: On Slippery Slope
Price of Indian basket of it imports has gone below $30 levels which is good for the economy as a whole as it helps the government control its fiscal and current account deficit. However, it’s bad news for equity markets. Historically, higher oil prices have been positive for equities as oil producing countries participated in the markets through the higher profits they reaped from oil prices.
But since mid 2015 oil-producing countries, especially in the Gulf region are experiencing the pain of low oil prices and have been regularly withdrawing money from financial markets to meet their fiscal deficits. Oil prices will play an important part in 2016 in determining market direction.
Budget: Unfulfilled Promises
After two lacklustre Budgets, pressure is mounting on Finance Minister, Arun Jaitley, to announce a big bang Budget. Despite a series of reform measures, not much has changed on the ground. Corporate India has started complaining about the slow pace of reforms.
Foreign investors are still talking of unresolved issues which have been a legacy for this government but have not yet been resolved. Consumption has not increased which is also reflected in barely any increase in savings in the banking system. A lot is at stake for the government in the present Budget in order to boost confidence boost of both suppliers and consumers.
GST: An Acid Test
Unarguably the biggest reform against which the government’s skill of floor management has been tested is likely to be cleared in 2016. Repeated rounds of meeting with all political parties has been going on and expectations are high that the Budget session will clear the GST Bill. Reports say that GST is likely to add between 1.5 to 2 percentage points to India’s GDP.
Market participants, especially foreign institutional investors have been sitting on the fence till they see clarity on GST. Once cleared, government expects to be able to implement it by the middle of the year. Mere clearance in the Parliament will be good news for the economy and the markets.
(The writer is a Mumbai-based market analyst)
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