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Modi magic triggers Sensex rally: Five things investors must watch out for

business Updated: Mar 15, 2017 15:43 IST
Raj Kumar Ray
Narendra Modi

A bull statue outside the BSE in Mumbai. Markets have soared since Modi’s BJP won the elections in Uttar Pradesh.(HT photo)

Indian markets have soared since Prime Minister Narendra Modi’s Bharatiya Janata Party won the elections in Uttar Pradesh.

The Nifty hit an all-time high of 9,122.75 while the Sensex jumped 616 points to touch 29,561.93 in intraday trade on Tuesday and analysts forecast a buoyant market, at least in the short term. The Rupee has also surged to a 16-month high against the US dollar.

But here are five things investors must consider before putting their money on Indian equities:

1. US Fed rate hikes

Global investors are bracing for interest rate hikes by the US Federal Reserve and the unwinding of easy money policies in Europe and Japan.

An aggressive stance by the Fed may lead to capital outflow from emerging markets including India. Ahead of the latest Fed policy review on Wednesday, Indian markets traded flat while Asian markets were down. The Fed is expected to raise rates for the second time in four months.

Bank of Japan and European Central Bank may also signal intentions to unwind quantitative easing in coming days as economic growth picks up in their regions.

2. Oil price and risk appetite

An overall rebound in commodity prices, led by oil, has buoyed global markets, increasing the risk appetite among investors.

Oil prices have, however, slipped in the recent weeks on higher US inventories and shale gas output, which offset the impact of oil producing nations’ planned output cut by 1.2 million barrels per day for at least six months and a freeze on production at around 32.5 million barrels a day.

On Tuesday, An OPEC report forecast the world oil demand to grow at 1.26 million barrels per day or just 1.26% in 2017.

“Most of the oil demand growth is anticipated to originate from Other Asia, led by India, followed by China, then OECD America. The OECD Asia Pacific is the only region anticipated to reduce its oil requirements in 2017 y-o-y,” it said.

A fall or flattening commodities rally led by oil might mute chances of higher earnings by energy and commodity companies across the globe and cut the share rally.

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3. Brexit and its fall out

While global markets weathered the initial impact of Britain’s referendum on exiting the European Union, political uncertainties in the continent are on the rise. The country’s upper house of parliament ratified this week a legal provision to trigger its exit from the European bloc.

After Brexit, conservative leaders of many European countries, including France, Italy and Netherlands, have pushed for their countries to follow suit.

These developments could keep foreign funds on the edges. In times of heightened crisis, Foreign Institutional Investors might pull out from risky assets and emerging markets to cut losses at home. Should that happen investors in India could bear the brunt.

4. Pace of reforms in India

Prime Minister Modi’s emphatic win in Uttar Pradesh probably leaves him enough political elbow room to push unpopular reforms such as overhauling labour and land laws, but experts warn that with general elections just two and half years away, the government might veer towards populism to broaden its appeal among a larger section of voters.

“A stronger (reforms) push will, more likely than not, be postponed to his second term,” a report from leading foreign brokerage CLSA said. National polls are due by May, 2019.

Modi’s efforts to push reforms is complicated by his party’s lack of a majority in the Rajya Sabha. The victory in Uttar Pradesh and the party’s performance in up and coming elections in other states could alter that math, handing Modi the magic number in the upper house.

However, the imminent launch of a Goods and Services Tax (GST) regime from July bodes well for markets.

5. Modi’s second term

The elections in Uttar Pradesh were billed a virtual semi-final for the national polls in 2019. By that measure, Modi would have improved his chances of a second term, boosting investor sentiment. Both retail and FII investors would look for more political signals of further tightening of Modi’s grip on power.

Conversely, if the opposition parties manage to forge a credible anti-BJP alliance ahead of 2019 that could add to investor nervousness.

“With the market having learnt the challenges of policy implementation, the Modi rally-2 is unlikely to be as large or as extended as the one in 2014,” Bank of America-Merrill Lynch said in a note.