India will be largely driven by global markets. There are two themes that will mark the world in 2018. First is a synchronized monetary tightening to reverse a process which started in March, 2009. Central banks are going to tighten monetary policy this year (US has already started this and the European Central Bank (ECB) will follow in this year) and interest rates are likely to move up.
The impact of budgets on the market has been waning over last many years. After the strong returns last year, we think returns this year will be moderate and lower than in CY17. Markets will see a phase of consolidation and correction over the next six months. Investors should brace for more volatility than they have seen last year. A worry however, is that the Singapore exchange (SGX) is now planning to trade the top 50 Indian stock futures. Most foreign institutional investor (FII) holding is in the top 50 shares (by market capitalization). Somewhere what may happen is that FIIs may choose to trade those shares on the Singapore exchange and pay zero tax. As a result, over time, the trades will shift from domestic bourses to overseas exchanges. The foreign portfolio investors (FPI) may have some protection if they are operating out of tax havens. But, FPIs have also turned wary due to the expansion of the fiscal deficit to 3.5 per cent of the GDP in 2017-18, and the inability to curb expenditure in 2018-19. The FPI reaction has also caused a spike in the US dollar with the rupee falling sharply in the past two sessions.
Two positions appear tempting at the current moment. One is the long dollar-rupee position, which assumes that the dollar will snap back quite a lot higher, from current levels. Second is the deep, relatively cheap long put at say Nifty 10,500 or even Nifty 10,000. This settlement has three weeks to run (till February 22) and the market could easily fall another 3-5 per cent in that period. There is also a case for taking a long March Nifty put at 10,000. The market has run straight up from 9,650-9,700 since last September. It could give back 500 – 1,000 points of that move equally quickly. The 200-day moving average of the Nifty is sitting at around the 10,000 mark and it is very likely to be tested if the selling continues.
In terms of possible hedges, the information technology (IT) sector could regain some importance. It is positively impacted by a falling rupee and most IT majors are low debt entities that are more or less immune to changes in the rupee interest rate. Pharmaceuticals have also underperformed the market for almost two years, but they may see some rebound based on the dollar-rupee equation. The worst hit sectors included financials, public sector banks and realty, which all saw very heavy selling. Energy also got hit hard, probably because higher crude oil prices are a cause for concern. The domestic market will take cues from global stocks and tread accordingly. US non-farm payrolls grew by 2,00,000 in January and the unemployment rate stood at 4.1 per cent, while wages saw their biggest jump since the end of the Great Recession, said a CNBC report. Economists surveyed by Reuters had been expecting jobs growth by 1,80,000. US stocks are likely to show an impact of this robust jobs report, which will be watched keenly by markets across the globe, including India.