There are some major factors that are likely to have significant bearing on the overall markets this year.
GST: The historic reform of the goods and services tax (GST) just turned a year old. After remaining as proposal for a decade, GST finally became a reality on July 1, 2017. Since its launch, GST has led to mixed reactions, and after several initial hiccups, more-or-less things have stabilised. Ever since its implementation, the GST collections have been around Rs 85,000 – 95,000 crore per month. But going forward, with improved implementation and compliance, GST collections are expected to surpass Rs 1,00,000 crore per month.
NPA clean-up: A major drive to tackle toxic assets, especially in the public sector banks, has been embarked upon. Hopefully, this exercise will end up making the banking system stronger in times to come, even though there are significant headwinds and pain points in this execution. As RBI governor Urjit Patel articulated we are also keenly awaiting ‘Amrut’ at the end of NPA manthan.
The Reserve Bank of India (RBI) is sparing no efforts in this clean-up job, as they are using every mode possible in this mega exercise ranging from placing 11 public sector banks in the prompt corrective action (PCA), huge sell-off of government-owned bank NPAs (non-performing assets), proposal of bad-bank, consolidation of weak banks, etc.
We are not sure whether the asset quality has bottomed out yet, but it is safe to assume that in independent India, this scale of bank asset clean-up job was never done.
Monetary Policy: For the first time, the monetary policy committee (MPC) of RBI had met for three days (instead of standard practice of two days) at the recent policy meet of June and hiked the repo rates by 25 basis points (bps) to 6.25 per cent. This was the first rate hike by RBI since January 2014 and after the National Democratic
Alliance (NDA) government led by Narendra Modi came to power in
May 2014. This interest rate decision was taken unanimously with all six MPC members voting in favour of
interest rate hike. RBI has tried to pacify the market by not changing the neutral stance and also tried to convey that this is not the beginning of interest rate hiking cycle. But the market fears that a change in RBI’s stance and/or start of interest rate hiking cycle is a matter of time on the back of persistent inflation risk and hastening growth. That said, we expect RBI will look for clarity on solid evidence of a sustained recovery, key inputs like MSP policy, crude oil trends (supply demand dynamics into summer) and monsoon trend.
US cash flow: American companies are expected to engage this year in more than $2.5 trillion in the form of share buybacks, dividends and the M&As (merger and acquisitions) activity. This development comes as
US companies find themselves awash in cash, thanks primarily to years
of stashing away profits plus the benefits of a $1.5 trillion tax break
this year that slashed corporate rates and encouraged firms to bring back money idling overseas.
As of now, US companies have nearly $2.5 trillion in cash parked
domestically, according to the Federal Reserve and as much as $3.5 trillion overseas, various estimates have shown.
In 2018, dividend issuance in US is expected to cross $500 billion, buybacks to range from $700-800 billion (predominantly led by technology companies), and M&A to constitute about $1.3 trillion. If the numbers pan out, they would equate to about 10 per cent of the S&P 500’s market cap and 12.5 per cent of the US gross domestic product (GDP). This should provide reasonable floor for US markets in the near term.
Trade war: Did trade war-related tariffs cause the Great Depression? Historians still ardently debate the reasons behind the Great Depression of 1929. While there may be several reasons for dreadful depression, but there was a clear role of trade tariffs under specific set of rules known as the Smoot-Hawley Tariff Act, 1929. As per estimates, after enactment of these trade tariffs, global trade had tanked by 66 per cent by the end of 1934.
While we strongly believe the current ongoing trade war threats between the US and China are just platform for negotiation tactics, the parallels with 1929 cannot be completely ignored, as US president Donald Trump said in March that “Trade wars are good, and easy to win”!
Source: Centrum Wealth Research