Nothing much to cheer about
Most analysts predict a bleak year for the market, as a fear-factor has emerged among investors
Clouds of uncertainty hover over the Indian equity market as the economy grapples with the impact of demonetisation.
The Narendra Modi government’s surprise move has taken the fizz out of the market, wiping away all the gains of the past year.
The benchmark indices ended more or less on a flattish note in 2016, as the market went into a tailspin fearing disruption in the domestic economy over the coming few quarters.
Most analysts predict a bleak year for the market, as a fear-factor has emerged among investors.
Many fear that earnings growth for the next couple of quarters would be tough going by the economy’s slide. The market sentiment has been badly hit as the disruption caused in the growth momentum is likely to take two to three quarters to be resolved.
Before the government’s surgical strike on black money, the market was cruising comfortably, building up hopes on the back of a nascent revivial in corporate earnings.
The market was looking forward to a recovery in the economy, aided by the seventh pay commission award, better-than-expected monsoon rains and improvement in corporate earnings.
However, the momentum has been broken abruptly. Several domestic economy-focused sectors like cement, automobiles, textiles and retail are hit badly. The huge liquidity crunch in the economy is having an impact on corporate earnings growth.
Going ahead, many still see demonetisation impacting market gains for the next three quarters.
“We estimate tepid growth in FY17 Sensex earnings, but we expect double-digit growth in Sensex earnings over FY16 to FY18. We feel that the impact of demonetisation would be limited to March 2017. Global events to watch out are the extent of US Fed rate hikes, US policy changes after inauguration of the new president and France’s presidential elections. On the domestic front, Budget 2017, RBI policies, monsoon, UP and Punjab elections and implementation of GST would determine the market direction, says Arun Thukral, MD & CEO, Axis Securities.

Morever, better than expected economic recovery in China, along with a strengthening US economy, could facilitate outflows from emerging markets like India, putting pressure on the benchmark indices, say analysts.
In fact, foreign investors have been largely in the sell-off mode last year. Foreign institutional investors (FIIs) were net sellers of equity to the tune of Rs 9,995 crore last year, dragging down the market. Domestic institutional investors (DII), though, have bought shares worth a hefty Rs 35,000 crore in the market.
The flow of funds has reversed and is now moving from emerging markets to the developed markets. The situation has really become tricky for global fund managers after Donald Trump’s election as the next US president.
Overall, looking at the emerging pictures, the market will take time to beat its 2016 Nifty high and remain in a broad range between 7,000 and 8,500 points for calendar year 2017, analysts said.
Investors should expect lower-than-average returns in the equity markets in 2017. Key indices could correct by 10-15 per cent in three-six months if DIIs resort to a sell-off. December 2016 is turning out to be the worst month in terms of sell-off from global funds. But we expect things would start to improve in the second half of this year (H2CY-17) fundamentally, Vijay Singhania, founder-director, Trade Smart Online, a discount brokerage firm.

If we talk about the sectors to perform, we believe infrastructure, IT and pharma to remain performers in 2017. Hence, we advise investors to have exposure in those sectors,” he said.
High valuation is another problem plaguing sectors with a domestic focus. Valuations have gone up without matching earnings growth, so prices may come down. Export-oriented sectors will also be beneficiaries of the expected depreciation in the rupee from a strengthening dollar. The dollar may go up to the Rs 70-72 range, which will help export-driven sectors to register 15 per cent compound annual growth rate (CAGR) in earnings over the next two years.
“We expect 2017 will start the year in a bearish way. Basic chart reading reveals a long-term pattern with very strong support at 7,500 points. In the worst case, the Nifty index will fall to that level, which still validates a bull market scenario. In case of a major weakness in the Nifty, the fall is likely to halt around the 7,400-7,500 levels,” Singhania said.
High expectations are being built up on the upcoming Union Budget 2017-18. The market hope is that the budget will tweak the tax structure to aid economic recovery.
Domestic institutional investors are holding up the market at the moment, but if that support goes away, we have got a meaningful market downside in the near-term.
ashwinpunnen@mydigitalfc.com
Columnist: 
Ashwin J Punnen