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First half seen volatile, Nifty may peak later

Market in 2016: The year started on a somber note for Indian equities. Markets made yearly lows as the Budget was rolled out in February post which it gathered strength, marched upwards as sequence of positive macros unfolded. The Reserve Bank of India (RBI) repo rate cut, expectation of good monsoon and passage of GST bill kept the going strong. ‘Brexit’ fall was negotiated in a day.

Positive trend continued in the eventful month of August as well. Urjit Patel was nominated as the new RBI chief, GST bill was passed, Seventh Pay Commission payout was made and monsoons were near normal after two successive years of shortfall. Markets were cruising smoothly, reached within kissing distance of all-time highs in September when surgical strike by Indian army on neighboring country reversed the trend. Thereafter, spate of unfavorable macro-economic developments kept the selling pressure on. In US, their

10-year Treasury bond yields started spurting while it went into presidential election.

Our 10 year G-sec yields fell below 7% for the first time after 2009; the yields traded in the zone of 6.20% to 6.5%. This triggered pull out of funds by foreign investors, effecting rupee depreciation further which aggravated the pain. RBI’s repo rate cut by 25 basis points in October could not bolster the sentiments.

Tata Group fiasco; sacking of Cyrus Mistry as Chairman of Tata Sons had its own fall out of negative perception on corporate governance specter of corporate India. Turbulent November was marked by an unprecedented event in the Indian History , ‘demonetization’ of currency denominated in Rs 500 and Rs 1000 notes valued at around Rs 14.50 lakh crore. The very next morning Donald Trump won the US Presidential election race. Trump’s initial remark on boosting infrastructure spends in US triggered frenzied rally in base metals and crude oil which made hiking of interest rate by US Fed in December monetary policy roll out, eminent. US equities marched to new highs while we corrected sharply dealing with short term perils of demonetization. The roller coaster ride of Indian equities saw benchmark index ‘Nifty’ gyrating over 20% from lows to highs in 2016 while it settled with gains of mere 3.01% over 2015.

Globally, US equities rallied strong in 2016; their benchmark indices gained over 10% over 2015. Germany, UK and France had a decent run. Emerging markets was a mixed bag where Brazil and Russia were outperformers while South Korea, Hang Seng and India underperformed. Base metals, bullions and crude oil traded strong gaining in double digits despite strengthening US Dollar.

Outlook 2017: The first half of 2017 will be marked by volatility as market takes note of Budget roll out, outcome of UP elections and pace of economic recovery post demonetization. The focus of the Budget is likely to be on enhancing expenditure in priority areas of – farm and rural India, social and utility sector, housing, infrastructure, defense, employment generation, recapitalization of the banks, direct tax sops to individuals and corporates. All this is likely to boost demand for low-cost housing, two wheelers, white goods, electrical and electronic consumer durables and home refurbishing in particular. It will be a year of cyclicals, be it PSU banks, housing finance, infrastructure, metals, select automobile and auto ancillary stocks. Domestic consumption theme will be key driver of markets during second half of 2017. We expect Nifty to be trading near all-time highs towards the end of 2017.

The writer is head – retail research, Motilal Oswal Securities Ltd