While India was grappling with the demonetization, a cloud of fear hovered over the investor community as the GDP was expected to shrink taking corporate profitability along with it. The effect of this fear was evident as Indian markets languished till December 2016.
However, come 2017, hopes were reinstated as expectations of global growth improved. With the US focusing on reviving its economy, the European outlook improving and nations like Brazil and Russia marching towards recovery, the market started reflecting optimism.
The much-feared drop in corporate profitability was offset significantly as corporate India benefited from higher commodity pricing and increased profitability in the manufacturing sector.
Today, stock indices are attempting to scale new highs with Sensex nearly 5% up from the day Rs.500 and Rs.1,000 denominations were stripped off their legal tender status. Nifty had been flirting around with the new market top of 9,000 points since long before finally breaching the mark post major election results.
The recent state assembly results have improved the Indian political backdrop. Notably, BJP victory in the Uttar Pradesh elections is a positive event which lends significant stability to the political scenario in India. We expect the market optimism to soar as participants pour in investments into equities. Initial hiccups in the GST implementation could cause a short-term disturbance but in the longer term, equities are expected to perform well above historic average.
This phenomenon of unforeseen optimism is not restricted only to the Indian markets as the Dow Jones Industrial Average (DJIA) also continues to soar despite the unconventional policies proposed by the new President of USA – Donald Trump. The DJIA has gained close to 14% since the date Trump was declared president. However, a notable point would be that the spike in the DJIA was accompanied by a steep 7% drop in the MSCI Emerging Markets Index coupled with a rally in the US dollar.
Overall, the outlook for equities remains positive on the global front with various macro factors combining to create a buoyant environment for stocks. As far as the Indian equity markets are concerned, a further upside is expected to be driven by the much-anticipated improvement in corporate earnings.
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