4 Factors that can impact markets in the near future

The Narendra Modi-led National Democratic Alliance (NDA) government returned to power for a second consecutive term with a thumping mandate in the 2019 general elections. India Inc welcomed this news as under the Modi government’s previous tenure, a large number of reforms on starting businesses were implemented and more importantly the country’s position jumped 50 places to the 77th position in the World Bank’s Ease of Doing Business report. The news of a stable government being reinstated made Indian markets hit record highs with the Sensex crossing the 40,000 mark on May 23 – the day the election results were declared. However, the initial euphoria subsided, and stocks fell. Let us look at the factors that are impacting markets nowadays.

Sandhya Kannan, Head – Content
14th June, 2019

Economic slowdown

The new government’s innings started on a sour note with government data showing that the economy grew at 5.8 per cent in the January – March quarter, the lowest in 5 years. The report highlighted a fall in agriculture and mining output, lower consumption growth and weaker demand and a fall in manufacturing activity growth to 3.1 per cent compared to 6.4 percent in the previous quarter. Investment has also taken a backseat. All these indicate a bleak outlook for businesses as fall in manufacturing, investment and consumption make it difficult for companies to sustain their profits and growth which brings stocks lower. Markets could witness a fall owing to the dismal economic parameters and also make investors wary.

Unemployment reportedly at 45-year-high

According to data released by the Labour Ministry, the unemployment rate in 2017-18 was 6.1 per cent, the highest in 45 years. The report stated that 7.8% of all employable urban youth were jobless and in rural areas the percentage was 5.3%. The bleak employment scenario is an additional pressure for the new government to create jobs. Unemployment rates have a ripple effect on the economy. As such, stock markets generally rise or fall with the job scenario. A higher number of employed people equates to higher economic output, retail sales, increased spending and consumption, boost in savings and corporate profits. All these drive the economy and the health of businesses across sectors thus pushing stock markets higher. Conversely, the reverse situation i.e., high unemployment, which is prevailing in India right now does not bode well for the markets.

Fall in rural consumption and the agrarian distress

Economic growth receives a boost when the people spend more, and the consumption goes higher. The ongoing crisis in then agricultural sector has been the main reason behind rural consumers tightening their purses. This also caused manufacturing to slump as companies ere unsure of demand and inventories rose. The fall in fast moving consumer goods and two-wheeler sales shows the rural economy has taken a hit and will be a top agenda for the new government. With the RBI having cut repo rates by 25 basis points and with the extension of the assured income support scheme (PM-Kisan) by the new cabinet, rural consumption is expected to rise which will help the growth of various sectors especially consumer goods. Under the new PM Kisan scheme, 145 million farmers will be covered and Rs 6,000 will be transferred to their bank accounts. Increase in rural consumption will have a positive impact on markets.

Global trade tensions

U.S. President Donald Trump terminated India’s membership under the Generalized System of Preference trade program. Under this program thousands of products from beneficiary countries were permitted duty-free entry into the U.S. to foster economic development. India was the largest beneficiary of the program in 2017 with $5.7 billion in imports allowed duty-free. The cancellation of India as a beneficiary will impact India’s exports however, the extent of the impact is difficult to ascertain and will vary for various sectors. This can affect the stocks of those sectors.

The other angle in the trade issue that can impact markets is if and how India will benefit from the ongoing U.S. China trade spat. Experts believe that this can be an opportunity for India to boost exports to the US. However, India’s trade deficit with China have been at an all-time high at 60$ billion and with the new development of India no longer being a beneficiary of the GSP program, and the ongoing slump in India’s GDP. It will be a challenge for export-intensive companies which can make stocks fall.

One related number : 12,041.15 points

The Nifty 50 touched a record 12,041.15 points on May 23, the day the election results were declared. This was the first time that the Nifty50 crossed the 12,000 mark for the first time as investors and traders welcomed the news of the BJP government coming to power with a huge majority.

Related links:

  • Donald Trump terminates India's preferential trade status under GSP programme Read more
  • As election mania settles, market gets reality check Read more

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