Western War Effects And The Indian Markets

It was considered to be a quite fortnight for the equity markets in general and Indian equity markets in specific. Rather we had categorically stated that with hardly any trigger points, the Indian markets would remain range bound. However the leading indices witnessed a good up-move in the last fortnight owing to some events that emerged on the global front. 

The most important event during the preceding fortnight was the geo-political tussle between Ukraine and Russia. In the past week Ukraine plunged deeper into crisis as the country was caught in the middle of a power struggle between Western powers (USA in particular) and Russia. Impact of the same was visible in the equity markets globally as the indices witnessed significant decline. Global markets had tumbled after lawmakers through the voting process allowed Russian President Vladimir Putin to send troops into Crimea (a mainly Russian speaking peninsula in Ukraine), following the ouster of the country’s pro-Moscow government.

However, things changed significantly after Russian President played down the prospects of war by saying there was no need to send troops into the country. Immediately after his comments sentiments changed, resulting in a weighty second day of buying in the equity markets globally. The impact on the developed markets was such that S&P 500 touched a new record high. What followed was emerging markets witnessed traction and gained momentum.

While this was one reason to cheer, the other expectation is for the economy to cultivate at faster pace. To put the figures in a perspective, the data released indicated that GDP will expand 3.1 per cent in 2014 after it rose to 1.9 per cent in 2013.

While this was about the US GDP growth, the Indian GDP figures for Q3FY14 disappointed the street. This was the fifth successive quarter of sub five per cent growth clearly indicating that the slowdown is deeply entrenched. Had it been not the performance of the fi nancial services sector the performance would have been further discouraging. Here we are of the opinion that the poor GDP figures have been already priced in and even for the March quarter there are estimates of sub five per cent growth. 

However amid all these factors, emerged a positive factor as well. Recently announced data shows that, India’s Current Account Deficit (CAD) narrowed sharply to USD 4.2 billion (0.9 per cent of GDP) in Q3 of 2013-14 from USD 31.9 billion (6.5 per cent of GDP) in Q3 of 2012-13. This happened primarily on account of a decline in the trade deficit as merchandise exports picked up and imports moderated, particularly gold imports. This was also lower than USD 5.2 billion (1.2 per cent of GDP) in Q2 of 2013-14. With this we believe that the CAD would be contained below the expected USD 45 billion for FY14.

As for the markets, the general elections dates are announced which would be between April 7 and 12 May, 2014. Hence the markets would dance to the tunes of news flow on day to day basis. However with majority of negatives being discounted, we expect a positive bias for the markets.