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These 5 Factors Are Favouring the Bulls Right Now

Mar 25, 2019

Ankit Shah, Research analyst

After a fantastic bull run in 2017, 2018 turned out to be the year of the bears.

There were a slew of macro concerns and uncertainties that pushed the brakes on the Indian bull run.

Some of the top macro concerns included rising crude oil prices, depreciating rupee, rising interest rates in the US as well as India, escalating US-China trade war tensions, the mess in the Indian financial sector, election year uncertainty, and so on.

But besides these macro concerns, expensive stock valuations were also a key trigger for the correction in 2018.

2019 didn't start on a very enthusiastic note, either.

The markets remained cautious and range-bound through January and February with the general elections coming closer as well as the Indo-Pak tensions.

But the month of March is signaling the return of the bulls...

Let's look at the key factors that are behind the change of sentiment in the Indian stock markets.

  1. Stable crude oil prices

    India is heavily dependent on crude oil imports. In 2018, rising crude oil prices widened India's trade deficit, increased operating expenses for Indian companies, and caused a political stir. In 2019, crude oil prices have been relatively stable, bringing a sigh of relief to India.

  2. Strengthening Indian rupee against the US dollar

    The Indian rupee was one of the worst-performing currencies in 2018. Along with rising crude oil prices, a falling rupee further increased the import bill. The US dollar kept strengthening against the Indian rupee, and in October 2018, the exchange rate for one US dollar went as high as Rs 74.60. Since then, however, the rupee has regained some lost ground. And in recent weeks, USD-INR exchange rate has fallen below Rs 70.

  3. Markets Bet on Second Modi term

    For stock markets, a stable government is a positive sign. Various opinion polls that have been published in recent weeks have put Modi in the lead for the Lok Sabha elections.

    The Modi-led BJP is unlikely to have a thumping majority akin to 2014. Nonetheless, it appears that the Modi government has a good chance of securing another mandate at the Centre.

  4. Interest rate cut in India

    In 2018, the interest rate cycle in India reversed when in June 2018, the RBI raised the policy interest rates for the first time in four years. For four years, the central bank had either reduced interest rates or maintained status quo.

    Higher interest rates are a bane for capital investments and corporate profitability. So, it only added to the prevailing gloom in the Indian stock markets.

    But the direction of interest rates has changed again in 2019. In February, the RBI's Monetary Policy Committee (MPC) published its sixth bi-monthly monetary policy statement for the financial year 2018-19. It was the first policy of new RBI governor Shaktikanta Das.

    In a departure from the earlier stance, the central bank not only reduced policy rates by 25 basis points, but also decided to change the monetary policy stance from 'calibrated tightening' to 'neutral'. This was the first rate cut by the central bank since August 2017.

    Stock market investors gave a thumbs-up to this change.

  5. Shift in Global Monetary Policy Stance

    Another key factor that has turned in favour of Indian equities is the change of monetary policy stance in major economies of the world.

    To recall, in the aftermath of the global financial crisis, the developed economies of the world had embarked on the most ambitious and unprecedented monetary experiment - Quantitative Easing (QE). In layman's language, QE means money printing. The central banks printed money, artificially suppressed interest rates, and flooded the global financial system with cheap liquidity.

    This flood of cheap money found its way into many emerging markets, including India. But this trend began to reverse in the last few years as the US Federal Reserve started the process of shrinking its balance sheet and normalizing interest rates. The Federal Reserve commenced the reversal of its QE programme in October 2017.

    Rising US interest rates meant that liquidity that went to riskier markets and assets in search of higher returns began to make its way back to the US. And as a result, foreign investors had been dumping Indian equities.

    Until a few months ago, the US Fed was hinting at several rate hikes in 2019 and beyond. But in its most recent policy meet this month, it hinted that there would be no interest rate hikes in 2019. Also, the balance sheet unwinding is slated to halt by September this year.

    This is good news for India. And this is one of the biggest drivers of the huge inflow of foreign investor money in Indian equities over the last two months.

Will these macro factors continue to favour the bulls and drive Indian equities higher through the rest of the year? What are the threats and challenges that could derail the current rally?

At my premium newsletter Insider, I'm closely watching the big trends and cherry-picking the best investing ideas given the current market conditions.

Chart of the Day

Foreign investors are back in the news.

The recent surge in the Indian stock markets can be attributed to the strong foreign investor inflows into Indian equities.

The chart reveals the monthly trend in foreign investor flows into Indian equities over the last five years. The period almost coincides with the term of the Modi government.

Are Foreign Investors Coming Back to Indian Equities?

During this period, you can see that foreign investor participation in Indian equities shrank.

Over the last five years, foreign investors were net sellers in 24 months. Effectively, foreign investors were net sellers 40% of the time.

Now, here's something interesting...

After net outflows in the month of January 2019, foreign investors flows have shown a strong reversal since last month.

In February 2019, foreign investors were net buyers of Rs 15,328 crore worth of Indian equities.

The inflows have picked up further pace in March. As on 20 March 2019, foreign investors have already pumped in Rs 26,560 crore in Indian equities.

The chart shows that the highest monthly net foreign investor inflow over the last five years was recorded in March 2017 at Rs 33,782 crore.

If the money keeps pouring in for the rest of the month, the current month may break that record.

But should foreign investor participation be the factor guiding your investing decisions? I don't think so. Foreign investor flows are influenced by a myriad of global factors and are susceptible to change course anytime.

Happy Investing,

Ankit Shah
Ankit Shah
Editor and Research Analyst, Equitymaster Insider

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