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Which Factors Will Move Indian Stock Markets Now?
Fri, 9 Dec Pre-Open

On Wednesday, the Reserve Bank of India (RBI) surprised everyone by leaving interest rates unchanged. This was surprising given the current state of liquidity in the Indian financial markets.

And Mr Market, who is always in a panicky state, reacted quickly to the news by falling considerably after the announcement. That's the case with him. He trends.

And there is more market drama to come. Many upcoming domestic and global economic developments are gearing up to keep the Indian markets busy in the short-term.

First, we have the OPEC meeting scheduled for today.

Russia and other non-OPEC producers are going to meet with OPEC today to discuss the pace of production cuts. So far, the Organisation of Petroleum Exporting Countries (OPEC) has agreed to a production cut starting January. However, the implementation depends on Russia reliably committing to cut output.

If the decision goes through, it can have negative implications for the Indian economy. Ever since June 2014, the Modi government has received a huge tailwind from falling crude prices. But as crude oil prices start rising, this trend could reverse. Rising crude oil prices will have a pass-through effect on inflation.

Next, we have the Federal Open Market Committee (FOMC) meeting in the upcoming week.

The central bank has signaled a possible rate hike in December as the economy picks up steam. In our view, a rate hike in December by the Fed would have no less an impact on Indian financial markets than it would have in the US. The hike, however small, will lead to a global change in the direction of interest rates. This could mean a pullback of cheap liquidity from emerging markets, including India.

The effect of Italexit can also be felt on Indian markets. The latest issue of Vivek Kaul's Inner Circle explains the fragility of the Eurozone and its impact on Indian investors in vivid detail.

Apart from the above, the cash crunch led by demonetisation can take a heavy toll on the Indian economy. So far, the protracted shortage in money supply has led to a forced slowdown in consumption impacting India Inc. This in turn has put a question mark on economic recovery and pick-up in investments.

In all, the above factors can fuel volatility in Indian stock markets during the short-term.

This begs the question: What can one do to sail safely through such times?

Being Buffett-heads and taking to his advice as fish to water, we think the best way to counter the above volatility is to follow a long-term value investing approach.

As far as our outlook over the long term is concerned, we believe that the benchmark indices can go up as much as 70% in the next two-to-three years.

And Tanushree Banerjee, Equitymaster's co-head of research, recently reaffirmed this claim and stated that the 70% earnings upside extends well beyond Sensex.

Here's a snippet of what she had written,

  • Plenty of blue-chip stocks outside of the Sensex can fetch earnings growth in excess of 15% per year over the next three years. But if earnings were to grow at 15%, and if profit margins were to rise to their ten-year average of 11% from the current 9.6%, an EPS of Rs 100 can become Rs 174 by FY19. Which means an upside of 74%.

Our StockSelect team is already on the lookout for opportunities in such blue-chips. Subscribers can expect recommendations from the StockSelect team, as and when these blue chip stocks offer opportunity to invest.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Mar 23, 2018 (Close)