The calendar year 2016 went by many ups and downs in Indian Stock Market.
Top Events that shocked markets
From concerns over hard-landing of the Chinese economy to the surprise Brexit vote to a rise in the negative yield-bearing assets globally and stunning demonetisation drive in India to Donald Trump’s shock victory in the US presidential election, the year was action-packed, to say the least.
Continuing divergence in global monetary policies, asymmetric growth recovery, currency volatility and rally in commodity prices were some of the major trends noticed during the year. The US Federal Reserve ended the year with a single hike of 25 bps in the short-term interest rates to the 0.50-0.75 per cent range.
The EU and Japanese central banks continued to provide monetary stimulus to their economies through bond-buying programs and interest rate cuts (key rates at zero and dep ..
Performance of Global Markets
A mix of emerging and developed equity markets were among the top performers during the year, with Russia (52 per cent), Brazil (39 per cent), FTSE100 of the UK (14 per cent) and Dow Jones of the US (13 per cent) topping the charts. European indices rose 5 to 7 per cent. Chinese SSE composite (-12 per cent) was the worst performing index in CY2016.
Major sectoral stocks gained
Crude prices rose during the year after the Opec nations announced production cuts. Brent crude prices rose 23 per cent during the year to $56.82 a barrel. Metals, including zinc (61 per cent), steel (58 per cent), copper (17 per cent) and aluminum (14 per cent) rallied through the year, bouncing back from the lows of 2015 and on expectation of a revival in Chinese demand.
Specific Indian events
Despite global events impacting risk sentiments during the year, the positives of the domestic economy supported the market; which included a normal monsoon, a rise in the area under cultivation for winter crop (5.9% rise YoY by December), moderating inflation and implementation of the seventh Pay Commission award, all of which are expected to boost consumption.
However, a slowdown in the Chinese economy, the UK’s vote to exit the EU, weakness in global trade growth, policy normalisation by the US Federal Reserve, rise in global commodity prices and the US elections weighed on the equity market during the year.
Performance of Stock Market
The domestic equity indices ended Calendar 2016 with modest gains amid volatility in the frontline indices (BSE Sensex and S&P Nifty50), which gained 2-3 per cent while some of the broader indices rose about 4 per cent.
The midcap index was the best performer with 7-8 per cent. Cyclical sectors outperformed defensives during the year. Metals (37 per cent), oil & gas (27 per cent), auto (9.4 per cent) and bank (7.4 per cent) stocks were supported by a rally in global commodity prices and easing of the domestic money policy.
Capital goods and consumption sector (-3 to -6 per cent) stocks were hit by a slowdown in industrial demand, weak investment growth and falling consumption, aggravated by the cash ban.
The banking sector faced headwinds on account of weak credit growth.
Discretionary spend showed a negative growth trend, as observed in the 30-50 per cent (YoY) drop in sales of consumer durables in November in both value and volume terms.
Auto sales fell by 10-28 per cent (volume-wise) in November, and moderated in December. The impact of the cash ban is likely to be felt by the consumer discretionary sectors over the next few months even as the magnitude of the impact fades gradually. Export-oriented sectors such as IT and pharma may benefit from strengthening of the US dollar.
GDP growth for Q2FY17 has come the below market consensus of 7.5 per cent to 7.3 per cent compared with 7.1 per cent seen in Q1 of FY17 and 7.6 per cent seen in Q2 of FY16. In the aftermath of the demonetization drive, the GDP growth for FY17 is likely to stand at 7.1 per cent (RBI projection). Fiscal deficit slipped 52.3 per cent YoY in November on a pick-up in tax receipts (direct and indirect) even as non-tax revenues shrank.
However achievement of fiscal deficit target for FY17 would warrant a tradeoff between government spending to counter the slowdown due to demonetisation and expectation of a fall in tax revenue in H2 of FY17.
The rupee ended the year at 66.92 level to the US dollar, down 2.6 per cent on strengthening of the greenback and weak FPI flows. FPI flows into the domestic equity market for CY2016 stood at a five-year low of $2.90 billion (Rs 18,782 crore). FPIs remained net sellers to the extent of $6.50 billion in the fixed income market.
After net outflow in the first quarter of CY2016, a steady rise in FPI flows till October 2016 supported the 27 per cent rally in the frontline indices (Feb-Oct). However, expectation of an impending interest rate hike by the US Federal Reserve and weak domestic corporate results triggered outflows from mid-October.
Interestingly, domestic institutional investors ploughed Rs 37,200 crore into Indian equities during the year, surpassing the net flows from FPIs.
Macroeconomic indicators remained mixed during the year. Retail inflation fell even while industrial growth, PMI and trade deficit situation remained weak.
PMI: Cash shortage on account of withdrawal of high-value currency notes affected the performance of the services sector in India in November. The services sector PMI contracted in November for the first time since June 2015 to 46.7 from 54.5 in October. Manufacturing PMI fell to 52.3 in November (54.4 in Oct) on account of softer expansion in new orders and easing output growth.
IIP - The index for industrial production contracted 1.9 per cent for the 12 months ended in October 2016, led by a fall in manufacturing and mining growth. Growth in production of capital goods fell 26 per cent while the consumer durables segment grew 0.2 per cent.
Retail headline inflation for the 12-month period ended in November 2016 moderated to 3.63 per cent (4.2 per cent in October, 2016) on falling consumer food price inflation (2.11 per cent in November from 3.32 per cent in October 2016). WPI inflation eased to 3.15 per cent in November (from 3.39 per cent in October) driven by a fall in inflation in primary articles to 1.25 per cent (from 3.31 per cent in Oct 2016). Fuel and manufacturing inflation continued to strengthen.