According to UBS, a global financial service provider, the most crucial wheels of the past two year’s rally in small-caps and mid-caps might be turned out to be cold now. If it seems like the damaged midcap and small-cap funds appear tempting in the market that is raising the benchmark indices to a record high in every next day, one must take a careful look.
As per the survey by the global brokerage in July, both midcaps and small caps funds have lost support from the domestic mutual funds. The survey revealed that for more than last two years, flow from local mutual funds had a closer connection for small caps and mid-caps than foreign flows. Concerning the investors, the MF has reduced its rate of buying and the performance of small & mid-caps in the Nifty 2018 has not met the investors’ expectations.
The overall ranking of concerns (Investors’ outlook)
- Oil prices
- Local fund flows
- 2019 Elections
- Bank NPLs resolution
- INR exchange rate
The rankings are according to a small survey conducted by UBS where the investors were asked to rate the issues which are most critical for the Nifty on behalf of other investors. It has been predicted that the falling value of rupee is the most crucial issue but surprisingly, oil prices emerge out to be the most crucial issue by the investors. At present, even the 2019 elections is not a big worry for the investors. And the rupee depreciation is the last concern for the domestic equity investors.
The prime reason behind Nifty50’s underperformance across emerging market peers is the occurrence of rapid depreciation in the rate of INR along with a hike in the price of crude oil in the international market.
According to foreign brokerage, an increase of $10 per barrel in the price of crude oil might result into increase in India’s current account deficit by 0.3% of GDP and fiscal deficit by 0.1%. Moreover, CPI inflation may increase by almost 25 bps and cause a 30 bps impact on GDP growth if there is a 10% hike in the average prices of crude oil and if the raised fuel prices are passed on to buyers. Also, a hike of 10% in crude oil prices might not impact Nifty earnings so it may not change, but a drop in the rate of currency can push earnings up.
“Nifty50 has usually did not met the expectations by its performance in relation to other rising markets in periods whenever there was a hike of more than 10% in oil prices and also when the currency rate dropped by more than 5%”, UBS revealed. Although crude oil prices and currency depreciation has affected the macro stability of India yet India is still far from the delicacy situation like in 2013.
The dollar to rupee value is somewhere near 70 and the crude oil prices have touched $70 per barrel in the global market for some time now. UBS said the fall in the currency affected the market in an assorted way. Although a 5% drop in the currency would drive up inflation by 10 to 15 bps, its influence on growth would be somehow beneficial, provided a pump to net exports.
Considering 2019 elections
One of the prime factors for the Indian markets in the upcoming months will be the outlook of the investors for the elections going to be conducted in 2019. According to some sources, there is a solid chance that Narendra Modi is going to win again in the 2019 elections. UBS said, ‘the majority of investors are assuming that Modi is supposed to be the Prime Minister again in 2019 elections.