While global events will continue to hog the limelight, there is a fair bit of domestic news (policy, earnings and legislation) that will grab the market's attention in 2Q15. ''The market's bout of volatility in 1Q2015 is unlikely to subside in the current quarter, which is likely to be news-heavy with global developments around Fed policy, global growth data, domestic news flow around legislation and government policy, RBI policy and the upcoming earnings season as sources of potential market volatility. We expect government spending to rise, at least one rate cut (of 25bps) if not two, and earnings to be better than in the previous quarter,'' Morgan Stanley Research said.
Morgan Stanley lists following events that could play a role in determining market direction in the next three months:
Legislation: The Land bill and the GST bill will be up for approval in the Parliament in April.
Executive action by the government: Apart from ongoing changes to make business easy to do, the most important action could be in project awards. The government is targeting a 30% increase in investment spending in F2016. This is the most crucial driver for India's growth in the coming months, in our view.
Macro data: Apart from growth and inflation data, we are also looking at acceleration in government spending (fiscal data).
Rate cut in April? Our out-of-consensus view of a further 100 bps of policy rate cuts for 2015 is premised on further weakening in the inflation data.
Export growth and the overvalued INR: The concurrent subject is that of the INR's overvaluation (about 7% on REER) and its ongoing impact on export growth
Earnings: Earnings were very weak in the previous quarter. In the QE-Dec-14, revenue growth slowed to its worst level since 2009 at 3% YoY. MS coverage and broad market earnings were down 4% and 1% YoY. Sensex revenues and earnings were down 1% YoY and 8% YoY, respectively. In the upcoming season, we expect earnings to fare better than in the previous quarter, even though we do not expect the recovery to happen before the September quarter. So the March quarter will likely be better than the December quarter, and June will be even better, in our view.
Equity supply: Government has budgeted a doubling of divestments. We also expect more IPOs and other follow-on offerings in the coming months. A bunching of supply is a risk to short-term equity prices.
US Fed moves and other global factors: These will continue to drive volatility in Indian equities, which we expect to be higher than in the past 12 months. Global growth, China growth, oil prices, EM news flow and US Fed moves as an indicator of global liquidity, among other things, are factors to watch.
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