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Markets In June 2016: Movers & Shakers Of The Month (Part 3/3)

July 08, 2016

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Coming to the last part of our June 2016 monthly newsletter, after covering Rexit, FDI Changes and the possible impacts of this year's monsoon, we now look at the expected outcomes of the scheduled US Federal Reserve Meet, analyze last month's performance and finally give concluding thoughts on the Indian stock market. Have a look:

Fed Rate

  • Britain's exit from the 28-nation European Union was something that came as a surprise to financial markets across the globe. Shockwaves travelled across most of the financial markets on Friday i.e. 23rd June, 2016 after the outcome of the UK referendum.
  • But, one of the odder effects of this outcome is, the Federal Reserve’s rate hike plan thrown into tatters. The US dollar has been a main driver of Fed policy for the past two years as a huge chunk of sales by S&P500 companies are generated by exports. The currency rose sharply on Friday (close to 3% at one stage, the most in a day since 1978) in response to the UK's vote to leave the EU, as money flowed into the perceived havens. But a further surge would inject a destabilizing element into already the unsettled emerging markets. This has now added pressure on the Federal Reserve to delay any future rate rises.
  • Also, the US dollar being the reserve currency of the world, the Fed might have to provide additional liquidity support to foreign central banks so that they could lend support to financial institutions to avoid any further crisis. This has led many analysts to believe that instead of a rate hike in their 26th – 27th July, 2016 meeting, one can even expect an interest rate cut, a thing which seemed highly impossible just a few days ago.

So what does this mean for India?

  • As you might be aware, any rate hike by the Federal Reserve will trigger a massive sellof in the emerging economies including India, enabling the institutional investors to move to a safer haven, far from the relatively risky Asian markets. Hence, this possibility of a deferred rate hike is definitely good news for India, who stands out as one of the most stable economies in the emerging markets list.
  • Also, in the short term, due to ‘unfavorable’ global events, the world markets are expected to witness a ‘risk-off sentiment’, which would mean that safe havens like the US dollar and gold will be in demand. As and when the ‘risk-on sentiment’ comes back, India should be one of the biggest beneficiaries, given that our country is expected to have an above-average monsoon, which will help it draw good investor attention.

Market Performance

  • June 2016 has been one of the most volatile months this year, after February. Even after the unexpected Brexit outcome, the broader index, Nifty50, gained 127.65 points, recovering all losses due to the recent fall. The headline indices (BSE Sensex and Nifty50) swung between gains and losses, as investors continued to digest the outcome of the Referendum.
  • Have a look at the performance of Nifty50, S&P BSE Mid-Cap and S&P BSE Small Cap in June 2016:
Index Change
Nifty50 (+)1.56%
S&P BSE Mid-Cap (+)5.91%
S&P BSE Small Cap (+)3.09%

As compared to May 2016, in which Nifty50 gained 3.95%, it gained just 1.56%, mostly attributed to the global turmoil, of which, India has time and again been a victim of collateral damage.

Concluding Thoughts

  • The month ended on a positive note, with four consecutive green closings on the trot. Just recently, the government broadly accepted the much awaited recommendations of the Seventh Central Pay Commission, doling out an approximate Rs. 1 Lakh Crore annually. This bonanza is expected to encourage its beneficiaries to loosen their pockets and spend ‘more’, thereby boosting the chances of a spike in demand of goods and services, which will eventually mushroom the revenues of companies.
  • If the dust settles down on the Brexit part, one can expect the market to continue its short term momentum, making July 2016 a pleasing month for investors.
  • All that a true investor can take from the previous month is, one should not give too much importance to global events and remember the fact that it is the companies that form and grow the index, and thereby the economy; not such global events. Events like Brexit, Fed rate hikes, etc should be looked at as an opportunity to BUY quality businesses and not sell in panic and fear, as they mostly affect the mood of investors, not a company’s fundamentals and growth story. End of the day, it is the company's fundamentals that will help its stock price grow. As Warren Buffet wisely states, "If a business does well, the stock eventually follows", one should devote their time understanding the business and ignore the noise surrounding it.

Happy Investing!

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