Domestic and global risks that could impact the market

Volatility is a risk but it can also be a friend. Any fall in a market is an opportunity to buy quality stocks in a staggered manner as it offers avenues for wealth creation.

Apr 01, 2018 07:04 IST others Raushan Kumar |

Domestic Risks

1. Fiscal deficit: By January, fiscal deficit had already overshot the full-year target by 14%. With general elections due in 2019, proposed higher MSP (minimum support price) on farm products, oil prices, and house rent allowance, the fiscal deficit could increase further. 

2. Political uncertainty: Political uncertainty and noise are only set to rise as we are in a pre-election year, where every regional electoral event will be seen through the lens of 2019. Most investors have priced in Prime Minister Narendra Modi winning a second term in the 2019 elections, and any change to the political outlook would be a “key local risk”. 

3. Crude oil prices: Brent crude prices neared the $70 per barrel-levels, rising over 4% last week. Oil prices shot up after the number of active US oil rigs rose to a three-year high of 804. Moreover, expectations that the US would reintroduce sanctions against Iran, and statements from Saudi Arabia that production cuts, which have been placed since 2017, may be extended into 2019 also drove the prices. Saudi Arabia also wants a higher price to raise more money from its planned 5% sale of Saudi Aramco.  
 
Higher crude prices mean higher current account deficit, weakening of the rupee, and inflation. In fact, the trade deficit in January was at its widest in more than four-and-a-half years on the back of a surge in the import of crude oil, precious jewelry, and coal. 
 
4. Battle of the Exchanges: On February 9, 2018, the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and the Metropolitan Stock Exchange of India (MSEI) ended all licensing agreements and stopped offering live prices to overseas venues. The decision was taken to discourage offshore trading. The six-month notice period expires in August.

In MSCI’s emerging markets index ($88 billion AUM), Indian stocks have an 8.4% weight, the fourth-largest behind China, South Korea, and Taiwan. This means that such funds have invested nearly $7.3 billion in the country. If India drops out of the Emerging Market Index, there will be a very big repercussion. Hence, it’s very important to find a middle ground, otherwise, potential outflows are possible before August 2018. 
 
Global Risks

1. Yield curve risk: The inverted curve is a sign of recession and raises the risk of a downturn in the business cycle. So, spread between short- and long-dated treasuries should be watched carefully. 
 
2. US interest rate hike risk: Last week, at the US Federal Reserve meeting, the central bank had hiked interest rates by 25 basis points as expected. It had also retained its plan for a total of three rate hikes for this year. However, there is a high probability that the Fed will change its stance and revise the number of hikes to four this year on the back of a strong economy. 

3. US-China trade war fear: Last week, US President Donald Trump signed a memorandum that could impose tariffs on about $60bn worth Chinese imports. The memorandum has a 30-day consultation period before it gets finalised. Hence, the next 20 days are crucial as more concrete decisions may be taken. 

4. US treasuries selling risk: China is the largest buyer and owner of US treasuries in the world. So, if China stopped purchasing US debt securities, it might have a significant impact on treasury demand. Rates might indeed see a spike, because who is going to step up and replace the Chinese? And a modest rise in US bond yields would probably be negative for the emerging markets. 
 
5: Election risk: The results of this year’s US mid-term elections will be important for the future of Donald Trump’s presidency. The 2018 elections will mostly be held on Tuesday, November 6, 2018. If Republicans lose control of either the House of Representatives or the Senate in 2018, the conservative legislative agenda would be dead. In fact, other than US mid-term elections, more than 50% of the nations on the Bloomberg Barclays index have elections in their countries. 
 
Remarks
Volatility is a risk but can be a friend. Any fall in a market is an opportunity to buy quality stocks in a staggered manner as it offers for wealth creation. In spite of the challenges and risk in the markets, the recommendation is to stay invested by using hedging strategy under the supervision of a derivative expert and be careful of leverage.

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