If Fed doesn’t hike rates, expect market to log 7th month of consecutive gains

NEW DELHI: The domestic market recorded gains on Monday in line with major Asian peers, but looked a little jittery on Tuesday ahead of the rate-setting meeting of the US Federal Reserve.

That even when the odds are high against a Fed rate hike at its two-day policy meeting starting Tuesday.

Some experts expect the Fed not to hike rate even at its December policy meet, thus taking outflow fears off the domestic market, which is eyeing seventh month of consecutive gains in September.




“The probability of a September hike is quite low and I would think that the Fed would play along that line, because it seems to be aware that any unexpected move would have severe implications across the globe. So my sense is that it will probably continue to remain reactive rather than proactive. Unless the US data turns around very significantly and shows very strong signs of growth, I would think that they will take a very measured approach,” said Andrew Freris, CEO at Ecognosis Advisory.

Sensex has risen about 1 per cent in September so far. Fears of Fed rate hike have lowered the pace of foreign flows to emerging markets. This has hit domestic equities as well. The month has so far seen FII inflow of Rs 2,122 crore in equity compared with Rs 9,071 crore in August and Rs 12,612 crore in July.

The recent data on the US economy is anything but rosy. The US inflation has been ruling far below its targeted 2 per cent rate, employment is generating, but not at expected rate. Even if US Republican party’s presidential nominee Donald Trump wins the elections in November, Fed may not be in a position to hike rates.

“It is highly unlikely whoever gets elected that the Fed is going to make such a politically important decisions right after the elections — never mind if Trump gets elected in which case all better off. So we are back to Christmas. I do not think, it will hike rate in December either,” Freris told ET Now.

S Naren, ED & CIO at ICICI Prudential AMC, believes central banks globally would not like to change their policy stance in a disruptive way. They would actually ensure that the interest rates remain well behaved.

But if market forces take the interest rate higher, then there is scope for a correction in most asset classes across the world, he said.

What could hurt the sentiment in the near term is earnings at home, which has not picked up as per expectations.

Brokerage Motilal Oswal has kept its forecast for Sensex EPS unchanged at Rs 1,490, but has cut FY18 earnings estimates by 2.5 per cent to Rs 1,807.

The brokerage expects Sensex EPS to grow at 12.1 per cent in FY17 and 21.3 per cent in FY18. “The earnings cycle is at that kind of bottom where we have been through a prolonged period of slowdown, we have been through like three-four years of continuous downgrade in earnings and now we might be entering a virtuous cycle where the earnings might get upgraded,” said Ravi Dharamshi, CIO at ValueQuest Investment Advisors.

A confluence of good monsoon, confluence of reforms, confluence of government spending having some trickle down, maybe some additional kickers like stimulus like Seventh Pay Commission, all that will add to the economy getting a leg up, said Dharamshi.