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Equity Market

  • Jul 12, 2017

    Equity Commentary – June 2017

    The Indian equity markets ended lower in the month of June 2017, as both Sensex and Nifty were down by -0.7% and -1% respectively. The broader market outperformed the Sensex, as reflected by the performance of the BSE Midcap and BSE 200 index at +0.1% and -0.4% respectively. In terms of sectors; Consumer Durable, FMCG, Healthcare and Real Estate were the major outperformers whilst Auto, Capital Goods, IT and Oil & Gas were the major underperformers. FII flows continued to be positive in June, with net inflows to the tune of ~USD 560mn. Consequently, FIIs net inflows in CYTD amounts to ~USD 8.11 bn. Net equity investments in June 2017 by domestic MFs in the market were ~USD1.4bn.

    Index Name As on As on As on Return in %
    30-Jun-17 31-May-17 30-Jun-16 1 Month 1 Year
    Nifty 50 Index 9521 9621 8288 -1.0 14.9
    S&P BSE Sensex 30922 31146 27000 -0.7 14.5
    S&P BSE MID CAP 14644 14625 11717 0.1 25.0
    S&P BSE SMALL CAP 15411 15080 11801 2.2 30.6
    S&P BSE 200 4149 4166 3514 -0.4 18.1
    S&P BSE AUTO 23408 24162 19745 -3.1 18.6
    S&P BSE Bankex 26278 26547 20531 -1.0 28.0
    S&P BSE Consumer Durable 16013 15400 11973 4.0 33.7
    S&P BSE Capital Good 17076 17596 14875 -3.0 14.8
    S&P BSE FMCG 10428 10106 8453 3.2 23.4
    S&P BSE Health Care 14191 13564 15493 4.6 -8.4
    S&P BSE IT 9833 10230 11200 -3.9 -12.2
    S&P BSE METAL 11374 11248 8520 1.1 33.5
    S&P BSE Oil & Gas 13203 14247 9721 -7.3 35.8
    S&P BSE Power Index 2226 2221 1996 0.2 11.5
    S&P BSE Realty 2043 1931 1533 5.8 33.3

    Growth

    GDP growth for the fourth quarter of FY 2016-17 softened to 6.1% y-o-y reflecting the impact of demonetization. Nominal GDP growth for the quarter was 12.5% y-o-y.

    Index of Industrial Production (IIP) decelerated to 3.1% y-o-y in April 2017 as compared to 3.8% y-o-y in March. Capital goods and consumer durables contracted in April at -1.3% and -6% y-o-y respectively. Infrastructure & construction grew at 5.8% y-o-y in April 2017 as against 0.9% y-o-y in March. Overall manufacturing sector grew 2.6% y-o-y in April as compared to 2.4% in March 2017.

    Inflation

    Consumer Price Inflation (CPI) index fell to 2.2% y-o-y in May 2017 as compared to 3.0% y-o-y in April 2017 led by decline in food and fuel inflation. Deflation in food prices (-0.2% y-o-y) was seen for the first time since 2000. Fuel inflation decelerated to 5.5% y-o-y in May 2017 as against 6.1% in April 2017 and core CPI inflation (CPI excluding food and fuel) was 4.3% y-o-y in May 2017 as against 4.1% in April 2017.

    The Office of Economic Advisor, Ministry of Commerce and Industry released the new Wholesale Price Inflation (WPI) index series with base year revised to FY2011-12 from the existing FY2004-05. WPI Inflation decelerated to 2.2% y-o-y in May from 3.9% in April as per new series data. Food inflation fell to 0.1% y-o-y in May 2017 from 2.9% in April. Core WPI inflation (non-food) came in at 2.1% y-o-y in May as compared to 2.0% in April 2017.

    Monsoon & Crop Sowing

    As per Indian Meteorological department, cumulative rainfall was 6% above normal till 4th July 2017. Though some eastern regions have seen deficient rainfall, while all other regions have seen normal to excess rainfall. The sowing is up ~19% y-o-y with overall sowing as on 30th June 2017 reaching 21.0% of total Kharif sowing area.

    Goods and Services Tax (GST)

    The Government of India formally launched GST on July 1, 2017, one of the largest indirect tax reforms. GST aims to simplify the taxation regime by subsuming most indirect taxes. The uniformity in provisions and rates should aid ease of doing business in India. GST is expected to be neutral on inflation, with the lower final tax rates on several goods being offset by some higher tax rates on services and some goods. GST also aims to improve tax compliance leading to organized sector gaining market share from unorganized sector.

    Other macro developments

    The Cabinet approved central government employees’ allowances as recommended by the 7th Pay Commission. This would entail an increase of Rs.307bn per annum in the central government expenditure. The fiscal impact for FY2018 will likely be around 0.2-0.3% of GDP.

    India’s trade deficit widened to US$13.8bn in May 2017 from US$13.2bn in April 2017. Export growth moderated to 8% y-o-y while Gold imports remained high. Non-oil and non-gold imports posted 19.8% y-o-y growth. Foreign currency reserves stood at ~USD383bn as on June 23, 2017 as compared to ~USD379bn as on May 19, 2017.

    Market Outlook

    Equity markets consolidated in the month of June driven by near term growth uncertainty in the wake of GST transition challenges and announcement of farm loan waivers by certain states.

    GST has been implemented from July 1st 2017. Though, there are near term concerns on transitioning issues on supply & distribution chains of companies; from a medium-term perspective, this reform holds out the promise of reduced transaction costs, better capital productivity and improved tax compliance all of which augur well for the economy and its sustained growth.

    The focus on resolution of stressed assets in the banking system continues with the RBI announcing a list of 12 large bad loans for insolvency proceedings.

    Recent announcements by various state governments on farm loan waivers have raised some concerns on state’s fiscal deficit challenges and their ability to make investments. However, in most of the cases these waivers are directed at most affected segments of farmers only.

    Market valuations continue to sustain above their long-term averages. We believe, visibility of reforms like GST, expectations on earnings recovery, benign inflation expectations and continued strong flows from domestic investors, may result in markets continuing to remain above their long-term averages.

    Although, in the near term, reversal of FII flows due to global events would continue to remain a risk to watch out for. However, it is important to note that India is much better placed in such an event given its healthy macro-economic parameters.

    In terms of our portfolio positioning, we continue to remain overweight on direct and indirect beneficiaries of government push on sectors like roads, railways, defence and housing. We continue to remain overweight on private sector banks on account of their ability to gain market share and maintain relatively higher growth rates.

    Strong macro position, reforms and long-term structural drivers like demographic advantage, low household debt, limited penetration across different consumer categories, increased potential for financial savings and urbanization makes India a compelling equity story from medium to long term perspective.

    We believe investors would be well advised to invest with medium to long term perspective and systematically increase exposure to Indian equity markets.

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