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Equity Market

  • Jan 31, 2013

    Equity Commentary –December 2016

    The Indian equity markets closed lower in the month of December 2016, as both Sensex and Nifty returned – 0.1% and – 0.5% respectively. The broader market underperformed the Sensex, as reflected by the performance of the BSE Midcap and BSE 200 index at -3.7% and -1.3% respectively. In terms of sectors; IT, Oil and Gas, FMCG and Auto were outperformers whilst Healthcare, Metals, Banking, Power and Realty were the major underperformers. FIIs were net sellers in December, with net outflows to the tune of ~USD 1.2 bn. Consequently, FIIs net inflows CY’16 amounts to ~USD 3.2 bn. Domestic MFs were net buyers with a buying of ~USD 1.35 bn. in December.

    Index Name As on As on As on Return in %
    30-Dec-16 30-Nov-16 31-Dec-15 1 Month 1 Year
    Nifty 50 Index 8186 8225 7946 -0.5 3.0
    S&P BSE Sensex 26626 26653 26118 -0.1 1.9
    S&P BSE MID CAP 12031 12499 11143 -3.7 8.0
    S&P BSE SMALL CAP 12046 12330 11837 -2.3 1.8
    S&P BSE 200 3511 3558 3378 -1.3 4.0
    S&P BSE AUTO 20257 20145 18519 0.6 9.4
    S&P BSE Bankex 20749 21316 19329 -2.7 7.3
    S&P BSE Consumer Durable 11237 11279 11998 -0.4 -6.3
    S&P BSE Capital Good 13665 14045 14128 -2.7 -3.3
    S&P BSE FMCG 8131 8071 7872 0.7 3.3
    S&P BSE Health Care 14728 15734 16905 -6.4 -12.9
    S&P BSE IT 10176 9852 11061 3.3 -8.0
    S&P BSE METAL 10109 10666 7398 -5.2 36.7
    S&P BSE Oil & Gas 12152 11964 9556 1.6 27.2
    S&P BSE Power Index 1988 2029 1958 -2.0 1.5
    S&P BSE Realty 1264 1282 1344 -1.4 -6.0

    The Macro Picture:

    November-16 OCtober-16
    WPI 3.2% 3.4%
    CPI 3.6% 4.2%
    Index of Industrial Production -1.9% (for October 2016) 0.7% (For September 2016)
    Repo rate 6.25% (as on December 31, 2016) 6.25% (as on November 30, 2016)
    Marginal Standing Facility Rate 6.75% (as on December 31, 2016) 6.75% (as on November 30, 2016)
    Source: RBI, MOSPI

     

    Growth

    The Index of Industrial Production (IIP) contracted 1.9% YoY in October 2016, as compared to the 0.7% YoY expansion in September 2016. The 25.9% contraction in capital goods was the primary drag on IIP growth. The growth of IIP excluding capital goods was at ~2.0% YoY in October 2016. Consumer non-durables output contracted by 3.0% YoY, while consumer durables output rose by a marginal 0.2%.

    Inflation

    Consumer Price Inflation (CPI) index moderated to a 24-month low 3.6% YoY in November 2016 from 4.2% YoY in October 2016. The CPI index benefitted from moderation in the inflation for food & beverages and pan, tobacco & intoxicants, as well as mild easing in the inflation for clothing & footwear, housing and fuel & light.


    Wholesale Price Inflation (WPI) index softened to 3.2% YoY in November 2016 from 3.4% YoY in October 2016. The sequential dip in WPI inflation in November 2016 was led by a moderation in the inflation for primary food & non food articles, which was partly offset by the uptick in the inflation for fuel & power, manufactured food products, manufactured non-food products and minerals.

    De-monetization

    De-monetization is likely to have an impact on consumption and investments in the near to medium term and some of this is already evident in macro data. It could also further delay the recovery in industrial capex as weak demand will result in capacity utilization remaining at current low levels for some more time. It is expected that the government will try to offset some of this drag through higher public spending. As businesses move to a lower cash economy, the tax to GDP ratio should improve from current levels providing the government with additional resources to invest for growth.

    Other macro developments

    India’s trade deficit widened to US$13bn in November 2016 from US$10.4bn last month, led by a drop in exports (largely gems & jewelry) and a pick-up in gold imports. The fiscal deficit target for the financial year 2016-17 was set at 3.5% of GDP. As per the latest available data, the fiscal deficit touched 86% of full-year target in the month of November 2016. Foreign currency reserves stood at ~USD360bn as on December 23, 2016 as compared to ~USD365bn at the end of November 2016.

    Market Outlook

    Post demonetization, markets seem to be in evaluation mode to understand the impact on various sectors. The disruption caused by demonetization has certainly caused slowdown in certain sectors of the economy. However, it is important to differentiate between the “postponement of demand” and “destruction of demand”. There are many sectors which would recover faster than others once currency situation normalizes.

    Although there is likely to be near term impact on corporate performance on account of demand slowdown and margin contraction due to higher commodity prices and lower utilizations, it is expected that government may announce measures in the upcoming budget to counter the effects of demonetization.

    In the near term, global liquidity flows and economic policies of developed nations continue to be a key determinant for emerging market performance including India. Although the reversal of FII flows on account of global events pose a risk of price correction, however, it is important to note that India is much better placed to handle such an event given its healthy macro-economic parameters.

    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 use volatility to increase exposure to Indian equity markets.

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