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Equity Market

  • Jul 12, 2017

    Equity Commentary – July 2017

    The Indian equity markets ended higher in the month of July 2017, as both Sensex and Nifty were up by 5.2% and 5.8% respectively. The broader market performance vis-a-vis the Sensex was mixed. The BSE Midcap marginally underperformed with a return of 5.1%, whilst the BSE 200 outperformed with a return of 5.6%. Banks, IT, Metals, Oil & Gas and Real Estate were the major outperformers while Consumer Durables, FMCG and Healthcare were the major underperformers. FII flows continued to be positive in July, with net inflows to the tune of ~USD 1.18 bn. Consequently, FIIs net inflows in CYTD amounts to ~USD 9.3 bn. Net equity investments in July 2017 by domestic MFs in the market were ~USD 1.8bn.

    Index Name As on As on As on Return in %
    31-Jul-17 30-Jun-17 29-Jul-16 1 Month 1 Year
    Nifty 50 Index 10077 9521 8639 5.8 16.7
    S&P BSE Sensex 32515 30922 28052 5.2 15.9
    S&P BSE MID CAP 15390 14644 12661 5.1 21.6
    S&P BSE SMALL CAP 16094 15411 12310 4.4 30.7
    S&P BSE 200 4382 4149 3692 5.6 18.7
    S&P BSE AUTO 24463 23408 21091 4.5 16.0
    S&P BSE Bankex 28387 26278 21679 8.0 30.9
    S&P BSE Consumer Durable 16467 16013 12405 2.8 32.7
    S&P BSE Capital Good 17973 17076 15478 5.3 16.1
    S&P BSE FMCG 10094 10428 8725 -3.2 15.7
    S&P BSE Health Care 14195 14191 16299 0.0 -12.9
    S&P BSE IT 10438 9833 10813 6.1 -3.5
    S&P BSE METAL 12426 11374 9406 9.2 32.1
    S&P BSE Oil & Gas 14190 13203 10595 7.5 33.9
    S&P BSE Power Index 2324 2226 2077 4.4 11.9
    S&P BSE Realty 2186 2043 1607 7.0 36.0


    Index of Industrial Production (IIP) index slowed to 1.7% y-o-y in May as compared to 3.1% y-o-y in April. Manufacturing index grew 1.2% y-o-y while mining activity contracted by -0.9% y-o-y. Capital goods and consumer durables contracted -3.9% & -4.5% y-o-y respectively in May.


    Consumer Price Inflation (CPI) index fell to 1.54% y-o-y in May 2017 as compared to 2.2% y-o-y in May 2017 led by continued decline in food inflation. Food and beverages CPI index fell to -1.17% y-o-y in June 2017 versus -0.22% in the previous month. Housing CPI printed at 4.70% y-o-y as compared to 4.84% in the previous month.

    June Wholesale Price Inflation (WPI) index fell to 0.90% y-o-y in June from 2.17% in the previous month driven by continued food deflation. Food inflation contracted -3.5% y-o-y versus -2.3% in the previous month with wholesale vegetable prices contracting -21.2% y-o-y in June. Manufacturing inflation moderated to 2.27% y-o-y from 2.55% in the previous month.

    Monsoon & Crop Sowing

    As per Indian Meteorological Department, cumulative rainfall was 2% above long period average as on July 31, 2017. After a slow start in July, rainfall progress improved in the second half of the month. Sowing progress is on track with the area covered under sowing up 3.3% y-o-y as of 28th July 2017.

    Monetary Policy

    In its third Bi-monthly Monetary Policy meet, the RBI reduced policy repo rate by 25bps while noting that some of the upside risks to inflation have subsided in the last couple of months. Post this rate cut, the policy repo rate and reverse repo rate now stand at 6.0% & 5.75% respectively. According to the RBI, the recent low headline inflation, moderation in core inflation over the last three months and normal monsoons so far were the factors that opened space for a rate cut. The RBI’s decision making remains data dependent and it now projects headline inflation to be little above 4% excluding the onetime impact of the hike in House Rental Allowance for government employees.

    Other macro developments

    The fiscal deficit in April-June 2017 was 80.8% of the budgeted full year target for FY18, higher than the 61.1% level for the same period in the previous year. Total expenditure for the quarter is up 33% y-o-y with capital expenditure expanding 40% y-o-y. Trade deficit remained elevated at US$13bn in June 2017 with non-oil & non-gold trade deficit widening to US$8.5bn from US$7.7bn in May 2017. Exports growth slowed down to 4.4% y-o-y in June 2017 while imports growth moderated to 19.1% y-o-y in June against 33.1% y-o-y growth in the previous month. Foreign currency reserves increased to ~USD391bn as on July 21, 2017 from ~USD383bn as on June 23, 2017.

    Market Outlook

    Equity markets gave positive returns in the month of July based on earnings trends on expected lines, positive monsoon trends and signs of increased stability of the central government.

    Earnings growth has largely trended in line with expectations especially considering GST led destocking across most sectors in the month of June. Market concerns on GST are mainly limited to near term growth hiccups led by implementation challenges of GST transition and pace of inventory restocking.

    Although market valuations are above their long-term averages, we believe, progress on key reforms, steps for resolution of stressed assets in the banking system, benign medium term outlook on inflation as well as interest rates, inflow of domestic savings in equities and government stability continue to support the market, resulting in sustainability of higher equity valuations.

    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 and thus resilient 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. We are also diversifying exposure to consumption plays across multiple themes.

    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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