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Equity Market

  • Jul 12, 2017

    Equity Commentary – August 2017

    The Indian equity markets ended lower in the month of August 2017, as both Sensex and Nifty were down by 2.4% and 1.6% respectively. The broader market outperformed the Sensex. The BSE Midcap outperformed with a performance of + 1% and the BSE200 outperformed with a performance of -1.1%. In terms of sectors; Consumer Durable, FMCG, Metals and Oil & Gas were the major outperformers whilst Auto, Banks, Capital Goods, Healthcare and IT were the major underperformers. FII flows turned negative in August, with net outflows to the tune of ~USD 1.99 bn. Consequently, FIIs net inflows in CYTD amounts to ~USD 7.3 bn. Net equity investments in August 2017 by domestic MFs in the market were ~USD 2.8bn.

    Index Name As on As on As on Return in %
    31-Aug-17 31-Jul-17 31-Aug-16 1 Month 1 Year
    Nifty 50 Index 9918 10077 8786 -1.6 12.9
    S&P BSE Sensex 31730 32515 28452 -2.4 11.5
    S&P BSE MID CAP 15540 15390 13217 1.0 17.6
    S&P BSE SMALL CAP 15992 16094 12649 -0.6 26.4
    S&P BSE 200 4335 4382 3769 -1.1 15.0
    S&P BSE AUTO 23689 24463 22008 -3.2 7.6
    S&P BSE Bankex 27441 28387 22657 -3.3 21.1
    S&P BSE Consumer Durable 17701 16467 12485 7.5 41.8
    S&P BSE Capital Good 17331 17973 15212 -3.6 13.9
    S&P BSE FMCG 10174 10094 8822 0.8 15.3
    S&P BSE Health Care 13149 14195 16162 -7.4 -18.6
    S&P BSE IT 10064 10438 10439 -3.6 -3.6
    S&P BSE METAL 13284 12426 9940 6.9 33.6
    S&P BSE Oil & Gas 15177 14190 11073 7.0 37.1
    S&P BSE Power Index 2261 2324 2098 -2.7 7.8
    S&P BSE Realty 2138 2186 1542 -2.2 38.6

    Growth

    GDP growth slowed down to 5.7% YoY in 1Q FY18 from 6.1% YoY in 4Q FY17. The slowdown in economic growth in 1QFY18 can mainly be attributed to two factors: One, destocking of inventory in the run up to GST implementation led to a slump in manufacturing sector, which grew only at 1.2% in 1QFY18, the slowest pace in the last five years. Two, a much higher import growth (13.4%) than export (1.2%) has led to ~260bps contraction in GDP growth in 1QFY18 vs. only 33bps contraction in 4QFY17. GDP excl. net exports grew at 8.2% in 1QFY18 vs. 6.4% in 4QFY17.

    Inflation

    Consumer Price Inflation (CPI) index rose to 2.36% YoY in July 2017 from 1.5% YoY in June 2017; this increase was led by a 20% sequential rise in the price of vegetables. The rise in vegetable price led to food inflation moving into positive territory (0.4% YoY) from -1.2% YoY in June 2017.

    Wholesale Price Inflation (WPI) inched higher to 1.9% YoY in July from 0.9% YoY in June. The uptick in inflation was largely led by primary food inflation (2.2% YoY in July after two consecutive months of decline).

    Monsoon & sowing

    As per Indian Meteorological Department, cumulative rainfall in India moved from surplus in July to marginal deficit zone (-3%) by the end of August but is still within the normal long period average. Crop cultivation rose to 97.1% of the full-season area from 95.8% in the previous week; this sowing is similar to the same time in the season last year. Total area under sowing as on August end stood at ~102.8mn hectares.

    Other macro developments

    Fiscal deficit continued to track at 4.1% of GDP in July on a 12-month basis. Both expenditure and revenue growth accelerated in the month, keeping the fiscal deficit steady. The April-July combined fiscal deficit reached 92.4% of the budget estimate for FY18 as compared to 73.7% of the budget estimate for FY17 for the same period last year.

    India’s monthly trade deficit, which had widened to average ~$13.3 billion over the last three months, narrowed to ~$11.5 billion in July. Exports declined 1.2% sequentially driven by weakening of manufacturing exports (4.54% sequential drop in volumes) while non-oil non-gold imports weakened 9.8% sequentially with softening of imports seen across the board. Gold and silver imports narrowed further to $2.3 billion from $2.6 billion in June and an average of ~$3.8 billion between November and May.

    The RBI Annual Report for FY17 highlighted that Rs.15.28tn of the total Rs.15.44tn, or 99%, of demonetised currency was back in the system by June 2017. The overall level of counterfeit currency was only 0.2bp for Rs500 notes and 0.07bp for Rs1,000 notes.

    Market Outlook

    Equity markets consolidated in the month of August mainly on the back of geopolitical tensions over North Korea & China-India.

    The results in Q1 FY18, threw up some interesting trends, where sectors like Cement and Telecom performed ahead of expectations. Corporate lenders continued to suffer on account of high NPLs. Consumer Staples and Discretionary has been impacted by GST-led de-stocking & channel compensation. Health care disappointed due to pricing pressure in US and GST related de-stocking in domestic business. Growth trends and outlook in IT sector remains subdued.

    Market valuations continue to be 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 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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