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Equity Market

  • Jul 12, 2017

    Equity Commentary – September 2017

    The Indian equity markets ended lower in the month of September 2017, as both Sensex and Nifty were down by 1.4% and 1.3% respectively. The broader market outperformed the Sensex. The BSE Midcap outperformed with a performance of -0.7% and the BSE200 marginally outperformed with a performance of -1.2%. In terms of sectors; Healthcare, Metals and Auto were the major outperformers whilst FMCG, Realty, Power and Oil & Gas were the major underperformers. In line with August, FII flows continued to be negative in September as well, with net outflows to the tune of ~USD 1.75 bn. Consequently, FIIs net inflows CYTD amounts to ~USD 5.6 bn. Net equity investments in September 2017 by domestic MFs in the market were ~USD 2.7bn.

    Index Name As on As on As on Return in %
    29-Sep-17 31-Aug-17 30-Sep-16 1 Month 1 Year
    Nifty 50 Index 9789 9918 8611 -1.3 13.7
    S&P BSE Sensex 31284 31730 27866 -1.4 12.3
    S&P BSE MID CAP 15436 15540 13167 -0.7 17.2
    S&P BSE SMALL CAP 16114 15992 12781 0.8 26.1
    S&P BSE 200 4281 4335 3720 -1.2 15.1
    S&P BSE AUTO 24180 23689 22232 2.1 8.8
    S&P BSE Bankex 27025 27441 22046 -1.5 22.6
    S&P BSE Consumer Durable 17555 17701 12549 -0.8 39.9
    S&P BSE Capital Good 17172 17331 14582 -0.9 17.8
    S&P BSE FMCG 9773 10174 8461 -3.9 15.5
    S&P BSE Health Care 13488 13149 16181 2.6 -16.6
    S&P BSE IT 9947 10064 10229 -1.2 -2.8
    S&P BSE METAL 13564 13284 9764 2.1 38.9
    S&P BSE Oil & Gas 14843 15177 11378 -2.2 30.5
    S&P BSE Power Index 2206 2261 1990 -2.4 10.9
    S&P BSE Realty 2065 2138 1512 -3.4 36.6

    Growth

    The Index of Industrial Production (IIP) rose 1.2% in July 2017 as compared to a contraction of 0.2% YoY in June led by a modest pickup in the core sector growth to 2.4% YoY from 0.7% YoY in the previous month. Consumer durables and non-durables continued to diverge, with the former contracting by 1.3% YoY in July 2017 and the latter rising by 3.4% in the same month. Capital goods output contracted for the fourth consecutive month in July 2017.

    Inflation

    Consumer Price Inflation (CPI) index hardened to 3.4% YoY in August 2017 from 2.4% YoY in July 2017. Inflation in food and beverages rose to 2.0% YoY while housing inflation also recorded a slight increase to 5.6% YoY from 4.9% YoY in the previous month.

    Wholesale Price Inflation (WPI) index printed higher at 3.2% YoY in August 2017 as compared to 1.9% YoY in July 2017 led by broad-based hardening in both food & non-food inflation. Mineral oils inflation posted a sharp rise to 16.6% YoY in August from 4.9% in July on the back of rise in crude oil price.

    RBI Monetary Policy Committee (MPC) Meeting

    In its MPC meeting held on October 3rd – 4th, the RBI kept policy rates unchanged while maintaining its neutral stance. the RBI revised down its estimate for real Gross Value Added (GVA) growth to 6.7% in FY18 but revised up slightly its CPI projection to 4.2-4.6% for the second half of FY18. RBI estimates at the August meeting were 7.3% for real GVA and 4.0-4.5% for inflation. RBI in its review report noted longer-term inflation risks from fiscal slippage, noting specifically the States’ farm loan waivers and salary and allowances award.

    Other macro developments

    Indian monsoon season ended at ~95% of Long Period Average (LPA), thereby recording the second consecutive year of normal monsoons after two consecutive droughts in 2014 & 2015. Data for spatial distribution suggests that North West India and Central India have recorded a deficit of 10% and 6% respectively.

    The central government’s fiscal deficit for the period of Apr-Aug reached 96.1% of budget estimates (BE) compared to 92.4% of BE in Apr-July 2016. The slower pace of expenditure in Aug-17 was accommodated by pulling back on the pace of capital expenditure which reported a decline of 27.6% YoY in Aug-17 compared to an average growth of 37.6% during Apr-July. August trade deficit was flat at $11.4bn vs $11.45bn in June led by normalization of gold imports.

    Market Outlook

    Equity markets continued to consolidate in the month of September mainly on the geopolitical tensions pertaining to North Korea, higher crude prices, concerns on slowing domestic economy and selling by Foreign Institutional Investors.

    From a medium-term perspective, markets expect earnings growth to recover as the twin impact of GST and demonetisation wane.

    Although there has been market consolidation, 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, range bound 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.

    Risk of significant FII outflows because a major global risk off event remains a concern. However, it is important to note that India is much better placed and thus resilient in such an event given its stable 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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