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
|S&P BSE Sensex
|S&P BSE MID CAP
|S&P BSE SMALL CAP
|S&P BSE 200
|S&P BSE AUTO
|S&P BSE Bankex
|S&P BSE Consumer Durable
|S&P BSE Capital Good
|S&P BSE FMCG
|S&P BSE Health Care
|S&P BSE IT
|S&P BSE METAL
|S&P BSE Oil & Gas
|S&P BSE Power Index
|S&P BSE Realty
The Macro Picture:
Source: RBI, MOSPI
| ||November-16 ||OCtober-16 |
|Index of Industrial Production
||-1.9% (for October 2016)
||0.7% (For September 2016)
||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)
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%.
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 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.
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.