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Equity Market

  • Jul 12, 2017

    Equity Commentary – December 2017

    The Indian equity markets ended higher in the month of December 2017, as both Sensex and Nifty were up by 2.7% and 3% respectively. The BSE Midcap outperformed the Sensex with a performance of +5.3% as well as the BSE200 outperformed with a return of +3.3%. In terms of sectors; Automobiles, Consumer Durables, Capital Goods, FMCG, Healthcare, IT, Metals and Realty the major outperformers whilst Banking, Oil & Gas and Power were the major underperformers. FIIs were net sellers in December, with net outflows to the tune of ~USD -1.13 bn. (Data available up to 22/12/2017). Consequently, FIIs net inflows CYTD amounts to ~USD 7.9 bn. As per data available up to 21/12/2017 net equity investments in December 2017 by domestic MFs in the market were ~USD 951 mn.

    Index Name As on As on As on Return in %
    29-Dec-17 30-Nov-17 30-Dec-16 1 Month 1 Year
    Nifty 50 Index 10531 10227 8186 3.0 28.6
    S&P BSE Sensex 34057 33149 26626 2.7 27.9
    S&P BSE MID CAP 17822
    16917 12031 5.3 48.1
    S&P BSE SMALL CAP 19231 18229 12046 5.5 59.6
    S&P BSE 200 4679 4527 3511 3.3 33.3
    S&P BSE AUTO 26751 25205 20257 6.1 32.1
    S&P BSE Bankex 28857 28631 20749 0.8 39.1
    S&P BSE Consumer Durable 22689 21461 11237 5.7 101.9
    S&P BSE Capital Good 19134 18455 13665 3.7 40.0
    S&P BSE FMCG 10695 10321 8131 3.6 31.5
    S&P BSE Health Care 14799 13990 14728 5.8 0.5
    S&P BSE IT 11278 10731 10176 5.1 10.8
    S&P BSE METAL 14939 13902 10109 7.5 47.8
    S&P BSE Oil & Gas 16283 15928 12152 2.2 34.0
    S&P BSE Power Index 2382 2321 1988 2.6 19.8
    S&P BSE Realty 2608 2446 1264 6.6 106.4

    The Macro Picture

      November’17 October’17
    WPI 3.9% 3.6%
    CPI 4.9% 3.6%
    Index of Industrial Production 2.2% (for October 2017) 4.1% (for September 2017)*
    Repo rate 6.0% (as on Dec 31, 2017) 6.0% (as on Nov 30, 2017)
    Marginal Standing Facility Rate 6.25% (as on Dec 31, 2017) 6.25% (as on Nov 30, 2017)
    Source: RBI, MOSPI
    *revised upwards from 3.8% earlier

    Growth

    Index of Industrial Production (IIP) index growth moderated to 2.2% YoY in October from the revised 4.1% growth rate in September. This is mainly due to subdued performance of the mining and manufacturing sector. The weakness in consumer durables continued with the segment de-growing by 6.9% YoY while consumer non-durables grew 7.7% as rural growth showed improvement.

    The Centre For Monitoring Indian Economy (CMIE) released economic data for the quarter ended December 2017; the data showed continued weakening of private capex activity with decline in projects under implementation. However, government capex activity has been holding up with projects under implementation continuing to grow at ~12% y-o-y.

    Inflation

    India’s Wholesale Price Index (WPI) rose to 3.9% YoY in November compared to 3.6% in October driven by an increase in food inflation. Core inflation rose marginally to 3% YoY.

    Consumer Price Inflation (CPI) index rose to 4.9% YoY in November 2017 as against 3.6% in October led by increase in food and core inflation components. Inflation for food and beverages rose to 4.4% YoY from 2.3% in October while the core retail inflation printed higher at 4.9% YoY for November.

    Other macro developments

    Central government’s fiscal deficit for the period of Apr-Nov widened to Rs.6.1tn (3.6% of GDP) overshooting the full year fiscal deficit target of Rs.5.4tn (3.2% of GDP). The government announced an additional borrowing of Rs.500 bn for the fiscal year. During this period, the central government’s revenue expenditure grew 13.1% versus the budgeted growth of 5.9% and capital expenditure grew 29.3% against the budgeted growth of 10.7%.

    India’s trade deficit remained stable at USD 13.6bn in November compared to USD 14bn in October. November exports and imports grew 30.5% YoY and 19.6% YoY respectively. Oil imports remained stable at USD9.6bn and gold imports showed a moderate increase to USD3.3bn (USD2.9bn in October).

    Market Outlook

    Equity markets gained in the month of December in line with continued performance of global markets. Further, the ruling political party winning the Gujarat state elections and continued strong domestic flows supported the market.

    Calendar Year 2017 was a strong year for the equity capital markets. India was one of the best performing markets globally. The benchmark Sensex was up ~28% YoY. Mid-caps and small-caps outperformed large caps for the fourth consecutive year with over +45% returns.

    This calendar year also saw robust equity capital raises with ~Rs.2 trillion raised across ~220-capital raising transactions with IPOs contributing to ~40% of the capital raising activity.

    Going forward it is expected that consumption would remain one of the key growth drivers. Urban consumption has been strong so far, driven by lower food inflation and interest rates. Rural consumption (driven by increasing food prices and revival in sectors such as construction) is also expected to see a gradual uptick, resulting in a broad based consumption growth.

    Investment activity linked to government expenditure has already seen an uptick in the last couple of years and is expected to continue. In roads for example, new ordering as well as execution has shown strong growth for a couple of years now. Similarly, railways have also seen an improvement in capex spends.

    Although market valuations continue to be above their long-term averages, we believe, progress on key reforms, current 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 on account of 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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