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Equity Market

  • Jul 12, 2017

    Equity Commentary – October 2017

    The Indian equity markets ended higher in the month of October 2017, as both Sensex and Nifty were up by 6.2% and 5.6% respectively. The BSE Midcap outperformed the Sensex with a performance of 7.5% and the BSE200 marginally underperformed with a return of 6.1%. In terms of sectors; Capital Goods, Metals, Oil & Gas, Power and Realty were the major outperformers whilst Auto, Banking, Consumer Durable, FMCG, Healthcare, and IT were the major underperformers. FIIs turned net buyers in October, with net inflows to the tune of ~USD 469 mn. Consequently, FIIs net inflows CYTD amounts to ~USD 6 bn. Net equity investments in October 2017 by domestic MFs in the market were ~USD 1.39bn.

    Index Name As on As on As on Return in %
    31-Oct-17 29-Sep-17 28-Oct-16 1 Month 1 Year
    Nifty 50 Index 10335 9789 8638 5.6 19.6
    S&P BSE Sensex 33213 31284 27942 6.2 18.9
    S&P BSE MID CAP 16588 15436 13408 7.5 23.7
    S&P BSE SMALL CAP 17600 16114 13454 9.2 30.8
    S&P BSE 200 4541 4281 3754 6.1 21.0
    S&P BSE AUTO 25415 24180 22168 5.1 14.6
    S&P BSE Bankex 28284 27025 22384 4.7 26.4
    S&P BSE Consumer Durable 18466 17555 12756 5.2 44.8
    S&P BSE Capital Good 18423 17172 14874 7.3 23.9
    S&P BSE FMCG 10264 9773 8515 5.0 20.5
    S&P BSE Health Care 14282 13488 16374 5.9 -12.8
    S&P BSE IT 10362 9947 9995 4.2 3.7
    S&P BSE METAL 14730 13564 10286 8.6 43.2
    S&P BSE Oil & Gas 16552 14843 12296 11.5 34.6
    S&P BSE Power Index 2349 2206 2008 6.5 17.0
    S&P BSE Realty 2301 2065 1552 11.4 48.3

      September-17 August-17
    WPI 2.6% 3.2%
    CPI 3.28% 3.28%*
    Index of Industrial Production 4.3% (for August 2017) 1.2% (for July 2017)
    Repo rate 6.0% (as on Oct 31, 2017) 6.0% (as on Sept 30, 2017)
    Marginal Standing Facility Rate 6.25% (as on Oct 31, 2017) 6.25% (as on Sept 30, 2017)
    Source: RBI, MOSPI
    * revised downwards from 3.4%

    Growth

    The Index of Industrial Production (IIP) index rose 4.3% YoY in the month of August as compared to 1.2% in July 2017. Mining and electricity sector grew 3.1% and 8.3% respectively. Capital goods production activity grew 8.3% YoY during the month; a first in FY18. Infrastructure and construction goods grew 2.5% while growth in consumer durables remains soft at 1.6%.

    Inflation

    Consumer Price Inflation (CPI) index remained stable at ~3.3% YoY in September. Easing in food inflation was offset by rise in inflation for housing and fuel. The housing inflation (with a weight of 10.1% in the CPI Index) increased to 6.1% YoY in September 2017 from 5.6% in August 2017, on account of the revision in house rent allowance (HRA) for Central Government employees from July 2017 onwards.

    Wholesale Price Inflation (WPI) index moderated to 2.6% YoY in September as compared to 3.2% in August 2017 primarily led by slower momentum in food inflation.

    Public Sector Undertaking (PSU) Banks Recapitalisation plan

    The Indian Finance Ministry has announced a bank recapitalization plan of INR 2.11trn to support India’s public sector banks with high levels of NPAs. The two components of the plan are – issuing recapitalization bonds worth INR 1.35trn (~0.8% of GDP) and INR 760bn through fiscal resources and market raising. The scale of the proposed capital infusion is significant as compared to ~INR1.2tn infused in Indian PSU banks cumulatively in the last 10 years. The large infusion will provide banks some growth capital and will help them improve their capital adequacy ratios.

    Bharatmala Pariyojana (BMP) – Indian Government’s umbrella scheme for highway development

    The government of India announced plans to invest ~INR. 5.35tn and build ~34,800kms of roads in the next 5 years under the BMP programme. BMP is proposed to be funded through a mix of budgetary support, public private partnership and borrowings. This should pave way for gradual uptick in capex spending as well as employment generation.

    Other macro developments

    Central government’s fiscal deficit for the period of April-September improved to 91.3% of budget estimates (BE) compared to 96.1% of BE in April-August 2017. India’s trade deficit narrowed to ~USD 9bn in September from ~USD 11.6bn in August. Export growth picked up to 25.7% YoY and was broad-based across sectors while import growth remained elevated at 18.1% YoY.

    Market Outlook

    Equity markets gained in the month of October led by; the government’s announcement of a substantial package to recapitalize the state-owned banks, ambitious Bharatmala project to improve the road network with a 5 year investment programme of ~Rs.5.35 trillion and continued strong domestic inflows.

    We believe, that the recent decision by the government to recapitalize Public Sector banks is positive for corporate lenders both private as well as public. The quantum of recapitalization would encourage public sector banks to recognize and resolve Non Performing Loans whilst remaining compliant with prudent capital adequacy requirements. This should help in improving availability of credit in the economy and thereby give a boost to various economic activities.

    Although market valuations are 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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