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Equity Market

Equity Commentary – May 2018

The Indian equity markets ended moderately higher in the month of May 2018, as the Sensex was up by 0.5%, whilst the Nifty was flat. The broader market; the BSE Midcap & the BSE 200 both underperformed the Sensex with a performance of -5.9% and -1.5% respectively. In terms of sectors; Banking was the major outperformer whilst, Auto, Consumer Durable, Capital Goods, FMCG, Healthcare, IT, Metals, Oil & Gas, Power and Real Estate were the major underperformers. FIIs were net sellers in May, with net outflows to the tune of ~USD 1.49 bn. Consequently, there have been net FII outflows CYTD of ~USD 85mn. Net equity investments in May 2018 by domestic MFs in the market were ~USD 2.03 bn.”


Index Name As on As on As on Return in %
31-May-18 30-Apr-18
31-May-17 1 Month 1 Year

Nifty 50 Index

10736

10739

9621

0.0

11.6

S&P BSE Sensex

35322

35160

31146

0.5

13.4

S&P BSE MID CAP

16014

17012

14625

-5.9

9.5

S&P BSE SMALL CAP

17249

18402

15080

-6.3

14.4

S&P BSE 200

4654

4724

4166

-1.5

11.7

S&P BSE AUTO

24472

25834

24162

-5.3

1.3

S&P BSE Bankex

30007

28652

26547

4.7

13.0

S&P BSE Consumer Durable

20670

22380

15400

-7.6

34.2

S&P BSE Capital Good

18822

19543

17596

-3.7

7.0

S&P BSE FMCG

11291

11306

10106

-0.1

11.7

S&P BSE Health Care

13003

14154

13564

-8.1

-4.1

S&P BSE IT

13453

13568

10230

-0.8

31.5

S&P BSE METAL

13612

14277

11248

-4.7

21.0

S&P BSE Oil & Gas

14429

14430

14247

0.0

1.3

S&P BSE Power Index

2129

2238

2221

-4.9

-4.1

S&P BSE Realty

2235

2430

1931

-8.0

15.7


The Macro Picture

  April-18 March-18
WPI 3.2% 2.5%
CPI 4.6% 4.3%
Index of Industrial Production 4.4% (for March 2018) 7.1% (for February 2018)
Repo rate 6.0% (as on April 30, 2018 6.0% (as on March 31, 2018)
Marginal Standing Facility Rate 6.25% (as on April 30, 2018) 6.25% (as on March 31, 2018)
Source: RBI, MOSPI

Growth

India’s GDP growth improved to 7.74% YoY (provisional) in 4Q FY18 as compared to 7.0% in 3Q FY18; for the full year FY18 is now at ~6.7% YoY driven by a recovery in investment. The data underlines the recovery in the economy from the disruption of demonetization and GST (Goods & Services Tax) introduction in 2016 and 2017.

Manufacturing growth (9.1% in 4Q) was strong. Construction growth of 11.5% was the highest recorded in the new GDP series and pushed industrial growth to ~8.8%. This improvement possibly reflects the momentum in housing and infrastructure schemes of the government. The growth in gross fixed capital formation continues, with a ~14.4% growth in 4QFY18. Private consumption growth recovered marginally to 6.7% (5.9% in 3Q), likely aided by rural demand.

Inflation

India’s Wholesale Price Inflation (WPI) Index rose to 3.2% for the month of April’18 as an unfavorable base and faster rise in fuel inflation pushed up the index higher. Rise in cereal prices due to the minimum support price (MSP) increase and seasonal spike in food prices have the potential to push up the index further.

Consumer Price Inflation (CPI) Index rose to 4.6% YoY in April from 4.3% in March’18 even as food and beverages inflation moderated slightly to 3%.

Other macro developments

Trade deficit in March widened to ~USD 14bn higher than the monthly average of ~USD 13bn in FY18. Key observations are; non-oil exports growth has slowed to ~2% (vs. 10-11% growth in December 2017) owing to high base and some moderation in global trade; weakness persists in exports of labour - intensive sectors (gems/jewelry, fabrics, etc.) which contracted for the ninth straight month and FY18 trade deficit was USD 157bn, 44% higher YoY.

Market Outlook

Equity markets moved sideways (flat to moderate expansion) in the month of May driven by concerns on weakening macros – driven by crude oil price increase, quarterly results which were impacted by accelerated NPA recognition by banks and political uncertainty in the Karnataka elections.

In the latest quarterly results, the weakness in earnings was primarily led by NPA recognition in banks to comply with the new RBI norms on NPA recognition.

Going forward, it is expected that consumption would remain one of the key growth drivers. Urban consumption has been strong so far, driven by moderate 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.

Risk of significant FII outflows on account of a major global risk off event remains a concern. Crude oil prices and monthly GST collections would be key monitorable factors going forward.

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.

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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