Equity Commentary – August 2016
The Indian equity markets closed positive in the month of August 2016, as both Sensex and Nifty returned ~1.4% and ~1.7% respectively. The increase in the broader market was higher than the Sensex, as reflected by the performance of the BSE Midcap and BSE 200 index at 4.4% and 2.1% respectively. In terms of sectors; Metals, Oil & Gas, Banking and Auto were outperformers whilst IT was the major underperformer. FIIs continued to be buyers in August, with net inflows to the tune of ~USD 1.35 bn. Consequently, FIIs net inflows CYTD amounts to ~USD 6.14 bn. Domestic MFs were also buyers with a buying of ~USD 285 mn. in August, compared to selling of ~USD 5 mn. in July.
|Index Name ||As on ||As on ||As on ||Return in % |
|31-Aug-16 ||29-Jul-16 ||31-Aug-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
| ||July-16 ||June-16 |
|Index of Industrial Production
||2.1% (For June 2016)
||1.1% (For May 2016)*
||6.50% (as on August 31, 2016)
||6.50% (as on July 31, 2016)
|Marginal Standing Facility Rate
||7.00% (as on August 31, 2016)
||7.00% (as on July 31, 2016)
*Revised downwards from 1.28%
GDP growth at market prices decelerated to 7.1% YoY in quarter ended Jun-16 from 7.9% YoY in previous quarter. The slower than expected growth was due to a slowdown in investments. Gross Value Added (GVA) growth got support from strong government spending, which grew at 12.3%, the fastest in 6 quarters. On a sectoral basis, agriculture and industrial growth decelerated while services sector growth accelerated during the quarter. Agriculture growth weakened to 1.8% YoY in 2Q from 2.3% in last quarter largely on back of lower agri output. Industrial growth declined to 6.0% YoY in 2Q from 7.9% YoY in last quarter on the back of lower growth in mining and construction.
CPI inflation firmed up to a 23-month high of 6.1% from 5.8% YoY in May-June 2016. A rise in inflation for food & beverages (8.0% YoY), outweighed the dip in inflation for fuel & light (2.7%), while core inflation remained steady at 4.6% in both these months. Housing inflation dipped to 5.4% in July 2016. Rural CPI inflation rose to a 23-month high of 6.7% in July 2016 from 6.3% in June 2016 while urban CPI rose marginally to 5.4% in July 2016 from 5.3% in June 2016.
Fiscal deficit declined 31.7% YoY in July 2016 vs. growth of 24.7% YoY in June. The decline was due to a contraction in expenditure even as total receipts grew at a lesser pace. On a 12-month trailing sum basis, the fiscal deficit is tracking at a lower level of 3.8% of GDP as of July 16 vs. 4.1% of GDP last month. As a percentage of Budget estimates, fiscal deficit stood at 69.3% in July 2016, the same as last year.
Rainfall remained lower with the cumulative rainfall deficit now at ~3% as on August 26, 2016. While the bulk of the sowing for summer crop has already been completed (~97% of normal area is sown), still another ~30% of the monsoon season is still left. Currently area under cultivation is ~102 mn. hectares as of 26, August 2016, up 4.7% y-o-y. Improvement in reservoir levels augurs well for winter crop sowing.
Other macro developments
June trade deficit narrowed down sequentially to USD7.8bn vs USD8.1bn in May. The sequential decline in the trade deficit was led by a broad-based decline in imports even as exports declined again in July. Total imports fell 19% in July vs. 7.3% in June. July imports reflected a broad-based decline with contraction in commodity imports (including oil), gold imports, and non-oil non-gold imports. Capital goods imports declined again in July after the expansion in June. Forex reserves with RBI stood at ~USD 367bn.
FII flows continue to support Indian equity markets performance during the month. Progress on GST approval, normal monsoon and expectations of continuity in RBI policies given the appointment of Dr. Urjit Patel as RBI Governor, further aided bullish sentiments. Government’s recent decision to increase salaries of central government employees and pensioners is expected to augur well for consumer discretionary demand.
We believe, the medium to long-term performance of the market would be primarily governed by a recovery in earnings growth. It is expected that as public sector capex and urban discretionary consumption revives, corporate earnings growth should start improving gradually. However, market valuations are currently above long term averages.
Considering improving outlook for earnings growth, strong macro position and presence of long-term structural drivers like demographic advantage, low household debt, and urbanization, the medium term outlook for Indian equity markets continue to remain positive.
In the near term, reversal of FII flows on account of a global risk off event and higher than long term average valuations may pose a risk of price correction, however, it is important to note that India is much better placed to handle such an event on account of healthy macro-economic parameters.
We would urge investors to systematically invest in Indian equity markets and use any phase of volatility to their advantage.