Equity Commentary – September 2016
The Indian equity markets closed lower in the month of September 2016, as both Sensex and Nifty returned ~-2.1% and ~-2.0% respectively. The broader market outperformed the Sensex, as reflected by the performance of the BSE Midcap and BSE 200 index at -0.4% and -1.3% respectively. In terms of sectors; Oil & Gas, Auto, Consumer Durable and Healthcare were outperformers whilst Power, FMCG and Capital Goods were the major underperformers. FIIs continued to be buyers in September, with net inflows to the tune of ~USD 1.56 bn. Consequently, FIIs net inflows CYTD amounts to ~USD 7.7 bn. Domestic MFs were also buyers with a buying of ~USD 575 mn. in September.
|Index Name ||As on ||As on ||As on ||Return in % |
|30-Sep-16 ||31-Aug-16 ||30-Sep-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
| ||August-16 ||July-16 |
|Index of Industrial Production
||-2.4% (For July 2016)
||2.0% (For June 2016)
||6.25% (as on October 05, 2016)*
||6.50% (as on August 31, 2016)
|Marginal Standing Facility Rate
||6.75% (as on October 05, 2016)*
||7.00% (as on August 31, 2016)
*policy rates were revised downwards by 25bps by RBI on October 04, 2016
The Index of Industrial Production (IIP) contracted by 2.4% YoY in July 2016, as compared to the 2.0% growth in June. The sharp 29.6% contraction in capital goods and the mild 1.7% de-growth in output of consumer non-durables weighed upon the performance of the IIP in July 2016.
CPI inflation eased to a five-month low 5.0% YoY in August 2016 from 6.1% YoY in July 2016. There was softening in the inflation for food and beverages, as well as a mild easing in fuel & light and housing. Core-CPI inflation inched up to 4.7% in August 2016 from 4.6% in July 2016. WPI inflation rose to 3.7% YoY in August 2016 from 3.5% in July 2016, with an adverse base effect outweighing the cooling effect of lower food inflation.
Rainfall remained lower with the cumulative rainfall deficit now at ~3% as on end September. For the month of September, rainfall was 2% below normal. On a regional cumulative basis, most of India remained in normal to excess rainfall with parts of north-east India, south India, and north India remaining deficient. Kharif crop acreage at 106.8 mn hectares was higher at 3.6% YoY. Sowing for pulses was 29% higher than the previous year, which should keep pulses inflation under control.
Other macro developments
Fiscal deficit at the end of August stood at 76% of the budgeted annual deficit. Last fiscal the corresponding number was 67%. August trade deficit was largely unchanged at USD 7.6bn. Indian exports declined a marginal 0.3% YoY, while imports declined 14% YoY. Gold imports declined a significant 77% YoY.
The government recently concluded its income declaration scheme, a step directed towards curbing tax avoidance and brining defaulters into the tax system. The scheme was successful in garnering total declarations in the form of cash and other assets amounting to INR652.5bn (USD9.8bn, or 0.4% of GDP), which was more than market expectations. At a 45% tax rate, the government will earn INR294bn (0.2% of GDP) in additional revenues.
Global liquidity continues to be a dominant factor for emerging market performance including India. We believe, the medium to long-term performance of the market would be primarily governed by recovery in earnings growth.
With near normal monsoon, rural consumption is expected to recover. Further, as the benefits of lower inflation and interest rates flow through the economy, discretionary consumption is expected to pick up. In this regard, the upcoming festive season will be an important indicator. On the investments side, recovery in private sector capex still appears to be some time away whilst government capex seems to be picking up.
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.