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Market Commentary

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Equity Market

Equity Commentary – July 2018

The Indian equity markets saw a healthy bounce back after moving sideways in May and June 2018, the Sensex was up by 6.2%, whilst the Nifty was up by 6%. The broader market; the BSE Midcap & the BSE 200 both underperformed the Sensex with a performance of 3.6% and 5.7% respectively. In terms of sectors; Oil & Gas, FMCG and Banking were the major outperformers whilst, Auto, Capital Goods, Healthcare, IT, Metals, Power and Realty were the major underperformers. FIIs were net buyers in July, with net inflows to the tune of ~USD 330 mn. Consequently, there have been net FII outflows CYTD of ~USD 462 mn. Net equity investments in July 2018 by domestic MFs in the market were ~USD 803 mn.


Index Name As on As on As on Return in %
31-Jul-18 29-Jun-18
31-Jul-17 1 Month 1 Year

Nifty 50 Index

11357 

10714 

10077 

6.0 

12.7 

S&P BSE Sensex

37607  

35423  

32515 

6.2 

15.7 

S&P BSE MID CAP

16013 

15451 

15390 

3.6 

4.1 

S&P BSE SMALL CAP

16584 

16032 

16094 

3.4 

3.0 

S&P BSE 200

4871 

4608 

4382 

5.7 

11.2 

S&P BSE AUTO

24497 

23838 

24463 

2.8 

0.1 

S&P BSE Bankex

31006 

29251 

28387 

6.0 

9.2 

S&P BSE Consumer Durable

20902 

20207 

16467 

3.4 

26.9

S&P BSE Capital Good

18296 

17488 

17973 

4.6 

1.8 

S&P BSE FMCG

12013 

11213 

10094 

7.1 

19.0 

S&P BSE Health Care

14206 

14004 

14195 

1.4 

0.1 

S&P BSE IT

14527 

13920 

10438 

4.4 

39.2 

S&P BSE METAL

12660 

13064 

12426 

-3.1 

1.9 

S&P BSE Oil & Gas

15024 

13660 

14190 

10.0 

5.9 

S&P BSE Power Index

1975 

1947 

2324 

1.5 

-15.0 

S&P BSE Realty

2095 

2073 

2186 

1.0 

-4.2 


The Macro Picture

  June-18 May-18
WPI 5.8% 4.4%
CPI 5.0% 4.90%
Index of Industrial Production 3.2% (for May 2018) 4.9% (for April 2018)
Repo rate 6.50% (as on August 1, 2018) 6.25% (as on June 30, 2018)
Marginal Standing Facility Rate 6.75% (as on August 1, 2018) 6.50% (as on June 30, 2018)
Source: RBI, MOSPI

Monetary Policy Committee (MPC)

India’s central bank, the Reserve Bank of India (RBI) hiked the policy repo rate by 25 basis points (bps) to 6.5% on August 1 while retaining its neutral stance. This was RBI’s second hike, following the one in the June policy meeting. Five members voted for the hike while one voted for pause. The inflation (CPI) forecast for 2HFY19 was pushed up mildly to 4.8% from 4.7% taking the RBI’s projection for India’s CPI inflation to ~4.8% for FY19.

The GDP forecast for FY19 was unchanged at 7.4% with risks evenly balanced. While it expects stronger rural demand on the back of normal monsoons and higher agricultural support prices, it is worried about rising trade protectionism. Rising crude oil prices and the strengthening dollar against the Indian Rupee were also mentioned as reasons for the hike.

Inflation

India’s Wholesale Price Inflation (WPI) Index rose to 5.8% YoY for the month of June, up from 4.4% YoY in April driven by a rise in crude oil prices, inflation for manufactured products, cotton prices and electricity tariffs. Core WPI inflation rose to 4.8% from 4.4% in May.

The Consumer Price Inflation (CPI) index rose to 5.0% YoY from 4.9% in May even as food inflation dipped to 3.2% YoY. Core CPI rose 6.4% YoY in June from to 6.2% YoY in the previous month. Housing inflation was steady at 8.4%.

Other macro developments

India’s fiscal deficit stood at Rs.4.3tn in Q1 FY2019, 2.9% lower than in Q1 FY2018; we note 34.4% expansion in revenue receipts and 27.3% growth in capital expenditure and a moderate 6.6% rise in revenue spending.  Fiscal deficit upto June 2018, is 68.7% of the budgeted estimates, lower than the 80.8% recorded in Q1FY18.

Update on monsoon:

 After an early onset, the volume and progress of the south-west monsoon was unfavourable in mid-June 2018. Cumulative rainfall is now 4% below the normal levels on an aggregate basis (over June 1st -July 28th, 2018). The total area sown till July 27, 2018 stood at 73.8 million hectares (~80.0 million hectares on July 27, 2017).

Market Outlook

Equity markets posted a good bounce back after moving sideways in the last two months. Key support drivers have been the marginal correction in crude prices from the highs in the start of July, earnings season has been largely reporting either in line or with a positive surprise, rupee too has stabilized in July 2018. Hence barring the continued noise on trade tariffs, certain key factors have turned stable.

The recently announced Minimum Support Price (MSP) hikes on certain key agricultural commodities and further cut in GST rates on certain consumer categories (electronics, footwear, Paints etc.) should further boost consumption in both rural and urban respectively. While rising inflation is an impending risk, we expect demand to remain strong in light of the aforesaid recent government initiatives. We maintain our view of broad based consumption being a key growth driver

While net FII inflow in July 2018 is encouraging, significant outflows on account of global risk off event remains a concern. GST collections further improved on a MoM basis in June 2018. Crude oil prices, inflation and GST collections would continue to be key monitorables going forward.

In terms of our portfolio positioning, we remain focused on companies with earnings growth visibility. 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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