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Equity Market

  • Jul 12, 2017

    Equity Commentary – January 2018

    The Indian equity markets ended higher in the month of January 2018, as both Sensex and Nifty were up by 5.6% and 4.7% respectively. The BSE Midcap underperformed the Sensex with a performance of -2.6% as well as the BSE200 underperformed with a return of +2.9%. In terms of sectors; Banking, Capital Goods and IT were the major outperformers whilst Auto, Consumer Durable, FMCG, Healthcare, Metals, Oil & Gas, Power and Realty were the major underperformers. FIIs were net buyers in January, with net inflows to the tune of ~USD 2.16 bn. Net equity investments in January 2018 by domestic MFs in the market were ~USD 1.16 bn.

    Index Name As on As on As on Return in %
    31-Jan-18 29-Dec-17 31-Jan-17 1 Month 1 Year
    Nifty 50 Index 11028 10531 8561 4.7 28.8
    S&P BSE Sensex 35965 34057 27656 5.6 30.0
    S&P BSE MID CAP 17364
    17822 12857 -2.6 35.1
    S&P BSE SMALL CAP 18717 19231 12936 -2.0 44.7
    S&P BSE 200 4812 4679 3701 2.9 30.0
    S&P BSE AUTO 25945 26751 21809 -3.0 19.0
    S&P BSE Bankex 30986 28857 22312 7.4 38.9
    S&P BSE Consumer Durable 22477 22689 12626 -0.9 78.0
    S&P BSE Capital Good 20364 19134 14783 6.4 37.7
    S&P BSE FMCG 10711 10695 8568 0.2 25.0
    S&P BSE Health Care 14559 14799 14797 -1.6 -1.6
    S&P BSE IT 12557 11278 9586 11.3 31.0
    S&P BSE METAL 15427 14939 11672 3.3 32.2
    S&P BSE Oil & Gas 16368 16283 12838 0.5 27.5
    S&P BSE Power Index 2319 2382 2168 -2.6 7.0
    S&P BSE Realty 2609 2608 1370 0.0 90.5

    The Macro Picture

      December 17 November 17
    WPI 3.6% 3.9%
    CPI 5.2% 4.9%
    Index of Industrial Production 8.4% (for November 2017) 2.0% (for October 2017)*
    Repo rate 6.0% (as on Jan 31, 2018) 6.0% (as on Dec 31, 2017)
    Marginal Standing Facility Rate 6.25% (as on Jan 31, 2018) 6.25% (as on Dec 31, 2017)
    Source: RBI, MOSPI
    *revised downwards from 2.2%

    Union Budget 2018-19

    The FY2019 union budget tries to balance the government’s medium-term objectives of economic growth and fiscal consolidation despite certain short-term macroeconomic challenges. In the difficult balancing act, the government did well to give the necessary boost to social sectors like housing & healthcare. The roadmap for slow and steady fiscal consolidation has been retained while reiterating firm commitment to continued investments in priority infrastructure, health, education and rural economy. The budget math looks credible with the government targeting to increase spending by ~10%; the assumptions on tax collection are realistic with widening tax base and better tax compliance.


    Index of Industrial Production (IIP) index recorded a sharper than expected 8.4% YoY growth in November’17 from 2% in October’17 led by the manufacturing sector.


    India’s Wholesale Price Index (WPI) softened to 3.6% YoY in December’17 compared to 3.9% in November’17.

    CPI inflation accelerated to 5.2% YoY in December from 4.9% in November, led by adverse base effect and pickup in core inflation. Food inflation hardened to 5% YoY compared to 4.4% YoY in November.

    Recapitalization of Public Sector Banks

    The Government of India released details about the recapitalization process for the Public Sector banks. The key observations in this regard are the following 1) the Government has front-ended the capital infusion with ~INR 881bn to be infused into identified Public Sector banks in the form of recapitalization bonds; 2) a significant portion of the capital infusion is to provide regulatory capital and is earmarked for capital deficient banks; 3) capital infusion comes with riders as banks are required to undertake several operational reforms such as higher financial inclusion, stringent pre- and post-sanction discipline, focus on small and micro enterprises, etc.

    Other macro developments

    Trade deficit in December widened to US$14.9bn, up from US$13.8bn in November’17. Non-oil & non-gold trade deficit also was at US$8bn in Dec’17. During April-December FY18, non-oil & non-gold trade deficit widened to US$75bn vs. US$54bn in April - December FY 17.

    Exports grew by 12.4% yoy in December’17 to US$27bn following a 30.5% jump in November’17. Imports grew by 21.1% to US$41.9bn in December'17 against 19.6% increase in November’17.

    Market Outlook

    Equity markets gained in the month of January driven by better than expected earnings growth in the ongoing results season, positive outlook on global growth and strong FII flows.

    The budget is pro rural growth, well intended (not populist), though the success of the budget depends on higher GST revenue collection and benign oil prices.

    The budgetary allocation for roads, railways and aviation sector has seen significant increases which will support investments in infrastructure. The government announced the revamped National Health Protection Scheme under which poorest 100 million families would be eligible for a health insurance of 0.5 million per family. Further Long Term Capital Gains and dividend tax on equity oriented fund makes both, Life and General insurance sector relatively attractive.

    Government support for Make in India, focus on housing, health, irrigation, power for all, rural roads and improving farmers’ income is likely to support overall economic growth. Though headline fiscal deficit is higher but government has targeted reduced net market borrowing which may be potentially positive for interest rates in the medium term.

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

    Investment activity linked to government expenditure has already seen an uptick in the last couple of years and is expected to continue. In roads for example, new ordering as well as execution has shown strong growth for a couple of years now. Similarly, railways have also seen an improvement in capex spends.

    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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