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Equity Market

  • Jan 31, 2013

    Equity Commentary –May 2017

    The Indian equity markets ended higher in the month of April 2017, as both Sensex and Nifty were up by 1% and 1.4% respectively. The broader market outperformed the Sensex, as reflected by the performance of the BSE Midcap and BSE 200 index at 5% and 2.3% respectively. In terms of sectors; Auto, Banking, Capital Goods, Oil & Gas and Realty were the major outperformers whilst Metals, Healthcare, IT were the major underperformers. FII flows continued to be positive in April, with net inflows to the tune of ~USD 367 mn. Consequently, FIIs net inflows in CYTD amounts to ~USD 6.36 bn. Net equity investments by domestic MFs in the market were ~USD1.54bn.

    Index Name As on As on As on Return in %
    31-May-17 28-Apr-17 31-May-16 1 Month 1 Year
    Nifty 50 Index 9621 9304 8160 3.4 17.9
    S&P BSE Sensex 31146 29918 26668 4.1 16.8
    S&P BSE MID CAP 14625 14798 11366 -1.2 28.7
    S&P BSE SMALL CAP 15080 15373 11142 -1.9 35.3
    S&P BSE 200 4166 4083 3443 2.0 21.0
    S&P BSE AUTO 24162 22782 19363 6.1 24.8
    S&P BSE Bankex 26547 25325 20112 4.8 32.0
    S&P BSE Consumer Durable 15400 15475 11761 -0.5 30.9
    S&P BSE Capital Good 17596 17866 14465 -1.5 21.6
    S&P BSE FMCG 10106 9412 8045 7.4 25.6
    S&P BSE Health Care 13564 15019 15246 -9.7 -11.0
    S&P BSE IT 10230 9619 11576 6.3 -11.6
    S&P BSE METAL 11248 11303 7950 -0.5 41.5
    S&P BSE Oil & Gas 14247 14455 9322 -1.4 52.8
    S&P BSE Power Index 2221 2330 1872 -4.7 18.6
    S&P BSE Realty 1931 1924 1421 0.4 35.9

    The Macro Picture:

    April-17 March-17
    WPI 3.9% 5.3%*
    CPI 3.0% 3.9%
    Index of Industrial Production 2.7% (for March 2017) 1.9% (for February 2017)
    Repo rate 6.25% (as on May 31, 2017) 6.25% (as on April 30, 2017)
    Marginal Standing Facility Rate 6.50% (as on May 31, 2017) 6.50% (as on April 30, 2017)
    Source: RBI, MOSPI

    Growth

    GDP growth for the fourth quarter of FY 2016-17 softened to 6.1% YoY reflecting the impact of demonetization. Agriculture and industry expanded by 5.2% & 3.1% YoY while services grew 7.2% YoY. On the expenditure side, private consumption rose by 7.3% YoY while government consumption rose 31.9% YoY. FY17 GDP grew 7.1% YoY compared with 8.0% YoY in FY16. Gross Fixed Capital contracted 2.1% YoY reflecting the continued sluggishness in private investments.

    Inflation

    Consumer Price Inflation (CPI) fell to 3.0% YoY in April 2017 as compared to 3.9% YoY in March 2017. The softening in CPI was led by food inflation, which dropped to 1.2% YoY during the month with sequential decline in pulses, cereals and eggs. Fuel inflation moderated to 5% YoY. The core inflation (excluding food and fuel) remained at around 4.5% YoY.

    The Office of Economic Advisor (OEA), Ministry of Commerce and Industry, released the new Wholesale Price Index series with base year revised to FY2011-12 from the existing FY2004-05. WPI Inflation for April decelerated to 3.9% YoY in April from 5.3% YoY in March as per new series data. Food inflation fell to 2.3% YoY in April from 5.2% YoY in March. Core inflation moderated to 2.4% YoY in April from 2.6% YoY in March.

    Goods and Services Tax (GST)

    The GST council finalized the rate structure for most goods and services along with the GST compensation for various products. Clarity on most critical product categories have been provided. This is a significant step in terms of progress on GST implementation.

    Other macro developments

    For FY 2016-17, the central government's fiscal deficit narrowed to 3.5% of GDP, meeting the target that it had set in the Budget. India’s trade deficit widened to US$13.2bn in April 2017 from US$10.4bn in March 2017. Export growth moderated to 19.8% YoY while import growth rose 49.1% YoY. Foreign currency reserves stood at ~USD379bn as on May 19, 2017 as compared to ~USD372bn as on April 28, 2017.

    Market Outlook

    Equity markets continued to do well in the month of May driven by strong flows, both from domestic and foreign investors, expectations of a normal monsoon, continued push on reforms and improving growth outlook.

    The visibility on implementation of GST from July 1 continues to remain high with GST council approving rates for many items. Overall the initial read through on the rates suggests that bias of tax rates is on the neutral side, indicating that greater compliance is being counted upon for tax buoyancy.

    The read through from the results season so far has been, that, in general companies have seen healthy demand trends post demonetization. Domestic consumption of discretionary products, like consumer durables and jewelry have shown strong growth trends. Companies in the metals sector benefitted from the strong prices with improved operating metrics and resultant profit growth, whilst, the pharmaceutical sector continued to face headwinds because pricing pressures and approval related challenges in key markets.

    Though valuations are above their long-term averages, visibility of reforms like GST, expectations on earnings recovery and continued strong flows from domestic investors, may result in markets continuing to remain above their long-term averages.

    Although, in the near term, reversal of FII flows due to global events would continue to remain a risk to watch out. However, it is important to note that India is much better placed in such an event given its healthy 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, defence and affordable housing. We continue to remain overweight on private sector banks on account of their ability to maintain relatively higher growth rates.

    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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