Equity Commentary –January 2017
The Indian equity markets closed higher in the month of January 2017, as both Sensex and Nifty returned 3.9% and 4.6% respectively. The broader market outperformed the Sensex, as reflected by the performance of the BSE Midcap and BSE 200 index at 6.9% and 5.4% respectively. In terms of sectors; Metals, Consumer Durable, Power, Realty, Capital Goods, Oil & Gas and FMCG were outperformers whilst Healthcare and IT were the major underperformers. FIIs were net sellers in January, with net outflows to the tune of ~USD 1.18 bn. Domestic MFs were net buyers with a buying of ~USD 769 mn. in January.
|Index Name ||As on ||As on ||As on ||Return in % |
|31-Jan-17 ||30-Dec-16 ||29-Jan-16 ||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
| ||December-16 ||November-16 |
|Index of Industrial Production
||5.7% (for November 2016)
||-1.8% (for October 2016)
||6.25% (as on January 31, 2017)
||6.25% (as on December 31, 2016)
|Marginal Standing Facility Rate
||6.75% (as on January 31, 2017)
||6.75% (as on December 31, 2016)
Union Budget 2017-18
The 2017-18 budget aims at retaining India’s macro stability by pursuing a path of fiscal consolidation, gives a boost to growth by focusing on small/medium enterprises, infrastructure and affordable housing as well as rural and social sector. The budget continues the government’s efforts to bring parallel economy into the main stream and channeling household savings into financial assets.
Expenditure growth has been kept moderate albeit with a greater tilt towards capital expenditure. The government is targeting a fiscal deficit of 3.2% of the GDP for FY18 as compared to a revised estimate of 3.5% of the GDP in FY17. From a medium term perspective, the reiteration of the commitment towards fiscal consolidation is a positive development. In particular, the commitment of aiming to lower India’s public debt to GDP to 60% by 2023 provides a useful roadmap for the path of fiscal consolidation over the medium term.
The Index of Industrial Production (IIP) expanded 5.7% YoY in November 2016, as compared to the 1.8%YoY contraction in October 2016. The rise in industrial production was driven by capital goods, which grew 15% YoY in November as compared to a 27% YoY contraction in October 2016. The growth of IIP excluding capital goods was 4.7% YoY in November as compared to 2% YoY in October 2016. Consumer durables output expanded 9.8% YoY while consumer non-durables and basic goods grew 2.9% YoY & 4.7% YoY respectively during the month.
Consumer Price Inflation (CPI) index moderated to a 25-month low 3.4% YoY in December 2016 from 3.6% in November 2016. The CPI benefitted from moderation in the inflation for food & beverages, clothing & footwear, housing and miscellaneous items, while the inflation for fuel & light and pan, tobacco & intoxicants recorded an uptick. The core-CPI inflation remained at 4.9% in December 2016, marginally lower than 5.0% YoY in November 2016.
Wholesale Price Inflation (WPI) index rose to 3.4% YoY in December 2016 from 3.2% YoY in November 2016, reflecting a combination of rising commodity prices and an unfavourable base effect. The sequential uptick in WPI inflation in December 2016 was led by rise in the inflation for minerals, and a modest increase in fuel & power, primary non-food articles and manufactured non-food articles, offset by a correction in the inflation for primary food articles.
Other macro developments
India’s trade deficit declined to US$10.4bn in December 2016 from US$13bn in November 2016, led by a reduction in gold imports (US$2bn vs US$4.4bn in November 2016) as well as recovery in exports. Export growth rebounded to 5.7%YoY in December 2016 from 2.3% in the previous month with strong growth in the non-oil exports segment (13%YoY). Foreign currency reserves stood at ~USD361bn as on January 20, 2017 as compared to ~USD360bn at the end of December 2016.
Indian domestic investors continue to remain positive on Indian equity markets. Quarterly results so far have been a mixed bag in terms of impact of demonetisation. The union budget for FY’18 balanced the twin objectives of growth and commitment to fiscal consolidation. Some of the key highlights of the budget are the focus on rural economy, infrastructure, affordable housing and measures to potentially improve tax compliance.
Going ahead, on the domestic front, the outcome of elections in five states including India’s largest state, Uttar Pradesh, may cause some volatility in the market. However, prospects of earnings recovery in second half and successful implementation of the GST reform are some of the positives market would look forward to.
From the global perspective, news flow around policy announcements from developed world and rate decisions by foreign central banks can have significant temporary impact on foreign investment flows. In such an environment, healthy macro and government’s commitment to stick to fiscal discipline should keep India in good stead.
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 use volatility to increase exposure to Indian equity markets.