Equity Commentary – October 2016
The Indian equity markets closed higher in the month of October 2016, as both Sensex and Nifty returned 0.3%. The broader market outperformed the Sensex, as reflected by the performance of the BSE Midcap and BSE 200 index at 1.8% and 0.9% respectively. In terms of sectors; Oil & Gas, Metals, Realty, Capital Goods, Consumer Durables, Banking and Healthcare were outperformers whilst IT and Auto were the major underperformers. FIIs were net sellers in October, with net outflows to the tune of ~USD 644 mn. Consequently, FIIs net inflows CYTD amounts to ~USD 7.06 bn. Domestic MFs were net buyers with a buying of ~USD 1.21 bn. in October.
|Index Name ||As on ||As on ||As on ||Return in % |
|28-Oct-16 ||30-Sep-16 ||30-Oct-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
| ||September-16 ||August-16 |
|Index of Industrial Production
||-0.7% (For August 2016)
||-2.5% (For July 2016)
||6.25% (as on October 31, 2016)*
||6.50% (as on September 30, 2016)
|Marginal Standing Facility Rate
||6.75% (as on October 31, 2016)*
||7.00% (as on September 30, 2016)
*policy rates were revised downwards by 25bps by RBI on October 04, 2016
The Index of Industrial Production contracted for the second straight month with August IIP at -0.7% YoY vs -2.5% in July led by decline in manufacturing and mining. Within manufacturing, capital goods continued to remain subdued, recording a fall of 22% YoY in August. Mining contracted by 5.6% while electricity grew a mere 0.1%
Retail inflation was the lowest in a year with September CPI recording at ~4.31% vs ~5.05 % in previous month. Vegetables contributed around 64bps of the 74bps decline in headline CPI in September while in the previous month they contributed 90bps of the 100bps decline.
The rainfall during 2016 monsoon season was 97% of its long period average (LPA) on cumulative basis with good spatial distribution across the country. Central India received above normal rainfall which was 106% of LPA while Northwest India and South Peninsula received 95% and 92% of LPA respectively. Northeast India received at 89% of LPA.
Monetary Policy Committee (MPC) unanimously decided to cut repo rate by 25bps in its first policy meeting in line with market expectations. In addition, the key highlights from the policy statement are - RBI has no specific timeline to achieve the 4% CPI target (earlier was set for Q4 FY18), real policy rate guidance was lowered to 125bps (vs 150-200bps earlier) with repeated emphasis on growth objective.
Other macro developments
September trade deficit inched up higher to $8.3bn vs $7.7bn last month despite pickup in exports. Exports recovery was led primarily by gems & jewelry (+22.4% YoY in September) followed by engineering goods +6.3% YoY while imports growth (imports saw the slowest pace of decline in 22 months) were led by petroleum products and gold while continued contraction in capital goods imports was seen.
The recent telecom auctions received bids worth INR658bn. The government will garner INR320bn this year as upfront payments from these auctions, which is below the INR640bn budgeted and suggests a shortfall of INR320bn (0.2% of GDP). Despite this, there is no expectation of slippage in the government’s fiscal deficit target, owing to better-than-expected indirect taxes collections and INR150bn collected through the tax amnesty scheme.
Global liquidity flows continue to be a key determinant 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.
On the investments side, though recovery in private sector capex still appears to be some time away, government capex seems to be picking up.
In the case of consumption, given the satisfactory monsoon, rural consumption is expected to recover. Further, as the benefits of lower inflation and interest rates flow through the economy and underscored by the recent seventh pay commission payouts, discretionary consumption is expected to pick up, in this regard, the ongoing festive season will be an important indicator.
The ongoing results season has remained mixed so far. The festive season has helped auto companies show strong volume growth in contrast to consumer staples companies which have seen tepid volume growth. Corporate lenders continued to recognize bad loans whilst retail, consumer and mortgage lenders have had steady results till now.
An 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 given its healthy macro-economic parameters.
We would urge investors to systematically invest in Indian equity markets and use any phase of volatility to their advantage.