Commentary - Equity Outlook
Mr. Anoop Bhaskar
Head - Equity
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Commentary - Equity Outlook
Mr. Anoop Bhaskar
Head - Equity
WHAT WENT BY
World poised for slowest growth in a decade: After growing by 3.6% in 2018, the world economy is on course to expand
at its slowest pace since the global financial crisis as slowdown in the Euro-zone and China continues and the US soon
joins the mix. Against that backdrop, fears of a surge in inflationary pressure have now been put to bed, it won’t be long
before policy loosening comes back on the agenda.
US Fed statement more dovish than expectation: As universally anticipated, the Fed left the target for the fed funds rate unchanged at 2.25-2.50%, but the language in the policy statement was more dovish than the market had expected. The big surprise was the removal of the reference to “further gradual increases” and including new language saying the Committee would wait to see “what future adjustments to the target range for the federal funds rate may be appropriate.” The neutral language will raise expectations that the Fed is done with raising rates and that its next move will be a cut.
US Government shutdown ends: President Donald Trump has agreed to reopen the government meaning that the economic impact over the first quarter as a whole may be minimal. Trump has only agreed to a temporary funding of government until mid-February. But, in a major climb-down, he has backed down on his demand that the full border wall funding must be included. As a result, the threat of and extended shutdown of the US government slowing global economy may have receded.
Probability of a No-deal Brexit increases: The UK government continues to have a wafer-thin majority, while the Prime Minister only remains in place because of a lack of a viable alternative from either her own or the opposition party. And with less than three months to go until the UK is due to leave the EU on 29th March, there is still no consensus in Parliament about how to go about leaving the EU. And while the UK would suffer some short-term economic disruption if it ended up leaving the EU without a deal, the threat to the rest of the world from this remains small as the UK accounts for only 2% of the world Gross Domestic Product (GDP) and 4% of world goods trade.
Global Markets rebound: After the sharp sell-off seen in the previous 2 months, global markets rebounded with the MSCI Emerging Markets Index and Developed Markets Index rising 8.7% and 7.7% respectively. India, which was the 2nd best performing market in 2018, didn’t participate in this rally with the SENSEX down -1.3% in USD terms. Developed Markets were led by the US (+7.9% Month on Month(MoM)) whereas Emerging Markets were led by Brazil (+17.7% MoM).
Crude rebounds: After the sharp sell-off seen in the last 2 months, crude rebounded with the Brent Index rising 15% MoM to close at $61.9/barrel. Despite the sharp rise in January, crude is still at a comfortable level for a large oil importer like India and shouldn’t trigger concerns as yet.
Domestic Markets: After outperforming briefly in December, Mid and Small caps again underperformed Large caps in January. Markets were volatile on account of impending elections, interim budget and Q3 earnings season. NIFTY was flat (-0.3% MoM) whereas NSE Mid Cap and NSE Small Cap Indices were lower -5.4% and -4.9% respectively MoM. With this, Mid and Small Caps are underperforming NIFTY across most timeframes up to 3 years. The 1 year returns for NIFTY, NSE Mid Cap and NSE Small Cap are -1.8%, -18.7% and -30.4% respectively. Even for the 3 year time frame, the respective CAGR returns are 12.7%, 10.7% and 6.6% respectively. The underperformance of Mid and Small Caps in 2018 has been so severe, it has wiped out the outperformance of CY 17.
On a sectoral basis, IT (+8.3% MoM) was the key outperformer, buoyed by better than expected top line growth and robust order books posted by most of the blue-chip IT companies. Consumer Durable (+2.7% MoM) and Private Banks (+1.3% MoM) were the only other positive indices. Auto was the key underperformer (-11.2% MoM) on concerns of slowdown in demand in most the segments including 2-wheelers, passenger cars and commercial vehicles; also a reflection on the tightness in the NBFC funding market. The Infra/capital goods pack also underperformed with the BSE Capital Goods Index, BSE Infra index and BSE Industrials Index falling 8.0%, 6.2% and 7.4% respectively MoM as markets feared slowdown in government capital expenditure spending given fiscal pressures and the impending elections.
Economic Growth: November Index of Industrial Production (IIP) dropped to 17-month low of 0.5% (vs 8.5% in November 2017) grossly undershooting expectations. Manufacturing growth contracted by 0.4% while capital goods were also down 3.4%. Positive growth was seen only in 10 out of 23 industry groups in the manufacturing sector.
Inflation: Consumer Price Index (CPI) soft patch continued with Dec print declining further to 18-month low of 2.2% on the back of fall in fuel (4.5% vs 7.2%) and transport (4.3% vs 6.1%). Food price deflationary trend, however, moderated slightly. Core inflation was stable at 5.7% as health and education inflation rose further.
Trade Deficit: December trade deficit narrowed further to 10-month low of US$13.1bn on the back of fall in oil (3.1% YoY growth) and gold imports. Export growth has remained stagnant, staying weak across all major categories as the short period of currency depreciation does not seem to have impacted export growth.
GST Council Meet: GST Council doubled exemption limit and raised threshold for availing composition scheme providing relief to MSMEs. Council increased exemption limit to Rs.20 lakh for the North-East and Rs. 40 lakhs for the rest of India and also allowed Kerala to levy 1% calamity cess on intra-state sales for a period up to 2 years. A 7-member group of ministers was instituted to look into inclusion of real estate and lottery under GST.
Interim budget marries populism with prudence: The finance ministry made a clear bid in the interim budget to shore up popular support ahead of the general election with proposals to boost rural incomes and cut income tax. But it is also hoping to demonstrate its commitment to fiscal prudence by projecting an unchanged deficit in the coming fiscal year.
Key highlights from the interim budget are given below:
◼ Good
Source: Bloomberg, RBI, Budget documents, Ministry of Commerce and Industry, Mospi.nic.in, NSE and BSE websites
US Fed statement more dovish than expectation: As universally anticipated, the Fed left the target for the fed funds rate unchanged at 2.25-2.50%, but the language in the policy statement was more dovish than the market had expected. The big surprise was the removal of the reference to “further gradual increases” and including new language saying the Committee would wait to see “what future adjustments to the target range for the federal funds rate may be appropriate.” The neutral language will raise expectations that the Fed is done with raising rates and that its next move will be a cut.
US Government shutdown ends: President Donald Trump has agreed to reopen the government meaning that the economic impact over the first quarter as a whole may be minimal. Trump has only agreed to a temporary funding of government until mid-February. But, in a major climb-down, he has backed down on his demand that the full border wall funding must be included. As a result, the threat of and extended shutdown of the US government slowing global economy may have receded.
Probability of a No-deal Brexit increases: The UK government continues to have a wafer-thin majority, while the Prime Minister only remains in place because of a lack of a viable alternative from either her own or the opposition party. And with less than three months to go until the UK is due to leave the EU on 29th March, there is still no consensus in Parliament about how to go about leaving the EU. And while the UK would suffer some short-term economic disruption if it ended up leaving the EU without a deal, the threat to the rest of the world from this remains small as the UK accounts for only 2% of the world Gross Domestic Product (GDP) and 4% of world goods trade.
Global Markets rebound: After the sharp sell-off seen in the previous 2 months, global markets rebounded with the MSCI Emerging Markets Index and Developed Markets Index rising 8.7% and 7.7% respectively. India, which was the 2nd best performing market in 2018, didn’t participate in this rally with the SENSEX down -1.3% in USD terms. Developed Markets were led by the US (+7.9% Month on Month(MoM)) whereas Emerging Markets were led by Brazil (+17.7% MoM).
Crude rebounds: After the sharp sell-off seen in the last 2 months, crude rebounded with the Brent Index rising 15% MoM to close at $61.9/barrel. Despite the sharp rise in January, crude is still at a comfortable level for a large oil importer like India and shouldn’t trigger concerns as yet.
Domestic Markets: After outperforming briefly in December, Mid and Small caps again underperformed Large caps in January. Markets were volatile on account of impending elections, interim budget and Q3 earnings season. NIFTY was flat (-0.3% MoM) whereas NSE Mid Cap and NSE Small Cap Indices were lower -5.4% and -4.9% respectively MoM. With this, Mid and Small Caps are underperforming NIFTY across most timeframes up to 3 years. The 1 year returns for NIFTY, NSE Mid Cap and NSE Small Cap are -1.8%, -18.7% and -30.4% respectively. Even for the 3 year time frame, the respective CAGR returns are 12.7%, 10.7% and 6.6% respectively. The underperformance of Mid and Small Caps in 2018 has been so severe, it has wiped out the outperformance of CY 17.
On a sectoral basis, IT (+8.3% MoM) was the key outperformer, buoyed by better than expected top line growth and robust order books posted by most of the blue-chip IT companies. Consumer Durable (+2.7% MoM) and Private Banks (+1.3% MoM) were the only other positive indices. Auto was the key underperformer (-11.2% MoM) on concerns of slowdown in demand in most the segments including 2-wheelers, passenger cars and commercial vehicles; also a reflection on the tightness in the NBFC funding market. The Infra/capital goods pack also underperformed with the BSE Capital Goods Index, BSE Infra index and BSE Industrials Index falling 8.0%, 6.2% and 7.4% respectively MoM as markets feared slowdown in government capital expenditure spending given fiscal pressures and the impending elections.
Economic Growth: November Index of Industrial Production (IIP) dropped to 17-month low of 0.5% (vs 8.5% in November 2017) grossly undershooting expectations. Manufacturing growth contracted by 0.4% while capital goods were also down 3.4%. Positive growth was seen only in 10 out of 23 industry groups in the manufacturing sector.
Inflation: Consumer Price Index (CPI) soft patch continued with Dec print declining further to 18-month low of 2.2% on the back of fall in fuel (4.5% vs 7.2%) and transport (4.3% vs 6.1%). Food price deflationary trend, however, moderated slightly. Core inflation was stable at 5.7% as health and education inflation rose further.
Trade Deficit: December trade deficit narrowed further to 10-month low of US$13.1bn on the back of fall in oil (3.1% YoY growth) and gold imports. Export growth has remained stagnant, staying weak across all major categories as the short period of currency depreciation does not seem to have impacted export growth.
GST Council Meet: GST Council doubled exemption limit and raised threshold for availing composition scheme providing relief to MSMEs. Council increased exemption limit to Rs.20 lakh for the North-East and Rs. 40 lakhs for the rest of India and also allowed Kerala to levy 1% calamity cess on intra-state sales for a period up to 2 years. A 7-member group of ministers was instituted to look into inclusion of real estate and lottery under GST.
Interim budget marries populism with prudence: The finance ministry made a clear bid in the interim budget to shore up popular support ahead of the general election with proposals to boost rural incomes and cut income tax. But it is also hoping to demonstrate its commitment to fiscal prudence by projecting an unchanged deficit in the coming fiscal year.
Key highlights from the interim budget are given below:
◼ Good
- ► Boost to rural and urban middle income households
► Fiscal prudence largely maintained despite election pressures
► Commitment to adhere to the fiscal deficit glide path and attain 3% by 2021
-
► Fiscal deficit for FY20 expected to be 3.4% with no improvement over FY19
► Increase in subsidies overshadows growth in Capital expenditure
► Fiscal math aided by high GST growth assumptions and high divestment/dividend targets
- ► Revival of Real Estate sector by giving much needed sops
► Expansion of tax exemption to Rs. 5 lakhs provided much needed succour to the urban middle class
► Though overall capex growth is muted, growth in rail, road and defense capex robust
Source: Bloomberg, RBI, Budget documents, Ministry of Commerce and Industry, Mospi.nic.in, NSE and BSE websites
| Equity Markets | Index | % Change YTD | % Change MTD | P/E |
| Nifty | 10,830.95 | -0.29% | -0.29% | 20.76 |
| Sensex | 36,256.69 | 0.52% | 0.52% | 22.27 |
| Dow Jones | 24,999.67 | 7.17% | 7.17% | 15.22 |
| Shanghai | 2,584.57 | 3.64% | 3.64% | 9.85 |
| Nikkei | 20,773.49 | 3.79% | 3.79% | 14.76 |
| Hang Sang | 27,942.47 | 8.11% | 8.11% | 10.70 |
| FTSE | 6,968.85 | 3.58% | 3.58% | 12.43 |
| MSCI E.M. (USD) | 1,049.93 | 8.71% | 8.71% | 11.97 |
| MSCI D.M.(USD) | 2,028.49 | 7.68% | 7.68% | 14.86 |
| MSCI India (INR) | 1,260.79 | -0.15% | -0.15% | 21.50 |
| Currency & Commodities | Last Price % | Change YTD % | Change MTD |
| USD / INR | 71.085 | 1.89% | 1.89% |
| Dollar Index | 95.58 | -0.62% | -0.62% |
| Gold | 1,321.20 | 3.02% | 3.02% |
| WTI (Nymex) | 53.79 | 18.45% | 18.45% |
| Brent Crude | 61.89 | 15.04% | 15.04% |
| India Macro Analysis | Latest | Equity Flows | USD Mn |
| GDP | 7.10 | FII (USD mln) | |
| IIP | 0.50 | YTD | -74.82 |
| Inflation (WPI Monthly) | 3.80 | MTD | -74.82 |
| Inflation (CPI Monthly) | 2.19 | *DII (USD mln) | |
| Commodity (CRB Index) | 412.83 | YTD | 1,010.10 |
| Source: Bloomberg, SEBI | MTD | 1,010.10 | |
| *DII : Domestic Mutual Funds Data as on Data as on 31stJanuary 2019 | |||