March 15, 2017
Nilesh Shetty - Associate Fund Manager - Equity
In the month of February 2017, BSE Sensex gained 4.01% on total return basis. In the first two months of the year, it has appreciated by 8.05%. Mid cap and small cap indices also rose handsomely by 5.53% and 5.92% respectively during the month. Among sectors, real estate, consumer durables and IT were among the best performers, some rising on the base of low expectations. Auto, metal and power were major indices which didn’t enjoy much favour with investors.
On a one year basis, Sensex has risen 26.9% on total return basis. FIIs invested USD 1.56 Bn in Indian stocks during February. Domestic institutions put a small USD 98 Mn to buying equities. Major part of this came from insurers whereas mutual funds sold stock worth USD 8 Mn. Indian rupee appreciated 1.73% against US dollar during the month.
On the global front, US plans to invest on replacing its legacy infrastructure. Many commodity prices, especially metals have run up fueled by such expectations. Other developed markets such as Europe and Japan have been struggling for growth. China, which was a major contributor to growth few years ago, has been facing problems with over-leverage of debt. China has invested heavily in factories and infrastructure to keep demand and employment high.
RBI held its monetary policy during the month. In a surprise move, it changed its stance from accommodative (rate cuts possible in further) to neutral. While overall inflation has come down to 3.2%, non food inflation remains sticky. This has been a concern for the central bank. Interest rates may not fall much in the coming future in India. There has also been a rise in interest rates in US, which prevents Indian rates to come down given risk premium an investor expects.
US interest rates may go up further in future as the economy has achieved low unemployment and is operating close to optimal output. This may hurt equities prices in emerging markets including India (at least in short run).
Most companies are seeing good demand and demonetization worries are receding. Consumer facing firms expect that there can be some impact till quarter ending March 2017 and not much beyond that. This bodes well for Indian equities as earning growth may return after the system shock witnessed in November 2016. However, the unorganized sector in India may undergo pain for longer as they have not disclosed their full income historically. Their pain can have spill-over effect on some other industries, eg banking.
We remain optimistic about Indian equities in the long run. India is unlikely to be impacted much economically from the unfavourable situation in other parts of the globe. Across the globe prices of commodities and energy have been falling, it has been a beneficiary for India. India is a bright spot in world equities, given high GDP growth which can continue. Demonetization so far doesn’t seem to have a big impact on listed companies, though it needs to be watched in the coming months. India is also relatively less impacted from global protectionist measures as consumption is 65% of GDP. We are less reliant on exports for economic growth. Investors can add to their position in equity to benefit from higher corporate earning growth. Valuation of equities also appears to be fair, not excessive.
Data Source: Bloomberg
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