Feb 13, 2017
Nilesh Shetty - Associate Fund Manager - Equity
In January 2017, the BSE Sensex gained 3.88% on total return basis. Mid cap and small cap stocks had a better run in the first month of 2017. BSE midcap index rose by 6.87%, while small cap index appreciated by 7.40%. Among sectors, metal, consumer durables and telecom were notable gainers. The IT and pharmaceutical sectors were among those not favoured..
FIIs underwent muted activity during the month, having sold stocks worth USD 6 Mn. Domestic investors (DIIs) were net buyers to the tune of USD 697 Mn in January. Among DIIs, mutual funds were buyers of USD 803 Mn, while insurers sold stocks worth USD 106 Mn. During the month, the rupee appreciated 0.09% versus the US dollar.
GDP growth in the developed markets remains subdued with the exception of the US. The Eurozone and Japan continue to follow loose monetary policy to revive growth and inflation. Their objectives haven’t been achieved so far. The recent increase in inflation in some parts of developed world has been due to rising energy prices (crude oil) rather than consumer demand.
There have been protectionist measures taken in various parts of the world. Brexit and the US election results are a vote against globalization. With incomes stagnating or falling in many cases, major sections of population have been voting against free trade and the movement of foreign workers within their borders. This has implications going for many companies. Either they may lose out on foreign demand or their costs could rise. The Indian IT sector is a case in point, with the US planning to double the minimum wage of persons working on H-1B visas.
A major event at the start of February was the presentation of the Union Budget for 2017-18. The date of the presentation was preponed by a month and, for the first time, the railway budget was merged into it. The Budget had higher resource allocation to the agricultural and rural sector. Before the Budget, expectations were high for a simplification of taxes (withdraw exemptions) and lower tax rates. Except for reducing taxes for smaller businesses, it didn’t deliver much on this front. The fiscal Deficit is likely to be controlled to 3.2%, signifying that the Government is prudent in managing its finances. The Government also showed its intent to bring transparency to political funding and to control black money by banning cash transactions above Rs 3 lacs. If implemented well, these measures will have a long term positive impact on the integrity of Indian political parties.
Many companies announced their 3rd quarter results for the fiscal year 2016-2017. Data from the impact of the recent demonetization on corporate results were monitored. Sectors such as real estate, two wheelers and FMCG have witnessed lower volume growth or even decline during this period. Many other sectors have surprisingly been quite resilient and posted good results. On the downside, capital expenditure by the corporate sector has still not picked up. There were expectations since May 2014, when the new government was elected, that corporate spending would pick up. It has been an almost 3-year-long wait.
We remain optimistic about Indian equities in the long run. India is unlikely to be impacted much economically from the unfavourable situations in the other parts of globe. In fact, it has benefited from the fall in commodity and energy prices. India is a bright spot among world equities, given its high GDP growth which is likely to continue. So far, demonetization hasn’t had a big impact on the listed companies, although it needs to be monitored in the coming months. India is also relatively less impacted from global protectionist measures as its consumption is 65% of the GDP. We are relatively more insulated on exports for economic growth. Investors can add to their position in equity to benefit from higher corporate earnings growth. The valuation of equities also appears to be fair, and not excessive.
Data Source: Bloomberg
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