10th October, 2016
Atul Kumar - Head - Equity Funds
In the month of September 2016, S&P BSE Sensex fell by 2.01% on total return basis. On calendar year to date basis, BSE Sensex has increased by 8.12%. As compared to its level a year ago, Sensex has gained 8.15%. BSE Midcap index had a lower fall of 0.32% during the month, whereas S&P BSE Smallcap index rose 1.16%. Sectors which performed well during the month were oil & gas, auto and consumer durables. Sectors which were beaten the most included FMCG, capital goods, power and telecom.
FIIs during the month of September bought stocks worth USD 1.4 bn. So far in the calendar year, they have invested USD 7.51 bn in Indian stocks. Domestic investors (DIIs) also turned buyers during the month, putting in USD 299 mn. Of this, insurance players contributed USD 72 mn while USD 227 mn came from MFs. Indian Rupee appreciated by 0.53% versus the US Dollar.
World economic growth has remained subdued for quite some time and is unlikely to change in the coming times. Trade among countries has slumped to a low since the financial crisis, as pointed by recent studies. A large part of the developed world is in the process of monetary easing. This has kept interest rates in the zero to negative territory. Low interest rates have also played a part in keeping asset prices high throughout the world. Equity, fixed income and real estate – most asset classes have benefited from easy liquidity.
The US is the only country among the large developed economies which is growing and not increasing money supply. There is a possibility of US Fed raising interest rates later during the year. If that happens, there could be a fall in equity markets, in India. Rise in interest rates in the US will make foreign investors prefer their home markets than take risk in emerging markets including India.
On the domestic data points, inflation at consumer level climbed above 6%, reversing the decline a month ago. On the other hand, yield on G-Sec has been falling to quite a low level. This indicates that inflation may have cyclical elements which will correct, apart from more money flowing in India as rates are zero to negative in many parts of the world. Monsoon has been very close to normal so far in the season.
On the domestic side, inflation in August fell to 5% after it rose to 6% in the earlier month. The Monitory Policy Committee, put in place at the RBI, would decide interest rates in the future. This is a departure from the past where only RBI personnel decided on rates. Now, the government also nominates outsiders for rate decision. The committee met in early October for the first time and cut repo rate by 25 basis points.
The Indian equity market was also spooked by India’s surgical strike on militant launch pads across the Line of Control (LoC). The strike was in response to terrorist attack on an army base in Northern India. There can be a possibility of tensions escalating at the border. While this is unlikely to have an impact in the long term, there could be sell off in equity market as a knee-jerk reaction.
The investment cycle still remains to pick up in India. Recent data by CMIE points that there are several projects stuck on the ground and the stock of stalled projects has increased. Recovery of investment is important for revival in economic activity and GDP. On the other hand, monsoon season has come to an end, with 3% deficit compared to projection. A normal monsoon after a two-year gap will help boost rural GDP apart from triggering higher consumer spending going ahead.
We remain optimistic about Indian equities in the long run. India’s economy is unlikely to be impacted much due to the unfavourable situation in other parts of the globe. In fact, India has been a beneficiary of fall in commodity and energy prices. The country is a bright spot in world equities, given high GDP growth which can continue. Investors can look to add moderately to their portfolio weight in equity although it has run up in recent times. Earnings of companies are also bottoming out. There could be a sharp jump in listed companies’ profits around the corner. This will result in better fundamentals for equities, which was lacking so far. Better monsoon and pay commission are short-term triggers while GST Bill passage is a long-term boost for the markets.
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