August 08, 2019
Quantum Equity Team
July 2019 turned out to be a forgettable month for Indian equities. A mix of global and local factors contributed to the decline. S&P BSE Sensex had a fall of 4.6% during the month. Returns from midcap and smallcap indices almost washed away like monsoon in western parts of India. BSE Midcap and BSE Smallcap each had negative returns of 7.6% and 10.6% respectively.
For the seven months of 2019 so far, BSE Sensex had a return of 4.8%. on the other hand, BSE Midcap and BSE Smallcap appreciation stood at -11.1% and -13.2% respectively in the same period. IT was the only sector which had positive returns during the month. Healthcare and FMCG were other sectors which fell minimal during the month. Auto and metal were sectors which fell the most, both in double digits.
|Market Performance at a Glance|
|Market Returns %*|
|S&P BSE SENSEX **||- 4.6%|
|S&P BSE MID CAP **||- 7.6%|
|S&P BSE SMALL CAP**||- 10.6%|
|BEST PERFORMER SECTORS||IT|
|LAGGARD SECTORS||Healthcare, FMCG, Auto & Metal|
|* On Total Return Basis|
FIIs were net sellers during the month of July. They withdrew USD 1.9 billion from Indian stocks during the month. So far in calendar year, they have been net buyers of USD 9.4 billion. DIIs were net buyers of USD 2.9 billion for the month. Of this, USD 2.7 billion came from mutual funds while insurers contributed the balance. On a cumulative basis, DIIs had net outflows of USD 1.8 billion.
Among international events, the U.S. Fed cut interest rates by 0.25%. This was expected by most market participants. However, any further interest rate cut was ruled out by the central bank. The outlook spooked most asset classes leading to fall in equity markets across the world. Europe led by Germany is also facing growth slowdown. Eurozone is likely to continue following lose monetary policy in times to come.
Global central banks on the other hand are likely to keep interest rates low. The U.S. Fed is expected to reduce benchmark rate in balance of 2019. Eurozone is also taking interest rates closer to zero as economic growth and inflation remain weak there. A significant part of government bonds are trading at negative yield in countries such as Germany and France.
UK has got Boris Johnson as the new Prime Minister. Comments suggest he is a hardliner favouring a no-deal Brexit. Apart from the economy, this could impact many Indian companies that have a base there. Protests in Hong Kong over China's attempt to have tighter control over it drew a lot of global attention. Iran planned to go for higher nuclear enrichment, which didn’t go well with countries such as U.S.
Domestic economy continues on a slowdown path and a number of industries are facing stress. The Union Budget didn't address some of major problems faced by the economy. The Government showed resolve to maintain fiscal discipline and turned to RBI to do the heavy lifting to pull the economy from doldrums. Measures to boost public investment, address the problems faced by NBFC and property developers were missing from the Budget, except for few sops here and there.
Post the IL&FS default, there has been loss of confidence among financial market participants. There was a linkage between debt schemes of Mutual Funds, NBFCs and developers in terms of funding. With few stresses exposed, NBFCs beyond the top quality are not getting funding and so is real estate sector which heavily depended on NBFCs. As funding has dried up, even good projects are stuck and staring at default. There is a need to get confidence back in the system.
Above needs to be resolved to melt the financial system which has frozen. Government so far has also held back on some of many budgetary payments including NREGA wages. With elections over, once this comes into economy this could help economic growth to an extent. It is also expected that with RBI slashing interest rates and the festive season 3 months hereafter, consumption slowdown will reverse.
RBI cut interest rates at the start of August by 0.35%. Many companies reported their quarterly numbers. Bottom line performance is likely to fall short in fiscal 2020 as compared to approximately 20% growth assumed by consensus. Many sectors dependent on consumption are facing head winds.
Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Economy is dependent on domestic consumption and thus insulated from any global problems. Events like global trade wars have very limited impact on India. Investors can expect good return from equities over a long period in future. There has been a decline in equity market recently and investors should use this opportunity to allocate to equities.Data Source: Bloomberg
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