The macro backdrop for India turned favourable in July as crude oil prices declined and the Rupee stabilized post the sharp sell-off in June. (Source: ABSLAMC Research)
The GST Council cut GST rates of 88 consumer items, the bulk of which were reduced from 28% to 18% tax rate. Majority of the items are from consumer discretionary sector like paints, refrigerators, washing machines, water heaters, mixer grinders etc. The cut would certainly help boost consumption significantly and we think it is a move in right direction. Other important implication is reduced GST collection. Based on total collections over last 3 months, GST income for the government is trailing the budgeted number by over Rs 100 bln per month. Finance minister estimates a further impact of 7000 cr due to duty reduction, 0.5% of overall collection. We think 2 things would help incrementally here a) improved volumes due to duty reduction and b) government has also made an amendment to GST wherein they would be able to use excess cess collection of around 2500-3000 cr per month to offset the overall shortfall. Besides, we still estimate that overall central GST collections would be short by 40-50 bps of GDP which would be made up by better than estimated collections in direct taxes. (Source: RBI, ABSLAMC Research)
We have been highlighting over the last 2 months, how critical it is to have low oil prices for a stable macroeconomic environment in India. Oil prices have fallen by 6% in July. Any decline in oil is certainly positive. But we must remember goldilocks for India is to have oil prices between 55-65 dollars per barrel and we are still at 75 dollars per barrel post the correction. So, while equity markets have rejoiced with decline in oil prices, we remain watchful as prices are still above comfort zone. (Source: Bloomberg)
Monsoons have recovered to 6% below Long period average (LPA) but IMD has lowered seasons forecast to 95% vs 97% of long period average. Recovery of monsoons in July was very encouraging. Rainfall in South and central India is at LPA and north west is at 4%below LPA. East and North east is where monsoons are 26% below LPA. States like Bihar, Jharkhand, North Karnataka are the most impacted. What is more important to track is a) sowing data and b) reservoir levels as Rabi crop is dependent on it. In terms of sowing we are only 5% lower than last year for rice and pulses and 2% lower on an overall basis indicating that Kharif crop sowing is in-line with expectations. In terms of reservoir levels, we are similar levels to last year which should comfort Rabi crops too. (Source: ABSLAMC Research)
Trade deficit for June is at 5 year high of $ 16.6 bln. Importantly, 60% of m-o-m increase is due to higher oil prices which have declined now. We expect overall 20 bln dollars in trade and CAD due to high crude prices. At current levels of crude, CAD would be at 2.9% of GDP and currency may remain around 69-70 levels. Export oriented sectors would benefit and we continue to remain constructive on IT and other export oriented sector in near term. (Source: ABSLAMC Research)
RBI hiked rates by 25 bps as expected. While the hike was already priced in, markets were surprised that RBI was not hawkish and maintained a neutral stance. MPC acknowledged that domestic economic activity has continued to sustain momentum and output gap has virtually closed indicating robust domestic growth. RBI thinks risks to inflation are symmetric to crude prices, MSP hikes and trade wars balanced by good monsoons and GST cuts. Our view is that there could be 1 more rate hike in next 6 months as real rates arealready healthy at 150 bps and then a long pause. Key risks are now external - slowdown in global growth due to trade wars, snowball effect to China deleveraging etc which we continue to monitor while the domestic economy is on strong wicket. (Source: ABSLAMC Research)
On the equity market view, July was a good month post a tumultuous May and June. FII turned net buyers after being net sellers for the last 3 months while DII remained net buyers largely led by positive mutual fund flows. Nifty and Sensex were up 6% during the month, while mid and small caps were up 4%. As mentioned over the last 2 months, after having a large cap bias for more than a year, we now think that there is serious value emerging in mid-caps. Valuations in mid-caps are in-line with long term averages after quoting at a premium for a long period of time. We would advise investors to have 20% of their equity portfolio allocated to mid caps today. (Source: ABSLAMC Research)
With regards to the sectoral outlook, we continue to like Consumer Discretionary space with sectors Autos, Small Appliances and White Goods. We also think private sector banks are secular market share gain hypothesis for the next decade. Apart from the retail banks that we have been overweight for some time, we have turned constructive on private corporate banks too as we think majority of the asset recognition pain is already in the price and recovery is in the offing. We also like rural oriented NBFCs as many of them are leading from the front to provide higher access of credit where traditional banking platforms have not been able to penetrate. We have a whole host of funds across categories with consistent performance – large cap, multi cap, midcap, small cap, balanced, dynamic equity, ELSS and thematic funds that you may choose from in line with your risk appetite. (Source: ABSLAMC Research)
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