The month of October saw a continuation of the fall in equity markets, even as the Q2 earnings season kicked off on an optimistic note. We also saw a rebound in the past week with key indices rising by 5-9%. (Source: ABSLAMC Research, Bloomberg)

• Global Macro:

  Starting with global macro, Brent crude prices have declined more than 15% from peak levels of $86/bbl to $72.5/bbl on the back of supply assurances from Saudi Arabia and concerns of a global demand slowdown going forward. Oil prices will continue to remain volatile in the next few months as the US sanctions on Iran kick- in. Recent commentary indicates that eight countries, including India, have been granted 180-day time-bound waivers provided they make significant reduction in their imports. This is negative for oil and positive for emerging economies. (Source: ABSLAMC Research, Bloomberg)

• Oil and Other Global Events:

  With a pull-back in oil prices, the Rupee also stabilized in the 73-74 INR per USD range even as the Dollar Index has continued to strengthen. We believe the Rupee may stabilize at these levels if oil prices stabilize. (Source: ABSLAMC Research)

  Other key global events that could have a meaningful bearing on equity markets over the next few months include US mid-term elections in November and trade talks between the US and China. (Source: ABSLAMC Research)

• Domestic Markets:

  On the domestic front, the re-pricing of risk in the credit market and tightened liquidity have had a contagion effect on the NBFC sector. However, we believe most NBFCs will be able to tide over this environment while some better- capitalized private banks will be able to take share from NBFCs. The government as well as regulators are providing support to ensure that the liquidity flow becomes streamlined again in the next few quarters. It will be important to see how the festive season goes and it will be a good test of consumer sentiment and availability of financing. (Source: ABSLAMC Research)

  In the past couple of weeks, bond markets have calmed down meaningfully in response to policy makers' announcements on keeping the economy well supplied with liquidity. Also, with inflation consistently undershooting estimates due to benign food prices, expectations of a policy rate hike in December have reduced considerably. Yield on the benchmark 10-Yr Government Bond has declined from 8.2% to 7.8% over the last few weeks. (Source: ABSLAMC Research, Bloomberg)

  A positive point to note is that India has leapfrogged 23 places to 77th rank in the World Bank's global Ease of Doing Business rankings. This should raise the country's attractiveness for global investors. Additionally, GST collections crossed the INR 1 Lakh Crore mark in October. (Source: Mint)

• Earnings Season:

  The Q2FY19 earnings season is so far trending below expectations. We may see a cut in full-year FY19 earnings estimates to 14% vs. 16% earlier due to a subdued economic outlook because of the liquidity issues in the NBFC sector. 43 of the Nifty 50 companies have reported earnings thus far, with around 2/3rds coming in line with or above estimates. Excluding Corporate banks, sales grew by 27% YoY, EBITDA by 15% YoY, and PAT by ~5% YoY. A point to note is that the numbers may have been impacted by the base effect as the Q2 earnings last year were strong post the GST implementation. Sectors which have done well include Capital Goods, Banks, Domestic Autos, and export-oriented sectors such as IT and Pharma. (Source: ABSLAMC Research)

• Coming To Our View On The Markets:

  The equity market has seen significant correction and the Nifty 50 index has fallen more than 10% from its peak, while the midcap and smallcap indices have fallen ~20% and 35%, respectively. We believe the market will remain range-bound due to global macro concerns and domestic developments, including the substantial election calendar ahead. Even as there would be near term pain in earnings for NBFCs and wholesale-oriented banks, broader earnings growth for the market remains supportive. In addition, valuations are now at their long-term average providing a cushion to overall markets. (Source: ABSLAMC Research)

  Fear in the market has led to distressed prices and good value is emerging in individual stocks. The recent correction provides a good opportunity for prudent investors to build equity exposure for the long term. Investors will be better off doing SIPs/STPs for the next 6-9 months, rather than lump sum investments, so as to benefit from any fall in the market. (Source: ABSLAMC Research)

  It would also be prudent for investors to allocate 20% of their corpus to midcap and smallcap funds. Valuations in that space have become reasonable and we remain constructive on overall economic growth. (Source: ABSLAMC Research)

  In terms of sectoral outlook, sectors which will be impacted positively by a weaker Rupee include IT, Pharma, Metals and Mining, and Auto ancillaries. We continue to like the Consumer Discretionary space with sectors such as Autos and Consumer Durables. We also believe that for private sector banks, the increase in market share will be a secular trend over the next decade. Corporate banks are expected to see strong growth post the NPA resolution. (Source: ABSLAMC Research)

Thank You and Happy Investing!

The sector(s)/stock(s)/issuer(s) mentioned in this article do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s).

USD: United States Dollar; YTD: Year To Date; FII: Foreign Institutional Investors; GDP: Gross Domestic Product; EPS: Earnings per share; EBITDA: Earnings before Interest, Tax, Depreciation and Amortization; CAD: Current Account Deficit

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