The month of August saw us in the midst of the earnings season. We saw robust financial performance in 1QFY19 with around 2/3rds of the Nifty50 companies reporting earnings that were in line with or above consensus estimates. Consequently, both the Nifty and Sensex rose ~3% and attained life-time highs in August. (Source: ABSLAMC Research)
Excluding corporate banks which missed their earnings due to higher provisioning and will need some time to stabilize; Nifty sales grew by 24% YoY, EBITDA by 19% YoY and Adjusted PAT by 27% YoY. A point to note is that the growth figures may seem high due to the base effect, but even adjusting for that, growth has been strong. Consumption-oriented sectors such as FMCG, Consumer Durables, Domestic Autos, Private Banks, and NBFCs reported strong earnings, and export-oriented sectors such as IT also did well. (Source: ABSLAMC Research)
Although Indian corporates have been gaining traction, the global macro backdrop for India is becoming a bit cloudy on the back of rising oil prices and Rupee depreciation. (Source: ABSLAMC Research)
Over the past 3 months, we have reiterated that it is critical to have oil prices in the $55-65/bbl range for a stable macro-economic environment in India. In August, Brent crude oil prices rallied almost 10% due to lower supply and averaged US$ 74/bbl. Consequently, the trade deficit surged to a 5-year high of $18 Bn and the Q1 CAD widened to 2.4% of GDP. In response to an increase in inflation, the RBI also raised rates by 25 bps. We remain watchful as crude prices are above our comfort zone. (Source: ABSLAMC Research, Mint, Bloomberg)
The USD also gained strength in August. In addition, US GDP growth has been strong and has boosted the odds of further rate hikes by the US Fed. The fact that this will lead to continuing strength in the dollar is weighing on EM currencies. In August, INR depreciated 3.3% MoM. YTD, the INR has depreciated more than 13% vs. the USD and also breached 72/$ for the first time. We believe that the Rupee will continue to have a depreciating bias and investors should recalibrate their portfolios accordingly. (Source: ABSLAMC Research, Financial Express)
Amongst EMs, Turkey and Argentina has been getting attention as their currencies are down ~20% and 30%, respectively, over the past month due to stubbornly high inflation. The Turkish central bank has said that it will be adjusting its monetary policy to bring about price stability. Argentina has raised its benchmark interest rate to 60%, entered an austerity program, and is being bailed out by a $ 50 Bn loan from the IMF. Overall, experts see the risk of contagion from these two countries to be limited as they have very low trade linkages with other countries globally. (Source: ABSLAMC Research)
On the trade front, the US is poised to impose tariffs of 25% on as much as $200bn worth of Chinese goods. If the US goes ahead, Beijing has already threatened to retaliate. In such a scenario, the share of world trade affected would be just over 6%. We continue to monitor these developments as trade experts suggest that further escalations in the trade war can start impacting global growth. (Source: ABSLAMC Research)
- Coming to our view on the Equity markets, India continues to be amongst the best performing markets globally in USD terms despite macro concerns. While the largecap indices attained lifetime highs in August, the market breadth also improved with midcaps outperforming large cap indices during the month. (Source: ABSLAMC Research)
- On a trailing basis, the market valuation is still on the higher side and the upside in the near term is likely to be capped. The market can consolidate in the short term and global volatility can lead to a minor correction. However, with earnings growth supporting the market, investors should buy into any corrections, if at all, and continue to build equity exposure for the long term. (Source: ABSLAMC Research)
- While we have had a large cap bias for almost whole of last year, we think that it would be prudent for investors to allocate 20% of their corpus to mid-cap funds. Valuations in that space have become reasonable and we remain constructive on overall economic growth. (Source: ABSLAMC Research)
- Sector Outlook
In terms of the sectoral outlook, with the ongoing Rupee depreciation, export-oriented sectors like IT should benefit. We continue to like Consumer Discretionary space with sectors such as Autos, Small Appliances and White Goods. We also believe that for private sector banks the increase in market share will be a secular trend over the next decade. Apart from the retail banks that we have been overweight for some time, we are constructive on private corporate banks too as we think majority of the asset recognition pain is already in the price and a 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 in areas where traditional banking platforms have not been able to penetrate. (Source: ABSLAMC Research)
Thank You and Happy Investing!
USD: United States Dollar; YTD: Year To Date; Yoy: Year on Year; PAT: Profit after tax; CAD: Current Account Deficit; IMF: International Monetary Fund; GDP: Gross Domestic Product; EPS: Earnings per share; EBITDA: Earnings before Interest, Tax, Depreciation and Amortization
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