Global equity markets continued to perform well in November, led by the US and China. However, Indian Equity markets were flat in November. Markets declined in the first half of the month on concerns of weak macroeconomic data. However, they rallied in the second half of the month driven by both global risk-on sentiment and positive reforms in India.
Global central banks continue to maintain a dovish stance which has led to increased liquidity and a continued risk-on rally, even as the uncertainty on the trade war continues. Emerging Markets continue to see FPI interest. India alone saw FPI inflow of more than USD 3 Bn in Equities in November which has supported the current rally in Indian Equities. YTD, FPI’s are net buyers of more than $13 bn in Indian equities.
In India, 3QFY20 GDP growth declined to 4.5% yoy but headline CPI inflation in October rose to 4.6% yoy. Consequently, in a surprise move, the RBI kept the policy rates unchanged even as it has continued to maintain an accommodative stance. This has kept hopes alive for further rate cuts which may be necessary to revive GDP growth which is now projected to come in at 5% yoy for FY20E. With various measures announced by the government so far and with additional measures expected to boost demand, GDP growth seems to be bottomed out and we should see a gradual recovery from here.
Market sentiment got a meaningful boost following the Supreme Court’s positive verdict on Essar Steel and the Government’s announcement of a framework being deployed for the resolution of systemically important NBFCs under the IBC process. The government also announced a major strategic disinvestment push, which entails selling the government’s entire 53.3 % stake along with the transfer of management control in the country’s second-biggest state-owned refiner Bharat Petroleum Corporation Limited (BPCL). Along with this, the government announced partial/full sales of its holdings in four other public sector entities.
2Q FY20 was a noisy reporting season as tax provisions for companies were volatile given the cut in corporate tax rates announced in late September and revaluation of deferred taxes. While Nifty50 2QFY20 revenue and EBITDA declined marginally, Adjusted PAT increased 8% yoy largely due to the corporate tax cut. Overall, the breadth of operating earnings was mixed, with 26% of companies exceeding expectations, 48% meeting expectations, and 26% missing expectations.
View on the Market
Earnings growth has likely bottomed out and we should see an uptick from here as the economy recovers gradually. Nifty FY20 earnings growth of 12-13% is expected.
The largecap Nifty 50 index was flat in November. The Nifty Midcap index outperformed the largecap index while the Nifty Smallcap index still has some catchup to do. While the market breadth has improved somewhat, only select midcaps have performed well and we are yet to see a broad-based rally.
In terms of valuations, while the risk-reward for largecaps is fairly balanced, mid-and-smallcap stocks still trade at a discount to largecaps and are attractive in terms of valuation.
In this environment, funds in the Large-and-Mid category stand to do well as they can have a balanced allocation across largecaps and midand-smallcaps. While the largecap stocks can provide stability to the portfolio, the mid-and-smallcap stocks can provide the upside.
Select themes we are participating in are Consumption (i.e. Low-ticket Consumer Discretionary, Staples, Retail), Financials (i.e. Private banks, Corporate Banks, select NBFCs and Insurance), Industrials (Capital Goods, and Cement), and Pharma.
Source: ABSLAMC Research, Bloomberg
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