India outperformed other Emerging Markets in May. We saw a rally on the back of a strong mandate for the PM in the Elections. On the other hand, global equities witnessed a selloff due to weak macroeconomic data and deteriorating sentiment on trade disputes.
On the global front, US-China trade tensions re-escalated in May, with negotiations breaking down and tariffs being raised by both sides. Global growth is likely to slip, and this is getting reflected in slowing global trade and Purchasing Managers Index (PMI) numbers. In the US, the Fed is now expected to cut rates by 50 bps over the course of the year on concerns of slower growth and low inflation. The Chinese govt is also expected to support the economy with additional fiscal and monetary stimulus. The market seems to be anticipating an 'Extended Escalation' scenario, wherein negotiations continue for the next few months and a resolution is expected to be hammered out by the end of the year. While increased uncertainty has led to some Emerging Markets seeing FPI outflows in May, India saw an inflow of ~USD 1.2 Bn as FPIs continued to correct their light positioning.
With the General Elections getting concluded, a key uncertainty weighing down the Indian economy and markets has been removed. It is the first time since 1971 that an incumbent PM has secured an absolute majority for the party for a second successive term.
The immediate priority of the new administration would be to revive cyclical growth. India’s 4Q FY19 GDP growth came in at 5.8% YOY and dragged down full-year FY19 growth to 6.8% y-o-y, a five-year low. The slowdown was likely due to the NBFC stress and liquidity issues in addition to the election uncertainty. With slowing growth and inflation below target, the RBI cut its policy rate by 25 bps and changed its stance from neutral to accommodative confirming further scope of rate cuts in the future. Also, system liquidity is expected to come back to a surplus in June post the elections. To boost farmer income, the government has already announced that it will roll out the PM-KISAN scheme to all farmers and it is also working on measures to close the gap between the prices the end-consumer pays and what the farmers receive. It is also a pleasant coincidence that, like in 2014, when the government starting its new term, crude oil prices have seen a significant decline. This should keep both inflation and current account deficit in check.
On the Investments side, private capex which typically slows down 1-2 quarters before elections, should also pick up post elections. The new budget will be passed in July after which govt capex will begin. Simplification of GST increase in direct tax collections, and divestments should lead to an increase in revenue which will enable public sector capex. The US$1 trillion+ infra push to boost job growth in informal sector will be a key priority.
View on the Market:
Post the election results, we have seen a rally with the largecap Nifty and the Sensex crossing all-time highs of 12,000 and 40,000, respectively. However, in comparison to an 11% rise in the largecap Nifty index year to date (YTD), the mid-and-small cap indices have risen only 1-2%. With confidence coming back to markets, mid-and-small cap stocks still have room to rally further.
IN Q4 FY19, Sales and PAT for Nifty companies grew by 10% and 16%, respectively, largely aided by Financials. Excluding Corporate Banks, Nifty profit after tax (PAT) grew by ~2% YoY only and broader earnings growth for the market remains muted. At ~19.5x 1-Yr forward P/E multiple for the Nifty, valuations are at a premium to their long-term average. However, valuations for the broader market still offer a good return for the long-term investors. With the election-related uncertainty over and the incumbent government getting a strong mandate, we remain constructive on India’s overall economic growth going forward and suggest that investors may continue to build equity exposure for the long term.
In this environment, funds in the multicap and large-and-midcap category could be favourable as they provide flexibility to move across market cap and sectors. Also, they will typically have a significant allocation to mid-and-small cap stocks, many of which we believe are still available at reasonably attractive valuations.
Select themes that we may look to participate in are Consumption (i.e. Consumer and Consumer Discretionary) and Financials (i.e. Private banks, Corporate Banks and select NBFCs), and Industrials (i.e. Capital Goods, Infrastructure, and Cement).
Thank You and Happy Investing!
PM: Prime Minister; RBI: Reserve Bank of India; Fed: Federal Reserve; USD: US Dollar; FPI: Foreign Portfolio Investors; EM: Emerging Markets; NBFC: Non-Banking Finance Company
Source: ABSLAMC Research, Bloomberg
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