After a strong start to the year in January, global equity markets continued the positive momentum in February buoyed by a decisively dovish Fed coupled with optimism on resolution of US-China trade talks. Locally, however, markets were impacted by a) mixed Q3 earnings season, b) concerns around some NBFCs, c) uncertainties surrounding outcome of upcoming General Elections, and d) heightened geopolitical tensions between India and Pakistan. (Source: ABSLAMC Research)
The US economy cooled less than expected in Q4 CY2018. However, GDP growth is expected to decline in Q1 2019 as consumption growth is slowing down. The US Fed is expected to hold or cut rates going forward. With the world’s major Central Banks, including the Fed, ECB, Bundesbank, and BOJ becoming dovish, Emerging Markets now have space for policy easing which should give a boost to their economies.
On the trade war front, US President Trump has said the US and China are very close to signing a new trade agreement, following substantial progress in talks. In an encouraging sign, Mr. Trump also delayed tariff increases on Chinese goods scheduled for March 1st. A resolution is expected soon and will be positive for the global economy.
Brent crude prices rallied 23% in Jan-Feb 2019, post a 36% drop in 4Q18 mainly due to supply cuts by the OPEC+ coalition. However, they remain within our expected range of USD 60-70 per barrel which is manageable by oil importing emerging economies, including India.
Considering these developments, Emerging Markets saw FPI inflows in Feb with India alone seeing inflow of USD 2.4 Bn in Equities. However, with MSCI increasing China’s weight in the MSCI EM index by 90 bps, India's weight could potentially reduce by 75bps thereby impacting FPI flows in the coming months. (Source: ABSLAMC Research, Bloomberg)
With inflation consistently undershooting estimates and well below the RBI’s target of 4%, the RBI cut its policy rate by 25 bps and hinted at additional rate cuts this year which should boost the economy. Despite this, the Rupee was flat in Feb even though the Dollar Index moved higher by 0.6%. With crude prices and Rupee range-bound, external stability is less of a concern now.
India’s Q3 FY19 GDP growth moderated to 6.6% mainly due to a decline in credit growth and disbursements as risk aversion increased post the NBFC issues. The slow down seems temporary as liquidity is improving and demand is expected to pick up due to the stimulus provided by measures in the Interim Budget.
Expected GDP growth for FY19 has been revised downwards to 7% from 7.2% mainly due to government spending coming off from a high base. However, India is still expected to be the world’s fastest growing economy with FY20E GDP growth expected to be 7.3-7.4% driven mainly by domestic consumption. As per a recent report, India’s consumption has been growing at a 13% CAGR over the past decade to reach INR 110 trillion in 2018. It is likely to continue growing at a 12% CAGR over the next decade to reach INR 330 trillion by 2028.
The government announced an infusion of Rs 48,000 Cr aimed at reviving Public Sector Banks that are still under the Prompt Corrective Action (PCA) framework. With this infusion, most of the banks should be able to exit PCA parameters which should aid credit growth. The government also recently reduced the GST rates on under-construction properties which is positive for sentiment.
The Q3 earnings season has concluded and 2/3rds of the Nifty50 companies have come in above or in-line versus estimates. Nifty companies have shown robust revenue growth, however operating margins and PAT have been under pressure as companies faced the full impact of rising material prices and energy cost, tightened liquidity, and higher interest cost. Select Private & Corporate Banks, IT, Capital Goods & Infra and consumption-oriented companies reported decent set of numbers. Nifty EPS growth for FY19 and FY20 has been downgraded by 3-5% because of earnings downgrades in sectors such as Auto, Cement, and Metals. (Source: ABSLAMC Research, Bloomberg)
View on the market
While the large-cap Nifty index was flat in Feb, we saw significant intra-month volatility with the Nifty moving +/- 5%. Mid and small cap indices were down ~1-3% in Feb and continued to underperform the large cap index. While global markets have seen a good rally YTD, India has not participated in the rally due to which India’s outperformance versus the MSCI Emerging Markets Index seen in 2018 has been wiped off. However, after a strong response from the Indian government on cross-border terrorism, the market is factoring in higher chances of the current government coming back. Confidence is coming back in the markets leading to the rally seen in mid-and-small cap stocks. We expect the markets to pick up from here.
Broader earnings growth for the market remains supportive. At 18x 1-Yr forward P/E multiple for the Nifty, valuations are at a slight premium to their long term average. However, valuations for the broader market have corrected and offer a good return for the long-term investors. We remain constructive on India’s overall economic growth going forward and recommend that investors continue to build equity exposure for the long term. Investors would be better off doing SIPs/STPs for the next 6 months rather than lump sum investments. It would also be prudent for investors to allocate 20% of their corpus to midcap and small cap funds as valuations in that space have become attractive.
Select themes that we are participating are Consumption (i.e. Consumer and Consumer Discretionary) and Financials (i.e. Private banks, Corporate Banks and select NBFCs). (Source: ABSLAMC Research, Bloomberg)
Thank You and Happy Investing!
NBFC: Non-Banking Finance Company; Fed: Federal Reserve; ECB: European Central Bank; BOJ: Bank of Japan;
OPEC: Organization of Petroleum Exporting Countries; USD: US Dollar; MSCI: Morgan Stanley Country Index; EM: Emerging Markets;
RBI: Reserve Bank of India; GDP: Gross Domestic Product; PAT: Profit After Tax
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