In contrast to the heightened global volatility seen last year on account of the strong USD, high crude oil prices, and US-China trade tensions, YTD 2019 has been relatively benign for equity markets. Consequently, global equity markets have witnessed a sharp V-shaped recovery paring all the losses recorded in 4Q18. Locally, Indian equities are enduring some volatility, even as the market is near an all-time high. Market uncertainty is likely to prevail as we approach the outcome of the General Elections.
Strong US and Chinese economic data, and optimism about the resolution of trade disputes between the US and China have been the key drivers for global markets this year. In addition, with inflation being benign, the US Fed and other Central Banks have become dovish thereby giving space for monetary policy easing in Emerging Markets. Consequently, EMs have seen strong FPI inflows as EM fund managers continue to correct their light positioning. India alone has seen FPI inflows of ~US$10bn in equities YTD.
Brent crude prices had briefly spiked above USD 75 per barrel as the US announced that it would not extend the waiver of sanctions on Iran. However, oil prices have since cooled down with additional supply expected from OPEC+. Rising oil prices remains a risk to be monitored closely for oil-importing emerging economies, including India. Notably, the Rupee has remained stable even as the Dollar index has risen.
On the domestic front, we saw liquidity tightening post the IL&FS crisis in Nov’18. While this has led to some concerns regarding a short-term cyclical slow down, we are seeing a dichotomy in key macro parameters. While the IIP numbers have been weak, the PMI figures are robust, and exports have improved. While auto sales have been subdued, construction-related indicators like cement and steel production remain strong. Recent slowdown in some consumption segments is likely due to election related uncertainty and impact of NBFC stress. However, the uncertainty related to the elections will be over by the end of this month. Liquidity is also expected to improve in Q2 FY20 led by seasonal fall in currency in circulation post elections and likely Balance of Payments surplus. With forecasts of a normal monsoon by IMD and below-normal monsoon by Skymet, the upcoming monsoon season needs to be closely monitored for the consumer sector.
With headline CPI inflation expected to remain below the RBI’s 4% target in the next few months, further loosening is very much a possibility. This should be positive for both business and investor sentiment. GST collections in April also reached a record high of Rs 1.14 trn, versus an average of Rs 981 bn per month in FY19.
View on the Market:
Last year we had seen that, amidst the heightened volatility, Nifty returns had been lopsided with the Top 7-8 companies contributing almost 3/4th of the returns. In March, we had seen confidence coming back in the markets leading to a broader rally in the markets, especially in mid-and-small cap stocks. The market has now taken a breather as we await the election results. While the large-cap Nifty index was flat in April, the mid and small cap indices were down ~4-5%. Flat performance of the Nifty hides significant volatility as the India NSE Volatility Index spiked ~27% in April and was only marginally below its five-year high. We expect the volatility to subside post the elections, and the markets to pick up from here.
Broader earnings growth for the market remains muted. At 19x 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 have corrected and offer a good return for the long-term investors. We remain constructive on India’s overall economic growth going forward and suggest that investors continue to build equity exposure for the long term.
We believe that the current volatile environment is more conducive for bottom-up stock picking. Funds in the multicap space could be favourable as it provides full flexibility to move across market cap and sectors. Also, a multicap fund 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 are participating 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).
Fed: Federal Reserve; OPEC: Organization of Petroleum Exporting Countries; USD: US Dollar; EM: Emerging Markets
Source: ABSLAMC Research, Bloomberg
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