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World & Indian Market's Views June - 2018
Aug 06, 2018
7 mins | Views 243
Discussions in the month of June’18 centered around OPEC + allies meeting to increase crude production. OPEC and its allies did agree to increase output by around 1 mln barrels per day which should ally fears of further increase in crude prices. However, willingness of all its members to participate in the production rise and also the timing of increase is still a question mark. Hence crude continues to remain at elevated levels and in fact ended the month at a high of 79 $ per barrel. As highlighted earlier, India is a net importer of crude and high crude price is one the key fault lines for a stable macro environment as CAD and inflation are adversely impacted.
(Source: ABSLAMC Research, Bloomberg)
Our trade deficit has increased 20% yoy to $ 14.7 bln and the currency is seeing a sharp depreciation to a level of around 69 INR per USD. Over the last two years of improving global growth, India has not participated in export growth largely on account of self-induced challenges like demonetization and GST implementation. While these measures have helped in channelizing unreported and under-reported portion of the economy into formal economy, it has had its fair share of pain in exports. We expect that with currency depreciation, export competitiveness will improve and should benefit in the next 12 months. Imports on the other hand have continued to increase especially on the non-oil and non-gold side. Gold imports have declined by 40% in the last 6 months to 343 tonnes which is good but electronics imports continue unabated. A policy intervention in terms of manufacturing sops in this space may be necessary to curtail the overall deficit.
(Source: ABSLAMC Research, Mint)
FII flows continued to remain negative in June with a USD 450 Mn outflow in equities and a USD 1.2 Bn outflow in the debt market. However, DIIs remained net buyers for the 15th consecutive month at USD 2 Bn in June.
(Source:Bloomberg)
Domestically, on the much-anticipated MSP price increase, weighted average MSP price increase is announced at 14.5% for the Kharif crops, largely in line with street expectations. It is pertinent to note that the hike in the last 4 years averaged around 4% CAGR and hence this should benefit farm income meaningfully in an election year. Our assessment is that if procurement is streamlined and hike is fully implemented then it would lead to higher inflation by around 50-70 bps. This means one can expect inflation to remain elevated for the next 12 months and a rate hike can be expected in coming Aug from the central bank. On the fiscal side, budget had provisioned for food subsidy to increase by 20% yoy and hence this may not lead to additional fiscal burden.
(Source: ABSLAMC Research, Financial Express)
Monsoons till date are at 7% below long term average but IMD continues to expect that July would be 101% of long term average and that the season should end at 97% of long term average indicating a normal monsoon for 3rd consecutive year. If true, this would be very healthy for rural income and consumption. (Source: ABSLAMC Research, IMD) Total GST collections for Apr-Jun average at Rs. 977 bln per month vs FY18 monthly average of 897 bln post implementation of GST. Government has budgeted Rs. 1050 bln per month for the year and hence the improvement is in line with expectation. However, being an election year, we can expect that some of the consumption items which are taxed at 28% GST bracket can be reduced to 18% in coming months which should help boost consumption.
(Source: ABSLAMC Research, Financial Times)
Data of last five election years suggest that markets tend to do well 1 year prior to elections as there is a good consumption as well as investment boost by the incumbent government. A key worrying trend is the recent spate of increase in farm waivers across the country. With Karnataka also joining the bandwagon recently post the state elections, the overall waiver is estimated to be a colossal Rs. 3 lakh crore which can have an impact on bank credit to the sector incrementally.
(Source: ABSLAMC Research)
Among global developments, the world was keenly watching US-N.Korea Singapore summit. The Singapore summit was a pleasant surprise and takes one of the key risks off the table. On the trade war front, President Trump did implement the first round of tariffs against China on 34 bln $ worth of goods imported in US in early July. We expect retaliatory measure from all countries which can impact global trade. Experts in global trade have pointed out that 10% increase in trade costs would lead to an impact of 1-1.5% of global GDP. While the base case is still that this trade war will not escalate further and is a tool to gain better terms of trade among large trading nations, this can be a serious headwind to global growth and we need to monitor the same.
(Source: ABSLAMC Research)
The investment landscape in the country has been gradually changing in the last few years. It is our opportunity now to #GoBeyondFixed and adopt this change to take our goals to the next level with a smart choice of investing in these debt funds after analyzing the risk reward trade-off.
(Source:Bloomberg)
Coming to the equity market view, while broad indices like Nifty and Sensex was flat during the month, mid and small caps continue to bleed. Mid cap index was down another 3% after falling 6% in May and small index was down 6% during the month. As mentioned last month, after having a large cap bias for more than a year, we now think that there is serious value emerging in mid caps. Valuations in mid caps are in line with the long term average after quoting at a premium for a long period of time. (Source: ABSLAMC Research, Bloomberg) Within sectors, healthcare and IT outperformed with 10% and 7% return in the last 1 month while PSU banks, metals, power, cap goods declined by over 5%. We continue to like consumer discretionary especially rural consumption, private sector banks due to market share gains and metals as global growth continues to be robust.
(Source: ABSLAMC Research)
For the first time in four years, earnings haven’t been downgraded and there is a high probability of earnings recovery after 5-year stagnation. All indicators point to a fairly strong Q1 earnings growth. Sustainable earnings growth will support and drive the market from here onwards.
(Source: ABSLAMC Research)
Thank you and Happy investing!
USD: United States Dollar; YTD: Year To Date; FPI: Foreign Portfolio Investors; DII: Domestic Institutional Investors; WPI: Wholesale Price Index; CPI: Consumer Price Index; GDP: Gross Domestic Product; GVA: Gross Value Added; GST: Goods and Sales Tax; EPS: Earnings per share; EU: European Union; CAD: Current Account Deficit; OPEC: The Organization of the Petroleum Exporting Countries
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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