Equity Markets Review - Review of July and outlook for August 2017

Equity Markets Review Review of July 2017 and outlook for August 2017

Indian equity markets had a mixed month with the implementation of GST and the beginning of the June quarter earnings season.

Nifty declined by 1.0% and Sensex by 0.7% whereas BSE100 index declined by 0.8% in June.

FII's were net buyers in equities to the tune of INR 36 billion and mutual funds were net buyers to the tune of INR 91 billion.

Sectors like real estate, healthcare, FMCG, metals and utilities outperformed whereas oil & gas, IT, auto, capital goods and the banking underperformed.

During the month of June, on the macro front, farm loan waivers by the states of Maharashtra, Punjab and Karnataka grabbed headlines on account of the announcement made by the UP government.

Banks also remained in focus on account of the 12 NCLT (National Company Law Tribunal) candidates identified and consequent provisioning requirement detailed by the RBI.

The Indian Met Department stated that 79 percent of the country has received normal-to-above-normal rainfall.

On the economy front, May retail inflation dropped to a record low of 2.18% in relation to 3% in April. This was led by a decline in food and fuel inflation. Deflation in food prices (-0.4% y-o-y) was visible on account of a good monsoon and bumper rabi crop. In addition, core CPI inflation (4.4% in relation 4.6%) declined too. WPI dropped to a 5 month low of 2.17% v/s 3.85% in April; similar to CPI due to weak food inflation.

Globally, the US Fed raised policy rates in mid June for the third time in 6 months. The ECB (European Central Bank) in its policy meet, kept the policy rates unchanged.

Outlook

GST (Goods and Services Tax) was implemented on July 01, 2017. Although it's a major reform and the same is likely to have a positive impact on the economy in the long run, it could have a short term impact on the economy and the earnings in the short run.

In the monetary policy meet held in August, the street expects the MPC (Monetary Policy Committee) to cut the policy rates. The RBI commentary in the background of the appreciating currency and benign crude prices will be keenly monitored.

Accelerating reforms and growth built upon a platform of stable macro-economics means that India continues to remain a standout amongst its global counterparts, even while domestic flows remain supportive.

Sensex trades at 18.0x FY18 estimated earnings. Realisation of anticipated earnings recovery, management commentary in the forthcoming 1QFY18 results, progress of monsoon and the impact of GST will be the key catalysts, in our view. We continue to remain optimistic from a medium to long term point of view.

Fixed Income Market Review

The Monetary Policy Committee (MPC) decided to keep the rates unchanged for the June policy.

MPC acknowledged the fall in inflation and revised its inflation projections to a new low.

The MPC voted 5-1 to remain on hold. This was the first time since the MPC was first formed in October 2016. This was on account of a rate decision not being secured with a 6-0 vote.

The bond yields eased significantly as the market cheered a lower inflation projection accompanied by a less hawkish tone.

Inflation data for the month of May was lower than market expectations as primary article inflation slipped into deflation (negative Y-o-Y).

Core inflation also eased as base effect continues to support a lower y-o-y reading.

The GDP growth data also sprung surprises due to the impact of demonetisation and the lag which came with it.

News of farm loan waivers by UP, Maharashtra, Punjab and other states caused a wide spread in state development loans amid fears of an increase in supply.

Globally, the US Fed raised rates by 25 bps which signaled hikes in the future.

ECB also signaled to ease out the rate cuts. Global bond yields rose as Fed and ECB signaled the end of an easy liquidity era. Commodities also reversed the falling trend and moved higher but crude oil continues to fall amid supply glut.

10 year G-securities benchmark bond yield eased by 15 bps during the month. The 10 year bond closed at 6.51% in comparison to the previous month's close of 6.66%.

Market Outlook

RBI's acknowledgement of a lower inflation and divided MPC has revived the rate cut expectations. Market sentiment has turned positive.

If the next few readings continue to undershoot the revised inflation projections, the RBI would have to deliver a rate cut.

The GOI has decided to implement the allowances recommendations of the 7th pay commission from July onwards. This would push core inflation higher by 50-90 bps purely on account of a onetime adjustment in the HRA component.

GST came into effect from 1st July and the same is unlikely to disturb the current CPI trends.

The US Fed seems on the right track to raise rates again in the second half and the same will send the balance sheet shrinking.

The overall probability of a rate cut in the August policy has increased and bonds are likely to trade in the range with positive bias.

Source: Bloomberg

This document is for information and illustrative purpose only. Any advice, opinion, statement of expectation, forecast or recommendation mentioned herein shall not amount to any form of guarantee that HDFC Standard Life Insurance Company Limited has determined or predicted future events or circumstances.