Cautious expectations and stabilising growth are positive for Indian equities: Nifty50 hit the 10k mark in Jul’17 defying valuation concerns, which incidentally coincided with weak Q1FY18 results followed by the Q1FY18 GDP print of 5.7%. Q2FY18 has revived GDP growth rate (6.3% YoY) and corporate earnings outlook though worries around elevated oil prices and likelihood of the Central government’s fiscal deficit target getting breached is causing uncertainty. Rational investor reaction to high valuations, concerns on elevated oil prices and fiscal strain, despite the optimism creating by Moody’s sovereign credit rating upgrade, has resulted in the Nifty50 being in a consolidation mode since Q1FY18-end, which we believe is a positive for Indian equities in the longer term given the emerging stability in longterm growth outlook. We believe these concerns are short-term in nature and are not structural impediments to growth, thereby providing entry points to long-term investors.
Robust institutional flows and capital raising activity: For the month of Nov’17, FPIs inflows into Indian equities came in at a 8-month high of US$3bn (including US$1.5bn in primary market) while DII flows continued to be positive (US$1.4bn). FPI buying was observed in telecom, utilities, energy and metal sectors. Capital raising activity continues at a robust pace resulting in US$3bn being raised in Nov’17, which was largely driven by IPO issuances.
High frequency indicators turning positive in Nov’17:
* Manufacturing PMI for Nov’17 at 52.6 saw its strongest improvement since Oct’16, which signals the fading away of GST and demonetisation related impacts on manufacturing as corroborated by the Q2GDP print (manufacturing growth at 7% YoY). Index of the eight core industries remained steady at 4.7% for Oct ’17.
* Robust Auto sales: Auto sales growth reported by major companies showed healthy volume growth.
* Industry credit growth remained weak at -0.3% YoY while within industry; loans to large corporates grew by 0.23% YoY. Personal loan growth continues to be robust at 14% in Oct’17. External borrowing (ECCB+FCCB+RDB) grew sharply (US$ 4.4bn in Oct’17 vs US$ 2.5 in Oct’16) largely due to refinancing of earlier ECBs
* Q2FY18 GDP growth at 6.3% YoY picks up sequentially: Industry as a whole grew 5.8% YoY from 1.6% in Q1FY18. The handsome recovery in industry growth rate was almost entirely due to sharp increase in manufacturing growth. The robust recovery in manufacturing growth rate suggests that the pain caused by demonetisation and GST could be behind us. Services grew 7.1% in Q2FY18 down from 8.7% in Q1FY18 and 7.8% in Q2FY17. All components of the service sector declined sequentially – trade (9.9% vs 11.1%), finance & real estate (5.7% vs 6.4%), and public admin (6% vs 9.5%). The decline in public admin growth rate reveals the government’s limited ability to push growth in coming quarters
Upcoming events: RBI Monetary Policy
The RBI is expected to keep policy rates unchanged at the upcoming monetary policy review on 6-Dec’17. Though the latest print of inflation displayed marginal uptick, inflation during the year is likely to remain within the RBI’s comfort level. Moreover, concerns of fiscal slippage and uncertainty about global oil prices are likely to keep the RBI in a cautious mode.
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