Published on 11/09/2018 2:42:32 PM | Source: Quantum Mutual Fund

Quantum AMC: Equity view by Mr. Atul Kumar, Head, Equity Funds

Below is the View On Equity by Mr. Atul Kumar, Head, Equity Funds

During the month of August, S&P BSE Sensex rose by 2.88% on total return basis. Mid cap and small cap indices which were under pressure for the past 6 months recovered well this month. S&P BSE Midcap index increased 5.62% while S&P BSE Smallcap index appreciated 3.84% in August. For the 8 months of year 2018, S&P BSE Sensex has risen 14.55%. In comparison, S&P BSE Smallcap and S&P BSE Midcap have fallen 10.11% and 4.58% respectively. The rout in earlier months continues to hurt investors in mid/small stocks.  

Healthcare stocks topped gains among sectors, providing double digit gain of 12.38% in the month gone by. Apart from investors correcting under-ownership in sector, rupee depreciation works in its favour. Metal and power were other prominent sectors that gave superior return. Telecom, oil & gas and automobile appreciated less than the index.                

FIIs were net sellers during the current month. They sold stocks worth USD 278 Mn. So far in the year 2018, FIIs have been sellers of USD 692 Mn. Domestic institutions saw net inflow of USD 403 Mn during the month. While MFs contributed USD 546 Mn to this, insurers were sellers to the extent of USD 143 Mn. So far DIIs have invested USD 10.5 Bn in 8 months. The Indian rupee depreciated 3.57% against the U.S. dollar. This follows many emerging market currencies taking a hit, while the U.S. dollar has been strengthening. 

In the next few days, there will be 10th anniversary of the global financial crisis (GFC) which culminated into failure of investment bank Lehman brothers. There was a credit freeze arising from lack of trust among financial sector participants. The crisis was fueled by excesses in housing sector, where loans were given to customers who didn’t have much income to service them. These loans were packaged in complex securities such as CDO/CDS and sold to investors who did little due diligence. As housing market fell and borrowers’ default rose, these securities became far less valuable than what they were carried at in books. All the excesses in housing and financial markets of many years led to big implosion. Risk management systems were found weak in most global firms.  

While the past 10 years has seen repair of problems and global economic growth has returned, many problems still remain. There was a huge liquidity provided by central banks post crisis including schemes such as Troubled Asset Relief Program (TARP), a large part of this continues to float around. The U.S. Fed is gradually purchasing some securities and reducing the bloated balance sheet. Other central banks such as Europe and Japan still have to follow this path. Leveraging/indebtedness of many countries have risen since GFC and are of concern. Countries such as China have very high debt/GDP ratio leading to worries of collapse or hard landing.  

Most emerging markets have also seen sell off in equity markets as well as currency recently. India’s equity markets have been relatively stable, with domestic retail investors showing faith and shoveling money in mutual funds. Rise in U.S. interest rates further could cause more volatility and lead to fall in equity prices in emerging markets including India.  

Among current events, GDP data was released for first quarter of the fiscal year 2019. It showed that GDP growth was very strong at 8.2%, much higher than 7.4% predicted by economists. Preceding this, there was also release of GDP data of new series for previous years to provide greater transparency. India adopted a new series in 2015 with 2011-12 as base year. New series data for older years points that India grew faster in years before fiscal 2012 than reported by old series. Monsoon in India is on last legs and likely to withdraw in the coming days. There is significant rainfall shortage in Eastern India (27%) while other regions have fared well.          

Barring a few sectors, valuations of stocks are at high levels. While share prices have run up, earning of companies are picking up now only after 4 year hiatus. High level of liquidity globally has driven up stock prices. With the Lok Sabha elections due next year, stock markets could be spooked by political uncertainty. Rising crude prices, rupee depreciation are macroeconomic concerns in the near term. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors can expect decent returns from equities over a long period in future. Valuations, however, leave moderate upside in the near term. Investors at this point should continue to invest in equities through SIPs.


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