Published on 10/10/2017 4:12:42 PM | Source: Quantum Tax Saving Fund
Equity Outlook By Atul Kumar Head, Equity Funds Quantum Long Term Equity Fund & Quantum Tax Saving Fund
In the month of September 2017, S&P BSE Sensex lost 1.35% on a total return basis. Despite the fall, the index has gained 18.85% in first 9 months of 2017. S&P BSE Midcap index and S&P BSE Smallcap indices performed better than S&P BSE Sensex during the month with returns of -0.57% and +0.89% respectively. Both these indices have delivered stellar returns in 9 months 2017 of 29.74% and 34.67% respectively
Among sectors, healthcare, auto and metal were among the best performers for the previous month. Telecom, FMCG and real estate were laggard sectors for the month. TRAI announcement to reduce drastically the interconnect charges by 60% and later abolish them reflected on the performance of telecom stocks. Reliance Industries stock was down 2.05% during the month.
FIIs were net sellers during the month of USD 1.65 billion worth of equities. So far in the current calendar year, they have purchased stocks worth USD 5.5 billion. Domestic institutions (DIIs) countered the selling of FIIs with purchase of USD 3.2 billion during the month. While mutual funds bought for USD 2.4 billion, insurers also turned positive for the first time with buying of USD 797 million. The Indian Rupee had a significant depreciation during the month, of 2.15% against the U.S. dollar.
Financial markets globally have been running on steroids of excess liquidity. There may be slight correction in that situation in future. U.S. Fed in its September meeting has taken steps to reduce its balance sheet. It plans to sell securities that it bought since 2008 financial crisis. Of the USD 4.5 trillion expanded balance sheet, it will unwind starting with USD 10 billion per month. This amount will climb gradually over time.
Europe on the other hand still continues to maintain interest rates at near zero levels. Despite the improvement in economic situation, it is unlikely to change interest rates in near term. Japan, the other major developed economy, is facing some political uncertainty. Its Prime Minister has called for snap elections, looking to consolidate his majority further.
India’s broad macroeconomic indicators look stable, even as it has not fully capitalized on the opportunity offered by low commodity prices and political certainty in past 3 years. Inflation at 3.4% remains manageable and interest rates are at subdued level. Fiscal deficit and current account deficit remain under control. Crude oil prices remain under USD 60 a barrel, which provides a comfort to the economy from major external shocks. Exchange rate remains stable while country sits on all time high foreign currency reserves. Monsoon has been close to normal, with 5% deficiency.
Events such as demonetization and poor implementation of GST have slowed down GDP growth considerably. GST system which was a landmark reform in indirect taxation, has a number of glitches. Companies are unaware of tax amount to be paid, which should be communicated by the system. This leaves room for confusion and litigations. Smaller businesses are in greater trouble to comply with the new tax system. These events, especially demonetization, put India on a path much below its potential growth rate. Right wing fundamentalism such as cow protection is having impact on animal husbandry and agriculture sector.
One of the major constituents of GDP is investment spending. Investment cycle has remained subdued for many years now. Excess capacity creation till 2008, leveraged balance sheet of corporates is some of the reasons behind investment cycle remaining weak. We still see no rebound in the capex cycle, especially in private sector. Investment pick up is also required to create jobs, and that in turn drives consumption leading to a virtuous cycle.
While animal spirits have not been unleashed in the economy, the same is not true for equity markets. Primary issuance through IPOs in the current year is reaching new highs. Companies have tapped the markets to raise 17 billion USD equity in 2017 year so far, which is the highest since the heady days of 2007.Valuation demanded by many of them leave no upside for the investor.
We remain positive on Indian equities over long term. High GDP growth relative to rest of the world, increasing consumption and likely investment in infrastructure are key drivers for equity returns. We are cautious on equities in the near term however. Markets have been running up which is not supported by earnings growth. Most sell side brokers continue to revise their earning estimates downward. This happens despite hopes since 2014 that there will be earning recovery. Upside in Indian equities is limited in the near term. The same is reflected in high cash levels held in our schemes. We suggest that investors don’t make aggressive allocation to equities at this point of time. However, they can invest moderate sums of money.
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The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
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