Published on 9/11/2017 5:14:41 PM | Source: Quantaum Mutual Fund
Equity Outlook By Nilesh Shetty Associate Fund Manager Equity Funds Quantum Long Term Equity Fund & Quantum Multi Asset Fund
Among sectors Telecom, Realty and Oil & gas, Healthcare and Metals were among the best performers for the previous month. Banking, Automobiles, Information Technology and Healthcare were laggard sectors for the month. Increase in effective tariffs by RJio and consolidation in the telecom sector led to sharp increase in telecom stocks. Announcement of recapitalization of PSU banks by the government led to sharp rally in public sector banks and underperformance in private banks, which dominate the banking index.
FIIs were net buyers during the month of ~USD 469 Mn worth of equities. So far in the current calendar year, they have purchased stocks worth ~USD 5.6 Bn. Domestic institutions (DIIs) continued their aggressive buying with a net purchase of USD 1.55 Bn during the month. Mutual funds were net buyers of USD 1.53 Bn, while Insurers had a net buy of ~USD 200 mn. INR appreciated marginally by 0.82% during the month against US dollar.
Globally the era of cheap credit may be drawing to a close. The US Fed maintained a status quo in its policy rates but given improving GDP growth most economists predict another rate hike in December. It has already started reducing the size of the balance sheet which had bloated post the global financial crises.
The ECB has also announced halving of its bond buying program in October from Euro 60bn a month to Euro 30bn a month. What remains elusive is inflation in the developed world which remains below target for US as well as Europe, forcing central bankers to tighten at an extremely gradual pace. Asset classes around the world have seen a rise driven by ample liquidity and low interest rates. Surprisingly, risk aversion in the market remains fairly low as investors seems to believe the rise in cost of capital will not significantly dent asset values due to accelerating growth.
India continues to have stable macro environment with low inflation and comfortable balance of payments primarily due to low global crude prices. However rising crude prices and sharp increase in Minimum Support Prices for the Rabi crop could potentially create inflationary conditions. The government has already blinked once to cut taxes on fuel in October to protect the consumer from sharp increases in petrol and diesel prices. Any further sharp increase in international crude oil prices could test the government’s resolve of allowing free pricing in the oil & gas sector.
Our interaction with companies suggests the disruption in inventory cycles due to Demonitisation and GST has still not normalized. Due to lack of clarity on input credit, suppliers are not getting paid which has frozen the entire working capital cycle. Despite the headline GDP number showing some slowdown in the last quarter we believe the GDP has been substantially below trend since Demonitisation. Given limitations of GDP calculation where the informal sector data is extrapolated based on formal sector data, we do not believe it currently captures the extent of slowdown that we observe on the ground when we meet different companies in the value chain.
PSU bank recapitalization announced by the government may allow these banks to aggressively write off bad loans. However, the major problem in India has stemmed not from the lack of availability of bank finance but from lack of appetite to set up new capex. We have yet to see a single corporate who claimed lack of bank finance as a hindrance to capacity expansion. The lack of appetite stems from multiple reasons including already excess capacity, overleveraged balance sheet of large corporates, having to pay market rates for natural resources etc. These problems will take some time to sort themselves out as part of the normal economic cycle as capacity utilization improves, balance sheet of overleveraged corporates are restructured and new players with cleaner balance sheets enter the market to build the next wave of infrastructure assets.
Given lack of earnings growth, the sharp run up has made valuations expensive. Most sell side brokers continue to forecast high earnings growth and the revise their estimates downward due to lack of earnings delivery. The concern on valuations is reflected in high cash levels held in our schemes. Despite near term concerns on valuations, we remain optimistic on Indian equities over long term. The economic cycle is close to bottoming out and may see a gradual recovery. We continue to advice caution and suggest investors planning to make lump sum allocation to stagger the same.
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