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Markets consolidate amid strong FII flows; Domestic flows tepid in Apr’19
* Markets consolidate after a sharp rally in March: Post an impressive finish to FY19 (Nifty rallied by 7.7% in March) and after a gap of eight months, the market logged in a life-time high of 11,856 points in Apr’19. However, it ended flattish with marginal gains of 1% in the month. FIIs remained net buyers (USD2.9b) for the third consecutive month, while DIIs were net sellers (USD 0.6b) for the third straight month. Mid-caps underperformed large-caps, with the Nifty Midcap100 down 3.8% in the month. Over the last 12 months, the mid-cap index has been down 13%, as against the Nifty’s rise of 9%, mainly due to the unsustainable valuation premium of mid-caps to large-caps, the preference for large-caps in a volatile environment, and the lack of pick-up in earnings growth.
* Macros stable; no fireworks in 4QFY19 earnings yet: Indian macros have been stable, with currency and 10-year bond yields moving in a narrow range. Brent crude prices increased 6.4% to USD72.8/barrel in Apr’19. Concerns over the US-China trade war, however, has brought Brent crude prices back in the USD69- 70/barrel range over the last few days. GST collection for the month of Apr’19 came in at INR1.13t — the highest since implementation of this reform in Jul’17. 4QFY19 earnings season has begun on an expected note, with headline numbers meeting expectations for the 54 MOSL universe companies and 16 Nifty companies that have declared numbers so far. Commentaries on consumption have turned a tad weaker for both Automobiles and Consumer Staples. Banks, however, reported a further improvement in asset quality trends. The earnings season has been devoid of any fireworks as yet and broadly tracked the earlier quarter’s trend of earnings downgrades outweighing upgrades.
* Japan and US top performers among global markets: In April, Japan (+5%), the US (+4%), Taiwan (+3%), Korea (+3%), Russia (+3%), MSCI EM (+2%), the UK (+2%), India (+1) and Brazil (+1%) were the key global markets to close higher in local currency terms. On the other hand, China and Indonesia were flat MoM. Over the last 12 months, MSCI India (+6%) has outperformed MSCI EM (-7%). Notably, over the last five years, MSCI India has outperformed MSCI EM by 140%. MSCI India’s P/E is at a premium of 104% to MSCI EM’s P/E, above its historical average premium of 48%. Sectoral trends for April –Cement and Technology top performers: Cement (+7%), Technology (+6%), Metals (+1%), Private Banks (+1%) and Oil (+1%) were the positive performers in Apr’19, while Media (-5%), Real Estate (-3%), Utilities (-3%) and PSU Banks (-3%) were the key laggards. Tata Motors (+23%), Wipro (+17%), Ultratech (+16%), TCS (+13%) and HCL Tech (+9%) were the top performers on a MoM basis. Yes Bank (-39%), Indiabulls Hsg (-19%), Bharti Infratel (-16%), IndusInd Bank (-10%) and Vedanta (-9%) were the top laggards. In this edition of ‘Bulls & Bears,’ we take a deep dive into the valuation metrics of the Capital Goods sector.
* Earnings – valuation metrics not offering much cushion: The near-term direction of the market will be decided by developments on the political front; the election outcome will induce elevated volatility in the equity, bond and currency markets, in our view. The first five phases of polling has been completed with broadly similar voting turnout v/s the 2014 General Elections. Opinion polls indicate renewed mandate to the NDA, albeit with a lower number of seats v/s the 2014 tally. Politics aside, the fundamental picture is not offering much comfort with earnings still being revised downwards and incremental corporate commentaries pointing towards moderation in demand, especially in the consumption-oriented sectors. Therefore, the importance of normal monsoons in CY19 cannot be overemphasized. Valuations at 19x FY20E EPS for the Nifty do not provide any material cushion, in our view. We believe rest of the CY19 will continue to be volatile, even after the government formation exercise is behind. Also, bottoms-up stock picking will be crucial. We continue to like Private Banks given the bottoming out of asset quality stress and market share gains from NBFCs. Despite the recent downward revision in guidance by Cognizant, we like IT due to its sustained healthy earnings growth, favorable deal activity and reasonable valuations. We remain selective in Consumers and Automobiles and prefer stocks with earnings visibility.
* Top ideas: Large-cap bets: ICICI Bank, Titan, Maruti, Bharti Airtel, Infosys, Motherson Sumi, HUL, Coal India and SBI. Mid-cap bets: ABFRL, Federal Bank, DCB, Godrej Agrovet, Indian Hotels, Zensar, Crompton Consumer, Tata Chemicals.
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