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Sector performance in the current bout of market volatility reflects a ‘paradigm shift’; India fundamentals continue to improve!

* Volatility rises on global risk-off environment: Expectations of the start of QE tapering by the US FED, rise in US bond yields, spike in energy prices and China slowdown concerns emanating from the government’s regulatory crackdown and liquidity crisis from the Evergrande episode resulted in bouts of volatility for India equity markets over the past week in line with global capital markets.

* However, sectoral performance in India does not reflect a typical risk-off trade: In a departure from historical trends, the systematic risk did not play out in Indian stocks with price decline largely seen in low-volatility stocks such as IT, FMCG and telecom. Outperforming sectors were inter alia cyclicals and balance sheet driven leveraged sectors such as PSUs, power, energy, realty, consumer durables, metals and infrastructure. Mid & small caps too outperformed benchmark indices. On the flip side NBFCs underperformed while Banks performed in line with market performance.

* Relatively attractive valuations coupled with nature of economic growth driving performance: We attribute the paradigm shift in factor performance mentioned above to the relatively attractive valuation of stocks connected to the resilient commodity cycle and pockets of robust demand in the economy, which is being led by gross fixed capital formation (GFCF) and sectors such as construction, manufacturing and electricity. On the flip side private final consumption expenditure and services sector continue to lag in terms of demand trends while commanding extremely high valuations.

* Incremental data over the past week on India fundamentals continues to improve on most fronts such as PMI, current account, fiscal position, tax buoyancy, capex spend, core sector growth and government Policy. Further spike in crude oil remains a key risk for Indian economy.

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