Equity & Debt Market Outlook - March 2018
Indian equity markets corrected ~4% in March 18 amid weakness in global equity markets. However, most of the global equity markets including Indian performed well in FY18 after a strong FY17 performance. The table below gives the details of performance of key domestic and global indices.
A summary of key developments of FY18 is as follows:
- Successful implementation of GST
- Moody’s upgrade of India’s sovereign rating to Baa2 from Baa3
- India’s ranking moving up 30 notches to 100 in the World Bank’s ease of doing business survey for 2018
- Steady improvement in real GDP growth to 7.2% and 6.3% in 3QFY18 and 2QFY18 respectively after falling to 5.7% in 1QFY18 post demonetization.
- Progress on cases referred to NCLT on track. Steel, that accounts for 20-25% of GNPA, has high interest from bidders under NCLT process
- Real Estate (Regulation and Development) Act, 2016 (RERA) implemented
- Announcement of recapitalization of PSU banks and a prominent loan default case
- Announcement of Bharatmala scheme, Saubhagya scheme etc.
- 10 year G-Sec yields were up in India (72 bps) and in US (35 bps) in FY18
- Improving trend of corporate earnings
- Imposition of long term capital gains of 10% on listed equity shares/units of equity oriented fund/units of business trust without indexation, subject to certain conditions.
- Escalation in concerns over a global trade war with both US and China imposing select imports from each other
Key Highlights of markets:
- FPIs bought Indian equities worth US$3.8bn in FY18 vs US$8.5bn in FY17.
- Net inflows in domestic equity oriented mutual funds were close to Rs 240,311 crores in FY18 vs Rs 93,512 in FY17.
- Record money raised through IPO’s, QIP’s, rights etc.
- Most of the key sectoral indices barring Healthcare (down 14%) gave positive return
Brent crude rose 29% in FY18. Steel, Zinc and Copper were up 12-18% while Aluminium and Lead were up close to 2%. In last two years, Steel is up 53%, Zinc is up 80% and other metals are up 30-40%.
Macro economic parameters of India like fiscal deficit, current account deficit, FDI, inflation are healthy. Growth should further accelerate with improvement in capex in Housing, urban infrastructure, defence and industrial capex led by oil &gas, metals, fertilizers etc. Capex in roads, railways, power T&D has already seen material improvement. RBI has estimated GDP growth of 7.4 and 7.7 in FY19 and FY20 respectively vs 6.6 in FY18.
Equity Markets are at an interesting juncture. The phase of weak earnings growth is ending. In the last five years, corporate profit as % to GDP has fallen from 3.8% in CY2013 to 2.3% in CY17E. Driven by improving fundamentals of key sectors like corporate banks, capital goods, metals etc. the profit growth should improve in future. In view of this, markets hold promise over the medium to long term in our opinion. Global events, sharp moderation in local flows and delays in NPA resolution under NCLT are key risks.
Indian markets have displayed very short term co-relation with global markets. Increasing US markets volatility / sharp fall in US markets can lead to short term correction in Indian markets. Further, any sharp increase in US rates could also adversely impact equity and bond markets in India especially in short term. Record foreign exchange reserves and healthy balance of payments should however moderate the impact of external environment and external capital flows for India. Besides, as in the past the impact of global developments on Indian markets should be minimal over medium to long term.
Local flows continue to be strong. In our assessment, bulk of local flows to equities are structural in nature, however these need to periodically monitored.
In view of the above, there is merit in increasing allocation to equities or in staying invested as the case may be (for those with a medium to long term view and in line with individual risk appetite).
Macro economic parameters of India like fiscal deficit, current account deficit, FDI, inflation are healthy. Growth should further accelerate with improvement in capex in Housing, urban infrastructure, defence and industrial capex led by oil &gas, metals, fertilizers etc. Capex in roads, railways, power T&D has already seen material improvement. RBI has estimated GDP growth of 7.4 and 7.7 in FY19 and FY20 respectively vs 6.6 in FY18.
Equity Markets are at an interesting juncture. The phase of weak earnings growth is ending. In the last five years, corporate profit as % to GDP has fallen from 3.8% in CY2013 to 2.3% in CY17E. Driven by improving fundamentals of key sectors like corporate banks, capital goods, metals etc. the profit growth should improve in future. In view of this, markets hold promise over the medium to long term in our opinion. Global events, sharp moderation in local flows and delays in NPA resolution under NCLT are key risks.
Indian markets have displayed very short term co-relation with global markets. Increasing US markets volatility / sharp fall in US markets can lead to short term correction in Indian markets. Further, any sharp increase in US rates could also adversely impact equity and bond markets in India especially in short term. Record foreign exchange reserves and healthy balance of payments should however moderate the impact of external environment and external capital flows for India. Besides, as in the past the impact of global developments on Indian markets should be minimal over medium to long term.
Local flows continue to be strong. In our assessment, bulk of local flows to equities are structural in nature, however these need to periodically monitored.
In view of the above, there is merit in increasing allocation to equities or in staying invested as the case may be (for those with a medium to long term view and in line with individual risk appetite).
Debt Market Update – March 2018
The fiscal year 2017-18 has been a difficult year for the Indian debt market. It was marked with a declining trend of yields in the first half followed by a sharp rise in yields in the second half. The rise in yields was due to concerns arising over fear of fiscal slippage, rising international crude oil prices, higher US bond yields and OMO (open market operation) sales by RBI.
The key macroeconomic events during the year were implementation of GST (goods & services tax), Rs 2.11 lac crores recapitalization plan for public sector banks, 25bps rate cut by the RBI, upgrade of sovereign credit rating by Moody’s, and three rate hikes by the US Fed.
The yield on 10-year benchmark GSec (7.17% GoI 2028) ended Mar18 at 7.40% as against 6.69% (6.97% GoI 2026) as at Mar17, up by 71 bps for the fiscal year 2017-18. The yield on 10-year AAA-rated Corporate Bonds ended Mar18 at 8.14% as against 7.65% at the end of Mar17. Thus, corporate bond spreads ended the year at 60 bps as against 85 bps at the beginning of the year.
The huge surplus of liquidity built up post demonetization reduced substantially during the year 2017-18. As against ~Rs3.13 lac crs of surplus liquidity absorbed by RBI at the beginning of the fiscal year 2017-18, about Rs.60 thousand crs of liquidity was injected by RBI at the end of fiscal year 2017-18. The overnight rate ended the fiscal year 2017-18 at 9.39% as against 7.37% as at end of fiscal year 2016-17.
INR marginally depreciated by ~ 0.51% during the fiscal year 2017-18 to close at 65.18 versus the USD in March 2018 as against 64.85 in March 2017. FII’s have purchased close to US$ 22.5 billion in Indian debt and equity markets in fiscal year 2017-18 as compared to inflow of ~US$ 7.60 billion during fiscal year 2016-17.
The average retail inflation CPI during fiscal year 2017-18 (April to Feb) was 3.53% as against 4.54% during fiscal year 2016-17 (April to March). CPI inflation began the year at 2.99% and bottomed out in Jun’17 at 1.46%. Since then CPI has increased to 4.44% YoY in Feb’18. Core CPI (excl. transport &communication, food &fuel) ranged between 4.12% to 5.65% during fiscal year 2017-18 (April to Feb).
RBI announced Gsec issuance calendar for first half of FY19 wherein it will auction Rs 2.88 trn of Gsec in 1H FY19, which is 23% lower than Rs 3.72trn of issuance in the 1H of FY18. This comprises only 48% of the full year budgeted borrowings (of Rs 6.06 trn) as against 60-65% norm for first half of the year. Additionally, government plans to reduce its budgeted gross market borrowings by Rs 500bn, out of which Rs250bn will come from its Small Savings Scheme and Rs250bn will be reduced from the budgeted buy backs.
The key macroeconomic events during the year were implementation of GST (goods & services tax), Rs 2.11 lac crores recapitalization plan for public sector banks, 25bps rate cut by the RBI, upgrade of sovereign credit rating by Moody’s, and three rate hikes by the US Fed.
The yield on 10-year benchmark GSec (7.17% GoI 2028) ended Mar18 at 7.40% as against 6.69% (6.97% GoI 2026) as at Mar17, up by 71 bps for the fiscal year 2017-18. The yield on 10-year AAA-rated Corporate Bonds ended Mar18 at 8.14% as against 7.65% at the end of Mar17. Thus, corporate bond spreads ended the year at 60 bps as against 85 bps at the beginning of the year.
The huge surplus of liquidity built up post demonetization reduced substantially during the year 2017-18. As against ~Rs3.13 lac crs of surplus liquidity absorbed by RBI at the beginning of the fiscal year 2017-18, about Rs.60 thousand crs of liquidity was injected by RBI at the end of fiscal year 2017-18. The overnight rate ended the fiscal year 2017-18 at 9.39% as against 7.37% as at end of fiscal year 2016-17.
INR marginally depreciated by ~ 0.51% during the fiscal year 2017-18 to close at 65.18 versus the USD in March 2018 as against 64.85 in March 2017. FII’s have purchased close to US$ 22.5 billion in Indian debt and equity markets in fiscal year 2017-18 as compared to inflow of ~US$ 7.60 billion during fiscal year 2016-17.
The average retail inflation CPI during fiscal year 2017-18 (April to Feb) was 3.53% as against 4.54% during fiscal year 2016-17 (April to March). CPI inflation began the year at 2.99% and bottomed out in Jun’17 at 1.46%. Since then CPI has increased to 4.44% YoY in Feb’18. Core CPI (excl. transport &communication, food &fuel) ranged between 4.12% to 5.65% during fiscal year 2017-18 (April to Feb).
RBI announced Gsec issuance calendar for first half of FY19 wherein it will auction Rs 2.88 trn of Gsec in 1H FY19, which is 23% lower than Rs 3.72trn of issuance in the 1H of FY18. This comprises only 48% of the full year budgeted borrowings (of Rs 6.06 trn) as against 60-65% norm for first half of the year. Additionally, government plans to reduce its budgeted gross market borrowings by Rs 500bn, out of which Rs250bn will come from its Small Savings Scheme and Rs250bn will be reduced from the budgeted buy backs.
Outlook
The reduction in gross supply of Gsec announced for first half of FY19 and the downward revision in inflation forecasts in Apr18 policy review has led to 10 yr GSec yield declining by nearly 50 bps. Going forward, we expect RBI to remain data dependent and to stay on hold for now.
We prefer to maintain a cautious stance due to the likely impact of upward revision in MSPs on inflation, improving economic activity, credit growth outpacing deposit growth, fiscal pressures, and rising US bond yields. Thus, we continue to recommend investment in short to medium duration debt funds.
We prefer to maintain a cautious stance due to the likely impact of upward revision in MSPs on inflation, improving economic activity, credit growth outpacing deposit growth, fiscal pressures, and rising US bond yields. Thus, we continue to recommend investment in short to medium duration debt funds.
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