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  • Indian economy and market watch: A quick update

    Publish date: 11th July, 2018

    Yesterday, our head of fundamental research, Rusmik Oza, conducted a webinar on Stock Market outlook. In case you missed it, here are the highlights from the session:

    Highlights

    We believe the Indian economy has performed better than other emerging markets like Indonesia and the Philippines. The data stretching between January 2018 and the last week of July indicate that the Indian market has remained more resilient compared to its peers.

    Rusmik Oza, our senior fundamental researcher, also mentioned that FMCG and IT sectors were the big winners, while the healthcare segment has bounced back from last year’s slump

    Factors influencing global markets

    • Global growth: The IMF has pegged the global economic growth at a decent 4.2% this fiscal.
    • Trade war: The trade face-off between China and the United States can result in the rupee sliding further. Currency depreciation in the emerging markets, including India, would be greater if China decides to devalue its currency in retaliation to US’ seemingly restrictive trade policies.
    • US fed rate: We believe the US will announce two more rate hikes by the end of this fiscal. If that does happen, there would a total of four rate hikes in one fiscal.
    • ECB tapering: The European Central Bank QE (quantitative easing) may reduce by the end of this fiscal, which may restrict the cash flow across international markets.
    • Oil prices: The recent Iran sanctions may jack up oil prices further. But the silver lining is that the OPEC countries have agreed to rev up its production, bringing some stability to the global crude prices. Our estimate is that the crude price may pause at $80 a barrel. But if it tips beyond that threshold, the Indian economy will be in a spot of bother.
    • Global PMI: The composite manufacturing and services PMI has remained steady at 54.
    • China PMI: China’s manufacturing activity has remained at 51. We reckon anything above 50 is good news for the Indian markets.
    • Bond yields: The US bond market is set to touch a decade-long peak of 3.5%.
    • Factors influencing Indian markets

    • Twin deficit: We believe the current account deficit (CAD) will go up to 2.9%. The fiscal deficit will touch 3.5%.
    • PMI: Both manufacturing and services have rebounded in June. The manufacturing PMI is 53 and the services PMI is 52.6.
    • Currency: We reckon there will be further depreciation of rupee. So far, the rupee has slid by 4%.
    • Inflation: Higher MSP to farmers — weighted average of 17.4% — and rising global crude prices are major factors for increasing inflation. We estimate inflation to go up to 4.5%.
    • RBI rates: With inflation climbing, the RBI may tighten monetary policy by announcing a 25 basis points rate hike in CY2018.
    • Monsoon: The start has been poor but it is too early to tell. We’ll have to wait till mid-August to get a better reading.
    • Government spending: It continues to drive economic growth. However, we feel it could slow down if the revenue collection doesn’t meet the government’s expectations.
    • Indian market headwinds

    • Inflation based on wholesale prices (WPI inflation) has reached a 14-month high of 4.43%.
    • Core inflation — inflation outside food — has firmed up. It is expected to stay at high levels.
    • Global crude prices
    • Spot rate of US dollars
    • Goods and Services Tax (GST)

    • The government needs a monthly run rate of Rs 1.04 lakh crore to meet its target.
    • June did see a jump in GST collections, roughly Rs 95,610 crore. But it still remains short of target.
    • If the GST target is unmet, there will be additional stress on government spending.
    • Trade deficit

    • Non-oil, non-gold trade deficit has worsened in FY2018. This can further weaken the rupee.
    • FII Flows

    • Even though India has performed better than other emerging markets like the Philippines, FII-cash and debt selling has been adversely hit. The only silver lining is that there is an inflow of US$10 billion in the FII-mutual fund segment.
    • Quarter 1 FY2019 earnings

    • The earnings have grown by 6% on a year-over-year (yoy) basis.
    • The number stands at 22% if you discount the PSU banks and ICICI Bank.
    • Last year’s low base due to GST is one of the primary reasons for the high earnings.
    • Full-year estimate earnings

    • Our data suggest that earnings estimates are usually high at the beginning of the year. The estimates usually go down by the end of the year.
    • Nifty valuations: FY2019 is trading at 18.8x Fw PE. The valuation is slightly rich but it is not in a bubble. However, if reaches 20x, we expect some resistance in the market.
    • The valuation of the bond yield market (8%) is current higher than its equity counterpart (5%). This means the equity market is at risk.
    • There will be a derating of midcap valuation. Therefore, we believe it is better to invest in large caps for few months.
    • The preferred sectors for with one-year perspective are automobiles, pharmaceuticals, metals, infrastructure and construction.
    • Preferred companies with one-year perspective are: ITC, Mahindra Holidays, tech Mahindra, Bajaj Auto, Mahanagar Gas, Jindal Stainless, Asian Granito India.

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