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Monthly Equity and Debt Strategy – September 2018
- Q1 FY19 earnings: Q1 FY19 net profits of Nifty Index companies increased 12% YoY supported by the low base of Q1 FY18. Aggregate PAT might be suppressed to consensus expectation dragged down by corporate financials and Tata Motors. However, excluding them, PAT growth stood at about 30% YoY, which is a relatively robust outcome. Favourable base effect, positive management commentaries, improving capacity utilization & IIP data and stable operating performance despite input cost pressures do indicate that there has been some improvement in underlying demand.
- Sectoral highlights (Likely turnaround): Probable recovery in PSUs and corporate financials as pre provisioning operating profit improves and asset quality seems to be stabilising. Also, improving outlook for exports as demand commentary in IT remains encouraging and signs of stabilisation in US businesses in Pharma sector (are the key takeaways during result season).
- GDP growth is expected to improve in FY19 from the previous fiscal. The ongoing gradual improvement in private investment, rising capacity utilization along with firm rural demand amid assurance of adequate procurement and support prices are expected to provide support to growth. This strengthens the case for mid-teens earnings growth for the year, unless global factors induce weakness in global growth.
- EMs exhibited higher vulnerability in midst of increasing risk: Global growth prospects continue to remain conducive (indicators from business surveys suggest manufacturing activity is likely to remain strong). However, resurgence of USD strength, tightening liquidity & faster pace of hikes by federal reserve has aggravated stress in Emerging Markets (EMs). Additionally, a full blown trade war between US & China is likely to adversely affect assets of EMs. Systemic risks to EMs have risen significantly & the ones managing their risks with better fundamentals are likely to outperform their peers going ahead. These adverse environment has already spurred more than a few EM central banks to start tightening policy on their part in order to arrest narrowing yield differentials.
- Institutional flows in Indian markets have remained positive. Domestic flows continue to support Indian equities (>US$10bn in net inflows into equities YTD vs flat for FIIs).
- Valuations are showing stretch. Market has traded historically at much lower valuations than current levels. Going forward, valuations may not have much support as macros turn marginally unfavourable coupled with hardening global bond yields and diminishing monetary support by the global central banks.
- Equity Strategy : Earnings surprises, upturn in FPI flows, neutral sentiment indicators and positive momentum may yield a little more upside in indices while rising valuations continue to moderate out incremental value in Equities. Lump-sum exposure may be taken to portfolios having an Export bias and the ones which can dynamically calibrate equity exposure depending on relative expensiveness of the market.
Fixed Income Strategy:
- In the month of August, in line with expectation, the RBI raised policy rates by 25 bps to 6.5%, with the MPC members voting 5-1 in favor of hike, MPC member Dr. Dholakia dissented
- Importantly, the MPC retained its ‘neutral’ stance; which came as a big relief to the market.
- While the Central Bank flagged risks on the inflation front, it also mentioned several mitigating factors, which could alleviate inflationary stress. MPC raised inflation projections marginally for H2 FY 19.
- The month of August witnessed rising bearish sentiments triggered by a weakening rupee owing to global EM sentiments & worsening crude oil prices. G-Sec has moved up from 7.70 level to 7.95 in the month of August
- The positive for the month has been from minutes of RBI policy, where participants took comfort noting that the minutes to the August policy statement did not indicate towards further hikes in interest rates.
- As a strategy, we have stayed away from duration centric (longer maturity bond portfolios) for quite some time and instead preferred accrual strategy (AA & above) short to medium maturity bond portfolios, to earn a predictable yield. We continue to recommend portfolios with maturity of 1-4 years.