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Monthly Equity Strategy - December 2018

Monthly Equity Strategy - December 2018

Equity Strategy – December 2018

 

  • Earnings review Q2 FY19: Aggrregate earnings growth stood at 10% YoY given the disproportionate PAT growth/(decline) for a few large companies. Adjusted for these (Ex-Corp. Fin., Bharti, TATA Steel & TAMO) aggregate PAT growth for Nifty universe is at 15% YoY. Top line growth was meaningfully better than expectations, but operating profit and PAT growth were largely in line due to margin pressure primarily on account of commodity cost inflation.
  • Outlook for H2FY19 & FY20: The recent softness in commodity prices and moderation in rupee depreciation should help to sustain the EBITDA growth/margin for domestic oriented companies, going ahead. While the underlying earnings story is improving (better revenue growth trends, corporate banks’ asset quality turning around, etc.), new risks to earnings are also emerging (Autos, NBFC). Taken together, it is expected that earnings growth may continue to rise by 12%-15% for NIFTY 50.
  • Equity Strategy: Fundamentals in terms of stabilising macros, falling yields, low teen corporate earnings, valuations near to mid cycle, sentiment indicator below average and FPI flows turing positive augurs well for domestic equities. On balance, while in the short term, equities may tend to be volatile (given global risk and increase in political risk premium as general elections inch nearer) we remain more confident of equity outperformance vs. bond funds over medium to longer term (its noteworthy that Equity Indices have underperformed Bond Funds in last two to three years).
    • India’s macroeconomic position appears to have stabilized with crude prices slipping closer to US$60/bbl. In addition, given that valuations are not very expensive (touch above long term averages), Indian equities offer relatively better value from a long term perspective.
    • Global volatility induced by probable slowdown in world economic outlook may indeed lead to some more correction, thereby providing opportunity. Hence, each dip in the market should be used as an opportunity to accumalte and build positions towards equal weight asset allocation. Customers who are under-weight equities can realign portfolios by taking incremental exposure to equities.
  • Key risk:Normalisation of central bank balance sheet will test financial conditions in the global market leading to increase in asset price volatility. Also, escalation in trade related barriers or slowdown in demand environment might potentially disrupt global growth prospects leading to increase in markets volatility.
  • Markets may remain volatile due to an increase in political risk premium in India as CY19 general elections inch closer. Macro variables may turn slightly unfavourable with firming up of oil prices (up move in broader commodities hurting, as India remains a net importer). Opec has announced production cuts beginning Jan-19 hold significance.