CORPORATE PROFITABILITY TO RESUME SOON… THIS COULD BE THE EDGE TO GO HIGHER

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In August, we had a mild consolidation wherein main indexes like Nifty50 corrected by 5%, Nifty-Midcap by 8.5% and Nifty-Smallcap by 12%. Some important factors that led to this correction were: increased geo-political tension (Korean Peninsula and India-China stand-off in Doklam), a dismal start to FY18 corporate results led by much below financial numbers for the first quarter than anticipated and crack-down by SEBI on shell companies.

Today’s hiccup could be a threshold to go beyond 10,000…

Nifty was finding it difficult to conclusively cross beyond the 10,000 level, but surely it will attempt it again. Throughout the year global market has been doing well and India has been outperforming strongly due to the hope that economic growth will expand led by transformative economic policies. The recent underperformance in the last one to two months had put the investors into a quest to know whether this weakness is likely to continue in the future also. Since India was helped a lot by the strong global trend, we should first understand the recent global wave.

Global market was recently impacted by increased tensions between US and N-Korea, and Hurricane Harvey in the US. But we believe that none of these factors can impact the global market in the long-term. There are some ongoing issues, which can impact the outlook of the global market like BREXIT, FED rate hike and lack of reforms from Trump. Having said that, there are no signs till date that might ignite any of these issues higher and impact the liquidity of the global market. The latest speeches by FOMC chair assure that the monetary policy of FED is unlikely to be changed very soon and impact the low cost money market of the world. Hence unless a change happens to any of the three issues, global trends will remain intact on the long-term, provided any distortion in the short-term is due to premium valuation (US is trading at high valuations) and adverse reduction in FED banking assets.

Domestic inflation is coming back giving hope for a pickup in growth…

Post this consolidation, Nifty has crossed the magic number of 10,000 again but as it nears the all-time high, volatility emerges. Investors were a bit cautious ahead the announcement of Q1 GDP numbers, which came much below expectation at 5.7%. Despite the weak number compared to 7.9% on a YoY basis, the market edged towards the positive side due to good monthly data like auto-sales and manufacturing on a MoM basis. Calmness in the India-China border issue also helped the market.

Importantly, good tax collection under GST and the government being ahead of the target regarding the number of tax payers and the amount of tax collected, provided  hope that economic growth will uptick from hereon post the hiccup from Demonetisation, GST and slow-down in export growth. Investors are expecting a reaction from the government to uplift the growth and focus on the long-term benefit of GST than transitory setbacks.

The recent economic data like CPI, WPI and IIP were also encouraging, in a sense like a revival in the earnings growth in future.

From a decade low of 1.46%, CPI has inched higher to 2.36% in July and 3.36% in August. Industrial activity also increased to 1.2% in July from -0.2% in June. On a very positive note, WPI increased from 0.90% in June to 1.88% in July and 3.24% in August. A moderately high WPI is lucrative for corporates to grow their businesses and profitability. It is anticipated that WPI will go beyond 3.2% – 3.7% over the next 1 to 2 quarters, whereas RBI is targeting CPI at 4.0% by the end of March 2018.

Look at the Big Picture…

During the last 1-2 months there has been a slowdown in liquidity from FIIs to Indian equity market due to global risk, lack of earnings growth and premium valuation compared to other Emerging Markets. From high FII net inflows of Rs34,000cr in the month of March, it has declined to Rs2,500crores in July. Then FIIs net inflows shifted from positive to negative at -Rs11,000cr in August and–Rs2500cr in Sept till date, resulting in underperformance.

But the big picture is that foreign investors have a very positive view on the Indian economy. For the first 7 months of the calendar year, total foreign net inflows, which includes equity, debt and FDI, has doubled to Rs2.75 lac crores comparing it to the same period in CY16 (FDI data is available with a lag of 2months). During the month of August and September though FIIs net inflow for equity is negative, they have brought more than equivalent amount in the Indian debt market. At the same time MFs have brought Rs23,000 crores, which is more than the amount of selling by FIIs in equity. MF trend is likely to be maintained given the transformation in cash hoarding and investment style of Indian citizens. On equity, FIIs may have a neutral view due to lack of earnings growth in India in the short-term and premium valuation compared to other EMs, but this is unlikely to impact in the long-term, as seen by the appreciation of INR in spite of selling by FII.

Given the healthy investment, reforms and infrastructure policies, India is likely to maintain its premium valuation and currency appreciation. INR is the most stable currency and performer in the top10 Emerging Markets of the world. FIIs may indulge in churning their exposure in a country accordingly to the near-term earnings growth, valuation and changes in FED policies. But FIIs will come back to Indian equity as valuation normalizes and earnings growth recovers by the second half of FY18. So sit tight and hold-on to your good and high quality stocks.

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