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| GDP grew by 5.3% in Q2 FY15, down from 5.7% in Q1. Demand side GDP was driven primarily by private consumption. On the supply side, growth was driven primarily by Agriculture (3.2% vs 3.8%) and the services sector (7.1% vs 6.8%). The industry category still looks weak with mining and manufacturing reporting low figures.
| Indian markets continued to scale newer highs in November with FIIs (foreign institutional investors) inflows continuing. |
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| Mid cap stocks outperformed the broader market with the CNX Midcap index gaining 4.6% in the month. BSE100 index gained 3.1% in November. |
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| FIIs continued their buying streak and were net buyers to the tune of INR.143bn; also mutual funds were net buyers to the tune of INR.17bn. |
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| Sectors that outperformed were banking, realty, IT, healthcare, auto and FMCG. Sectors that underperformed were metals, oil & gas, utilities and capital goods.
| The recently concluded earnings season was a neutral affair with no major surprises. The month long winter session of the Parliament started in November and 37 bills were up for introduction along with some pending bills due for passing. The key ones include GST bill, Insurance bill, Coal Regulatory Authority bill, two bills on Labour reforms and amendments to the Land Acquisition and Lokpal Act. The passage of these bills would be closely tracked by the markets. |
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| Government is already in a relative strong fiscal footing for FY15 budget which was further aided by the sharp fall in crude prices (Brent Crude down 19% in November, post no cuts from the OPEC). |
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| Inflation is expectedly moving lower and the RBI remains committed to keeping the economy on a disinflationary course. The RBI did not cut rates in its policy meeting held on 2nd December, but looks likely to cut early in 2015. This, coupled with the Budget expectations, has put India in a sweet spot heading into the year-end. |
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| With this backdrop we continue to maintain a positive bias on the market going forward. The markets are trading at about 18.2xFY15 & 15.2x FY16 estimated earnings for SENSEX.
| Market Outlook- |
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| The combination of external developments i.e. oil prices and internal developments regarding the food prices have dramatically eased the pressure on inflation. Moreover, economic growth around the world, except the United States, is also slowing down. The slower global growth is leading to fall in prices of other commodities (apart from oil), as well. Domestic inflation pressures are also easing. These developments have created room for RBI to ease rates over the next couple of policy meetings. The markets have already started discounting the start of RBI’s rate cut cycle based on the path of inflation. |
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| Meanwhile, Government’s finances are still a cause for concern. Inspite of the relief on the subsidy front, due to fall in oil prices, the Government faces an uphill task in bridging the gap through tax revenues. The Government and the markets are pinning their hopes on dis-investments of the equity holdings in large PSU entities to garner the required revenues. The markets are not pricing in any slippage in the deficit as of now. The Government remains committed to the fiscal deficit target of 4.1% of GDP. |
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| FII interest in India continues to remain strong. India is one of the few large beneficiaries of the fall in oil and other commodity prices. Apart from the lower inflation, the fall in commodities prices benefits the country’s trade deficit, fiscal deficit and corporate margins as well. India is also among the handful of countries, where interest rates are headed towards a downward trajectory. The stable currency and the positive economic outlook are expected to continue to attract FII investments. |
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| Bond yields are headed lower as RBI gets down to cutting rates. It is, seemingly, only a matter of timing of when RBI starts cutting rates, rather than whether RBI would cut rates. The markets are increasingly discounting an aggressive path of rate cuts. Any deviation in the pace and timing of actual cuts may cause some volatility in the short term. Another risk to the lower yields scenario is the possibility of a financial market disruption caused by sharp currency depreciation in vulnerable EM or Euro area economies or any turmoil caused by the US Fed’s rate hiking cycle. US economic data, though volatile, is pointing to a modest pick-up in growth. |
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Source Newsmedia |
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