Nifty rallied 4.6% in the month of January, 2017. FIIs flow turned neutral in domestic equities and DIIs remained net buyers of equities worth US$ 0.8 bn. Market rallied due to better than expected corporate results, lower than expected impact from demonetisation and on expectations of consumption/investment oriented Union Budget 2017-18. The following sectors outperformed the index – Metals, Infrastructure and Telecom as against sectors such as Real Estate, Pharma and Cement which underperformed in the index in 3 months ending January 2017.
Short term-Cautious; Long term-Positive
We are cautious on equity market in the short term as most positives from results and budget being factored into the markets, expectation of earnings downgrade cycle to continue and supply of papers – Govt. divestments and IPOs. The domestic equity market is currently valued at 17x FY17 earnings versus long-term average of 14.7x. However, in the long term we believe that the economy would be benefitted from the implementation of GST, higher GDP growth and increased focus on financial savings.
US Federal Reserve kept their benchmark rates unchanged. The government announced Union Budget 2017-2018 amidst emerging global protectionist environment and geopolitical developments. The Union Budget has given special thrust to the rural economy and infrastructure sector. Even though the government deviated marginally from its fiscal target for fiscal year 2017-18, it has demonstrated its commitment to fiscal consolidation by targeting to reach fiscal deficit of 3% of GDP in the fiscal year 2018-19. The Monetary Policy Committee (MPC) members unanimously decided to keep the repo rate on hold at 6.25%. However, the policy stance changed from accommodative to neutral and RBI commentary turned hawkish due to multiple factors. The key global factors being uncertainties surrounding the direction of US macro-economic policies and subsequent global spillovers, slowdown in global trade and implications on interest rates as central banks of Advanced Economies normalize exceptional accommodative monetary policies. On the domestic front the key concerns were regarding inflation edging higher on the back of higher energy prices (crude), stubborn core inflation at 4.9%, volatility in the exchange rate on account of global financial market developments and the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC). RBI considered it prudent to hold rates to move towards its 4% inflation target for March 2018. The Index of Industrial Production (IIP) for the month of November was seen at 5.7% as compared to -1.8% in October 2016. Consumer Price Index (CPI) was seen at 3.4% in December as compared to 3.6% in November. Indian Rupee closed against the dollar at 67.87 as on January 31, 2017.
We have a neutral outlook on yields over short term. RBI’s explicit change of stance effectively from ‘accommodative’ to ‘neutral’ may possibly signal the end of the easing cycle. The change has been brought about to emphasize the need to move to 4% CPI on a durable basis in context of a still stubborn core inflation. We believe that the yield curve will steepen going forward. Given the sharp reaction of the market post policy, our view on rates remains neutral till the fiscal year end.