Nifty gained 1.56% in the month of June 2016. FIIs remained net buyers of domestic equities worth US$ 0.77 bn. For the month, DIIs turned net sellers of equities worth US$ 0.32 bn. Nifty remained volatile during the month due to Brexit fears and subsequent outcome in favour of EU exit, passage of key bills by cabinet and mixed macro-economic data. The following sectors outperformed the index - Real Estate, EPC and Media as against sectors such as Technology, Oil & Gas and Telecom which underperformed in the index in 3 months ending June 2016.
Short term-Neutral; Long term-Positive
We expect equity markets to be range bound in the short term. Moreover, given the uncertainty in the global and domestic environment, we expect some delays in the revival of the corporate investment cycle. Additionally, weakness in domestic demand is likely to lead to earnings growth trajectory being weaker than expected. Further with inflation remaining sticky the central bank is expected to have limited room to lower interest rates further. The domestic equity market is currently valued at 18.5x FY17 earnings versus long-term average of 14.5x, with some downward bias to the earnings estimates. However, with good kharif and rabi harvests, hikes in central government employee wages and other government measures are expected to jump start the economic activity and provide boost to both rural and urban demand growth over the next 12-18 months. We also expect the acceleration in GDP growth on the back of increased demand to translate into improved corporate earnings growth and provide early double digit returns from the market in the long term.
The month saw two major events of REXIT and BREXIT. RBI governor Raghuram Rajan announced his decision to not continue beyond his term ending September 04, 2016. Britain had voted to leave the European Union with 51.9% in favour of the exit. Sterling pound (GBP) plunged to 30yr low of $1.28 vs US$ post the event and S&P downgraded UK’s rating by two notches to AA from AAA, citing the risk of a less predictable policy framework in the U.K. Domestically, the Index of Industrial Production (IIP) for the month of April was seen at -0.8% as compared to 0.1% in March 2016. Consumer Price Index (CPI) was seen at 5.8% in May as compared to 5.5% in April. Indian Rupee closed against the dollar at 67.53 as on June 30, 2016.
On the fixed income front, we maintain a neutral to positive stance. We expect global interest rate environment to turn softer, global GDP growth to be lower and commodity prices to remain weak. RBI is likely to maintain easing stance in such an environment. Domestically, food prices may pose a challenge to inflation and keep the yields range bound. Moreover, ample liquidity is expected to help the steepening of the interest rate curve. However, in case of any capital outflows, RBI would provide adequate dollar and rupee liquidity support. Overall the environment has turned more conducive towards interest rates.