Nifty gained 1.82% in the month of August, 2016. FIIs remained net buyers of domestic equities worth US$ 1.46 bn and DIIs remained net sellers of equities worth US$ 0.66 bn. Market remained flat during the month barring the last few days due to strong inflows from MSCI rebalancing and divided view from Jackson hole meeting on path of future Fed rate hikes. The following sectors outperformed the index – Metals, Media and Infrastructure as against sectors such as Technology, Telecom and Pharma which underperformed in the index in 3 months ending August 2016.
Short term-Neutral; Long term-Positive
Equity markets are expected to be range bound in the short term. Markets have ignored increased probability of FED rate hikes in December 2017 and continued corporate earnings downgrades. Additionally GST, 7th Pay Commission positive is factored in the current market valuation. The domestic equity market is currently valued at 19.7x FY17 earnings versus long-term average of 14.5x, with some downward bias to the earnings estimates. In our view recovery in rural growth post two years of drought and increased government spend on infrastructure is expected to improve the corporate earnings growth over the long term.
FOMC minutes revealed that its members were split on the rate hike timing. Fed’s Dudley had commented that “we are getting closer to the time to hike rates and that a September hike is possible”. Central bankers at Jackson Hole said that their efforts to bolster the economy through monetary policy may falter unless elected leaders step forward with bold measures. The ECB left its €1.7 trillion ($1.9 trillion) stimulus unchanged at a policy meeting, brushing off concerns over economic shock waves from Britain’s vote to leave the European Union and disappointing investors expecting the ECB to act again soon. Domestically, the Index of Industrial Production (IIP) for the month of June was seen at 2.0% as compared to 1.1% in May 2016. Consumer Price Index (CPI) was seen at 6.07% in July as compared to 5.8% in June. Indian Rupee closed against the dollar at 66.15 as on August 31, 2016.
We are cautiously positive on the fixed income market. Inflation numbers are likely to determine the interest rate trajectory. However good monsoon and higher sowing in pulses should address the food prices towards the year end. Markets to remain supported on expectation of continued OMO purchase conducted by RBI. We expect softer global interest rate environment. RBI is likely to maintain easing stance in such an environment. We expect RBI to cut Repo rate by 25 bps in next quarter.