Nifty gained 4.43% in the month of July 2016. FIIs remained net buyers of domestic equities worth US$ 1.69 bn and DIIs turned net sellers of equities worth US$ 1 bn. Market sentiments improved due to consensus among the parties for passage of GST bill, stimulus expectation from Bank of England and Bank of Japan and increase in passive fund flows to all emerging markets. The following sectors outperformed the index – EPC, Finance and Real Estate as against sectors such as Technology, Telecom and Pharma which underperformed in the index in 3 months ending July 2016.
Short term-Neutral; Long term-Positive
Equity markets are expected to be range bound in the short term. We expect private investments to improve gradually as uncertainty in global environment reduces. However, corporate earnings growth trajectory is expected to be weaker given the sluggishness in domestic demand. Additionally RBI will have limited room for lowering interest rates given the stickiness in inflation. The domestic equity market is currently valued at 18.9x FY17 earnings versus long-term average of 14.5x, with some downward bias to the earnings estimates. However, with good monsoons, 7th pay commission hike and other measures taken by the government, we can expect a consumption led growth over the next few quarters. In our view accelerated domestic GDP growth backed by increase in demand along with stable commodity prices is expected to improve the corporate earnings growth over the long term.
The Japanese cabinet under Prime Minister Shinzo Abe announced a 13.5 trillion yen ($132.04 billion) in fiscal measures on August 2nd as part of efforts to boost the economy, with cash payouts to low-income earners and infrastructure spending. The Bank of Japan kept its pledge to increase the monetary base at an annual pace of about 80 trillion yen and left the interest rate unchanged at -0.1 percent at its July 2016 meeting. Policymakers also decided to increase the annual exchange-traded equity funds purchase target to JPY 6.0 trillion from the previous JPY 3.3 trillion. Bank of England cut its benchmark rate from 0.5% to 9.25% on the backdrop of weaker growth outlook. In his last policy review, Raghuram Rajan kept repo rate unchanged at 6.5% to cool inflation running near two year highs, and urged the government to form a panel for the next review in October. The decision was in-line with the market expectation. Domestically, the Index of Industrial Production (IIP) for the month of May was seen at 1.2% as compared to -1.3% in April 2016. Consumer Price Index (CPI) was seen at 5.8% in June as compared to 5.8% in May. Indian Rupee closed against the dollar at 66.61 as on July 29, 2016.
We have a neutral outlook on the fixed income market. Market has rallied sharply in the month of July’ 2016. As it consolidates around current levels, market participants keenly await the announcement of next RBI governor’s name as they would like to ascertain the likelihood of any change in conduct of monetary policy compared to incumbent. Domestic food prices, particularly pulses, currently pose a challenge to inflation target of 5% by January. However good monsoon and higher sowing in pulses should address the food prices towards the year end. 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 2nd half of the year.