Nifty lost 1.93% in the month of September, 2016. FIIs remained net buyers of domestic equities worth US$ 1.4 bn and DIIs turned net buyers of equities worth US$ 0.3 bn. Market remained flat during the month barring the last few days due to surgical strike which led to geopolitical risks and Fed meeting which led to increase in December rate hike probability. The following sectors outperformed the index – Media, Metals and Oil & Gas as against sectors such as Telecom, Real Estate and Technology which underperformed in the index in 3 months ending September 2016.
Short term-Neutral; Long term-Positive
Equity markets are expected to be range bound in the short term due to overhang from geopolitical developments, US election results, increasing probability of US Fed rate hike, supply of paper-Govt. divestment and slew of IPOs. The domestic equity market is currently valued at 19.5x 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.
In the last FOMC meeting, Fed decided to maintain status quo on key policy rates. Based on the FOMC minutes, the probability of a rate high in its December’16 meeting is very high. The outcome of the US Presidential election to be held on 8th November ’16 to have bearing on global markets. OPEC countries decided to cut production of crude oil by 0.5 to 1 million barrels per day, causing the global crude prices to breach USD 50 once again. In its first monetary policy committee meeting, all 6 members unanimously voted for a 25bps repo rate cut bring the benchmark Repo rate to 6.25%. RBI governor Dr. Urjit Patel emphasised on a cooling CPI backed by lower food prices and a slowing economy as the key drives to this rate cut. In the biggest ever blackmoney disclosure, 65,250 crore of undisclosed assets were declared yielding 29,362 crore in taxes to the government. Domestically, the Index of Industrial Production (IIP) for the month of August was seen at -0.7% as compared to -2.5% in July 2016. Consumer Price Index (CPI) was seen at 4.3% in September as compared to 5.1% in August. Indian Rupee closed against the dollar at 66.61 as on September 30, 2016.
We maintain a cautiously positive outlook on yields over medium term. Inflation has cooled down to an acceptable level and we expect it to remain in that trajectory with further softening of food inflation. Softer stance by RBI and its reassessment of real interest rate to keep markets buoyant. Markets are expected to remain supported on expectation of continued OMO purchase conducted by RBI. However, global factors such US elections, possible rate hike by US Fed are likely to keep the market cautious. Recent OPEC decision to curtail oil production may exert upward pressure on domestic oil prices.