August 2018 was a mixed month for global markets. While gains were seen in the US; China and UK fared weakly. Within the US, the Dow Jones, Nasdaq and S&P 500 rose by 2.2%, 5.7% and 3% respectively. Japan ended the month higher by about 1.4%. Sensex rose by 2.8% during the month. On a YoY basis, all major markets have done well, except China which came in marginally lower.
In the calendar year till date, the Sensex is up by ~13.5%, amongst the best performers during the period.
Within India, gains were seen in stocks across the board with the indices ending higher by ~2.7 to ~5.5%. Midcaps however stood out in the month gone by, with the representative index rising by 5.5%. However, when gauged over a period of one year, large caps outperformed their small counterparts by a wide margin. In the year gone by, the Sensex and Nifty 50 rose by ~22% YoY and ~18% YoY respectively as compared to the ~9% YoY gain of the midcaps and ~1% YoY decline in smallcaps.
Coming to sectoral performances, gains were seen across the board. However, pharma, metal and IT stocks stood out with the representative indices up by ~13%, ~9% and ~8% respectively during the month of August 2018. Auto, realty and media stocks underperformed, rising marginally on a month on month basis.
On a YoY basis however, the IT stocks continue to standout with the index up by ~50% YoY. FMCG, energy, pharma and banking stocks followed suit with yearly gains of ~27%, ~20%, ~17% and ~15 respectively. Media and infra stocks continue to remain underperformers on a YoY basis.
When it comes to institutional activity, foreign investors remained net buyers, albeit, with relatively low figures - net purchase of INR 9 bn in August. In July 2018, FPIs were net buyers to the tune of INR 5 bn. Domestic funds DIIs) continued to be net buyers, investing a net amount of ~INR 38 bn in August 2018.
In the calendar year till date, DIIs invested a net of INR ~733 bn versus the net inflow amount of INR ~29 bn of FPIs.
Key highlights in the month gone by
India’s GDP (Apr-Jun) growth in 1QFY19 accelerated to 8.2% YoY vs. 7.7% in Q4FY18, beating market expectations (Bloomberg consensus: 7.6%). This is the first time it crossed the 8% mark after Q1FY17, indicating normalization in growth conditions post GST-transition. Nominal GDP growth accelerated to 13.8%, the highest level since Q3FY14. The uptick in growth was driven by both real GDP and deflator growth. GVA growth for Q1 stood at 8.0%YoY vs. 7.6% in Q4FY18. The key drivers of growth were manufacturing, followed by agriculture, while services growth moderated due to deceleration in public services.
The weakness in the INR continues, with it closing for the first time above the 70 mark recently. The depreciation pressures on the INR is part of the EM currency sell-off, initially triggered by elevated crude oil prices, a hawkish Fed, escalation in trade tensions and most recently by the economic crisis in Turkey. In the current fiscal year, the INR depreciation has been broadly in line with that of other Asian countries, but significantly lower than other EMs which have seen an avg. depreciation of 24%.
July CPI Inflation came in at 4.17%YoY from 4.92%YoY (revised lower from 5%) in June, driven by continued muted food inflation and moderation in core inflation. The biggest positive has been the consistent softness in food inflation. The drop in headline inflation was also supported on account of the moderation in core inflation. Core inflation was expected to rise further from June level and peak in July, however the annualized growth was unchanged from last month (6.29% YoY in July and June).How have our recent recommendations fared?
Going by historical trends, whenever a handful of companies have contributed to a sharp rise in frontline index, it has led to situations of the market being fairly heated. Is it the case this time around too? Well... going by what has been happening i.e. select few largecap stocks outperforming the mid and smaller sized peers in recent times, this trend is similar.
Not to mention that during such situations, market participants tend to move down the market cap hierarchy in search of value. After months of underperformance, midcaps finally outperformed their larger counterparts in August 2018 by a wide margin, indicating that this could possibly be the case this time around.
But will this trend continue? Have midcaps bottomed out? This remains a key question...
In addition, all of this is happening at a time when the fund flow dynamics seem to be changing. While FPIs have turned net buyers, the amount being invested is fairly low (in the range of INR 5-10 bn per month in last two months). This is nevertheless an improvement as compared to the total of the INR 125 bn being pulled out in the five-month period ended June 2018.
At the same time, DII net flows have slowed down. In the year till date, the average monthly inflows stood at INR 110 bn (during 1HCY18). In the months of July and August 2018, the same averaged to INR 39 bn per month.
In fact, we have been writing about this for a while, and is one concern we have that could impact markets – especially considering that higher inflows (read liquidity) has been a key reason behind the upward movement. As has been the case in the past, DII money tends to slow down whenever the market doesn’t meet expectations - albeit with a lag effect. And we won't be surprised if the situation turns out to be the same this time around as well.
Having said this, what should an investor's approach be? Our take remains unchanged - keep an eye on the prize i.e. long-term wealth creation. For this, all investors need to do is keep a track on individual companies that are going about doing their thing…and doing their thing well!
There remains no change in our stock selection approach. We continue to believe that the problem of housing shortage is real and that the need for quality infrastructure in the country is strong. Not to mention that the story of higher consumption and discretionary spends very much remains intact. The government's push towards improving the livelihood of the rural and agri space does remain.
And within these, there are direct and indirect (or proxy) plays. We prefer looking at the entire gamut of options to play on a sector. This would also help identity different opportunities with varied risk factors (such as less client concentration, less geography risk, amongst others).
The aim for long term investors is to build wealth. And to do so, one would essentially need to do as well or better than the broader market in both, rising or falling environments. Outperforming the market in a declining environment would essentially require one to fall less than the rest. And to do so, investors largely have two options - sit on cash or invest into companies where the downside seems capped (read favourable valuations) - or a mix of both. Notwithstanding the dull market sentiments in the past two quarters, we believe this should be the game plan for investors over the short to medium term.
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