Weakness seen in the
month of February 2018
The month of February 2018 witnessed weakness across the board. Within India, small and midcap stocks continued with their underperformance. While largecap stocks - as represented by the Sensex and Nifty indices - ended the month lower by ~5% each, the Nifty Freefloat Midcap 100 and Nifty Freefloat Smallcap 100 indices declined by ~5.4% and ~5.2% respectively, on a month on month basis.
Indian markets underperformed other global markets, which saw declines in the range of 1.9-6.2% on a month on month basis. On a YoY basis however, India remained amongst the top performers.
While small and midcap stocks continue to perform well when gauged on a YoY basis, the recent underperformance continued in the month gone by as the representative indices fell on a sharper note in February 2018.
Coming to the sectoral performance, weakness was seen across the board with stocks from the IT, metals and FMCG seeing the least declines; their representative indices fell in the range of 1.4 to 2.3% in the month gone by. Stocks from the banking, media and realty spaces were amongst the top underperformers in February 2018.
Capital continues to be poured into equity by domestic institutions who invested a net amount of INR 132 bn in February 2018 (till 26th Feb 2018). Foreign investors however saw a sharp U-turn in their interest as compared to the preceding month as the net outflow figure stood at the highest in many months.
Key highlights in the month gone by
Inflation concerns led to considerable volatility in the US (and as a result, global markets) after the higher inflation data surprised (core inflation stood at 2.88%) the markets, rising by 0.35% on a monthly basis, its highest in many years. This has led to expectations that the Fed could increase interest rates more than three times this year as has been guided by the central bank.
In other developments, the Indian economy grew at a five quarter high of 7.2% in the quarter ended December 2017 reflecting overall recovery. Growth was led by agriculture, manufacturing, construction and certain services.
Further, in its sixth bi-monthly monetary policy review in early February 2018, the RBI's Monetary Policy Committee kept policy rates unchanged. Post the decision, the repo rate, reverse repo rate and the MSF rate stayed unchanged at 6.00%, 5.75%, and 6.25% respectively.
One development that ruffled the PSU banking space was the scam involving PNB and Nirav Modi, which is currently under investigation. The amount under question is ~INR 114 bn,
How have our recent recommendations fared?
Post the Union Budget, the Indian stock markets have been on a roller coaster ride. In recent times, they have been hovering in the negative territory. This is largely related to the PSU banking stocks that have been ruffled with news flows and developments related to one of the largest PSU banks. And this has had a negative impact on the headline indices considering that the banking stocks in general and the PSU banking stocks, form a substantial chunk of the same. Small and mid cap stocks have also taken a beating in the process - which is a common trait seen with this category of stocks whenever there is any kind of negative news in the market.
Our stance for investing in PSU banking stocks has been consistent. That of taking a "better to be safe than sorry" approach. In fact, we have been maintaining this stance for a while now as we continue to believe that issues related to them make the fundamentals unappealing despite their attractive valuations. Aspects such as poor quality of assets / loans advanced, the instances of mismanagement and the lack-of-autonomy environment that the banks' managements operate in make the fundamentals of most players in this space, unattractive.
Looking beyond this space and focusing at the broader market situation at the moment, we expect 2018 in general to be a relatively volatile year as compared to 2017, which saw a run up in stocks across the board. As more news unfolds, we believe that the pressure will only increase within the public-sector banking space, and thus keep things quite shaky in the near term.
Over the medium term, news flows related to the elections in select key states this year will keep the markets on their toes. Not to forget that the earnings numbers will play their parts as well...especially at a time when expectations are becoming quite high.
As such, investors would do well to brace for volatility in the short to medium term, but make the most of it by increasing exposure in a gradual and staggered manner.
We say this because the broader situation is not bleak at all, as the broader fundamentals are unbroken. The fact is that the problem of housing shortage does remain. The need for quality infrastructure in the country is strong. The story of higher consumption and discretionary spends is very much intact. The government's push towards improving the livelihood of the rural and agri space is real.
At the end of the day, the fact remains that there's no close competition when it comes to equities being the best asset class to invest in for wealth creation over the long term. And thus having exposure to this asset class is a must. But goes without saying, that this should be in conjunction with one’s risk profile, of course.
We suggest investors take a bottom up stock selection approach, and recommend booking profits in those stocks where valuations and fundamentals are out of sync.
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