Indian markets start FY19
on a strong note!
The month of April 2018 saw the global markets perform well with gains seen across the board. Stocks in Asian markets outperformed other markets, with India, China and Japan seeing gains in the range of 2.6% to 6.8%.
On a YoY basis however, nearly all major markets were higher, rising in the range of 4.2% to 25%. In the calendar year till date, Sensex rose by 2.8%.
Coming to Indian markets, while gains were seen across the board, shares of the small and mid-sized companies outperformed their larger counterparts. The Nifty Midcap 100 and Nifty Smallcap 100 indices gained by ~8.2% and ~7.7% respectively in April 2018. Largecap stocks - as represented by the Sensex and Nifty indices - on the other hand ended higher by ~6.2% each.
However, the correction seen in the year till date did take the sheen off the mid and smaller size companies as the indices have underperformed their larger counterparts over the last year. The mallcap and midcap indices rose by 12.7% and 12.2%, respectively, on a YoY basis, while the Sensex and Nifty rose by 17% and 15.4% respectively. In the year till date, small and midcaps corrected by 7.7% and 4% respectively, while the Sensex and Nifty 50 rose by 2.8% and 2% respectively.
Coming to the sectoral performance, FMCG, IT and realty stocks did well in the month gone by with their representative indices gaining in the range of 9.6% to 11.8% in the month of April 2018. Energy, media and banking stocks were amongst the under performers.
On a YoY basis, the IT index (up ~41%), realty (up ~28%) and metal (up ~27%) were the top performers while pharma (down ~11%) and media stocks (up ~3%) were the underperformers.
Capital continues to be poured into equity by domestic institutions who invested a net amount of INR 113 bn in April 2018. Foreign investors were net sellers in the month gone by with a net outflow of INR 65 bn during the month. In the calendar year till date, DII’s invested INR 411 bn versus the INR 84 bn amount invest by FPIs.
Key highlights in the month gone by
The US Federal Reserve unanimously maintained status quo at its monetary policy review meet last month. The Committee noted that both headline and core inflation "moved closer to 2%", as against its previous assessment (in Mar-18) of inflation continuing "to run below 2%". More importantly, the Committee noted that inflation on a 12-month basis is expected to run near the symmetric 2% objective over the medium term.
Further, the India Meteorological Department's (IMD) forecast for 2018 Southwest monsoon season (June-September) predicts monsoon rainfall to be normal at 97% of Long Period Average (LPA), with a model error of +/- 5%.
In addition, oil prices have seen a sharp upward movement in recent times with crude oil prices averaging above US$ 70 pb since Apr-18. While the pick-up in crude prices was expected against the backdrop of deepening global growth recovery, the recent spike in prices has been more of a supply side story, driven by geopolitical events such as Syria and prospect of US sanctions on Iran, greater production cuts by OPEC members and press reports of Saudi Arabia supporting a higher oil price target of U$ 80 pb.
How have our recent recommendations fared?
Domestic fund flows into equities have had a strong role to play in keeping the markets firm over the past few quarters. Developments such as demonetization, RERA implementation and many rules & regulations have discouraged investments towards other assets classes; these have been key reasons for funds flowing towards equities, with the latter asset class being preferred due to lack of alternatives. Also, interest rates being at their lowest in many years, not enticing savers enough to park their money in debt instruments. This becomes a big factor to take into consideration as about two-third of India’s gross household savings are parked in physical assets such as real estate and gold; on the other hand, investments towards equities are very low, falling in the mid-single digit region.
For market bulls, the key argument remains is that there is no alternative. And thus, a slight change in percentage of money moving towards equities (from amounts being allocated towards physical assets) will turn out to be a substantial figure in absolute terms (given the low base). And this trend is expected to continue for many years to come, thereby making the case for equities quite strong. On the other hand, market bears would be of the view that valuations are not enticing enough to see strong upside.
Having said that, it may be pointed out that retail money in India has historically flown into equities keeping in mind the market sentiments and that too usually with a lag effect. As and when the markets continue to perform better as time goes by, the money inflows only rises. However, the same holds true in opposite times as well. When stocks begin to underperform due to whatever the reason may be – valuations, or a crisis situation - it is only a matter of time before fund flows towards equities start drying up. This is a trend that has been observed in the past - not only in India but globally – multiple times in almost every market cycle. And we believe there is no reason for this to change going ahead given the nature of human beings. As and when equities start underperforming or when their performance does not match up to expectations of market participants, flows are bound to dry up; and this will impact equities as mutual funds will then not have to deal with the not-so-bad “problem” of sitting on excess cash that they are facing at present.
We believe that a host of factors will play their parts in testing market sentiments and the endurance levels of market participants; some of which include the busy political calendar (state elections and the noise leading up to general elections), the emerging inflationary concerns and the expected impact on interest rates, discussion revolving rural income and farmer wages, and the monsoons, amongst others.
To conclude, we’d like to reiterate, it would be wise to keep expectations in check in the medium term - especially for investors new to the equity investing bandwagon. Be assured that we remain bullish on India and believe that there is no match to equities as a wealth creating asset class. But this view is over the longer term. Short term blips are bound to make the markets move in a volatile manner, which is something that new investors may have a hard time dealing with.
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