Market Outlook. March 2017

Transcription

1 Market Outlook March 2017

2 EQUITY MARKET

3 Global equity market snapshot: February 2017 Performance February 2017(local currency returns) (2) (4) (6) (8) RUSSIA MSCI EM - EUROPE PAKISTAN PHILIPPINES SRI LANKA JAPAN KOREA INDONESIA FRANCE UK GERMANY MSCI EM BRAZIL CHINA TAIWAN HANG SENG NIFTY S&P 500 DOW JONES (2) (4) (6) Performance YTD (local currency returns) RUSSIA SRI LANKA MSCI EM - EUROPE FRANCE JAPAN PAKISTAN UK INDONESIA GERMANY KOREA CHINA DOW JONES TAIWAN PHILIPPINES S&P 500 HANG SENG NIFTY MSCI EM BRAZIL 11 Nifty was up 4%, in line in emerging market performance (3%) during the month. US and India were the best performing markets during the month. Year-to-date, Brazil and India are the best performing markets. Source: Bloomberg, SBIMF Research

4 Indian stock market snapshot: February 2017 Performance in February 2017 Performance YTD (2) (4) 0 AUTO PSU METALS FMCG NIFTY CAP GOODS SENSEX PHARMA BSE 100 BSE 500 BANKEX MID CAP OIL & GAS SMALL CAP IT REAL ESTATE IT PHARMA AUTO SENSEX FMCG NIFTY BSE 100 PSU BSE 500 OIL & GAS CAP GOODS MID CAP BANKEX SMALL CAP METALS REAL ESTATE Nifty/Sensex was up 4% in February. Barring auto, all the sectors registered a positive growth during the month. YTD, both Nifty and Sensex are up 8% during the month. Midcap Index (+12.6%) and Small Cap index (+13.7%) has out-performed for the year. Real estate, metals and financials are the sector outperformers. Pharma and IT have been the worst performing sectors. Source: Bloomberg, SBIMF Research

5 Growth: Q3 FY17 GDP data surprises positively Q3 Growth was not as bad as feared. GDP growth at 7.0% (vs. 7.4% in Q2) and GVA growth at 6.6% (vs. 6.7% in Q2) Agriculture and Industry output were robust while services growth moderated 10.0 % y-o-y Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Real GVA at basic prices Real GDP GVAbp Agriculture Industry Total Mining Manufacturing Utilities Construction Services Total Q Q Q Gross value added (GVA) is estimated to have grown 6.6% in 3QFY17, which is lower than 6.7% growth in 2Q and 6.9% growth in 1Q. Agriculture (6.0% in Q3 vs. 3.8% in Q2) and Mining (7.5% vs. -1.3%) were the key drivers of growth in Q3 owing to bountiful harvest this year. Mining sector recovery can be attributed to the improvement in metal prices, lifting of iron-ore ban and higher steel production. Surprisingly, the CSO's calculations also suggest that manufacturing, trade and transport sector growth was not affected by demonetization and thus growth actually picked up in 3Q. Financial services data reflects to have borne the sharpest brunt of demonetization due to weakness in credit growth (3.1% in Q3 from 7.6% in Q2). Q3FY2017 official GDP estimates should be read with a caution because a) the GDP calculation incorporates the informal sector performances with a greater lag, b) inventory adjustment during demonetization masks the full impact, and c) robustness in economic activity during October and mid-november may have an offsetting impact. Various economic activity data shows a relatively weaker activity in January- February compared to Q3 FY17. Source: CMIE, SBIMF Research,

6 Q4 Earnings will be real test of demonetization Profits for Indian companies have been weak in FY15 and FY16 on the back of weak export and domestic demand, stressed balance sheet, high real interest rates, fall in global commodity prices (affecting the commodity related companies), delayed investment cycle and relative appreciation of rupee vis-àvis the trading partners. For FY17, earnings were expected to grow by as much as 14%. Both FY17 and FY18 expectations are likely to be revised downward post the demonetization exercise Against this backdrop and the fact that Q3 marked the implementation of demonetization, Q3 FY17 earnings have been positively surprising. Headline revenue growth accelerated to 7.5% y-o-y (NIFTY), the fastest growth in more than two years. Margins continued to expand and consequently, profits grew at more than 10% after two years of muted prints FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e Nifty EPS (in Rs.) (% y-o-y)- in RHS % 30% 20% 10% 0% -10% -20% The commodity sectors drove a large part of the acceleration in revenues and profits whereas the domestic consumer-facing companies saw the impact of demonetisation. Going ahead 4QFY17 will be a real test of demonetization impact given that 3QFY17 also had other juxtaposing factors (festivals, base effect, etc). Consensus earnings estimates have seen steady downgrades through the 3Q reporting season. This is especially true for domestic consumer-facing sectors earnings downgrades for which downgrades have accelerated in the first two months of Accordingly, market expects FY17 earnings growth to be much lower than 14% estimated at the start of the year and earnings to pick up to by 15-16% in FY18. Earnings narrative has improved at the margin for FY18 owing to visible signs of a cyclical uptick in global growth and trade, favourable base for select cyclicals like metals and PSU banks and growth in consumption on account of normal monsoon after two consecutive years of drought and from 7th Pay Commission pay-outs. A meaningful and sustained revival in earnings growth is extremely critical for Indian equity to sustain its current valuations. Source: Antique, SBIMF Research,

7 Indian Equity Valuations relative to emerging markets improved in February India s valuations relative to other EMs improved in February but is still lower than historical 5 year average and the relative RoE continues to strengthen 14.0% MSCI India ROE Relative to EM 100% 80% 60% 40% 20% 0% -20% MSCI India's P/E prem. wrt MSCI EM 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -40% 27-Dec Dec Dec Dec Dec Dec-15 Source: Morgan Stanley, SBIMF Research,

8 Liquidity: FII turned buyers in February FIIs turned buyers for the first time since October DIIs, on the other hand, continue to pump money USD mn USD mn Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Equity Investment Debt Investment Source: MOSL NSDL, SBIMF Research

9 Equity Market outlook Sensex and Nifty ended with 4% gains in February and 8% returns YTD. Performance down the capitalization curve was better with BSE Mid-cap and BSE Small-Cap Index up by 5% and 6% respectively (in February). Barring auto, all other sectors delivered positive returns during the month. Performance was marginally better relative to other emerging markets. Both FIIs and DIIs were net buyers, investing a total of US$1.5 billion in the cash segment. On the economy front, Q3 FY17 economic activity indicators and GDP growth data do not reflect any meaningful adverse impact of demonetization. It could perhaps also be due to the inability of many growth indicators to adequately capture the performance of informal sector performance. Global manufacturing activity is improving which is likely to feed into India s exports. Similarly, 3Q FY17 earnings were better than expected. Nifty PAT grew by 10.3%. The commodity sectors drove a large part of the acceleration in revenues and profits whereas the domestic consumer-facing companies saw the impact of demonetisation. The general perception is that the impact of demonetisation on profitability has not been as severe as expected. Cyclical revival in global manufacturing and trade activity, better-thanexpected corporate results, fading of demonetization fears and continued funds flows has brought further optimism to the market. This has led to richness in valuations (19 times 1 year forward earnings) and limits the nearterm upside. Valuations are at 19 times on 1 year forward earnings SD +1 SD Mean: 16 Sensex 1Y fwd PE Feb/06 Jul/06 Dec/06 May/07 Oct/07 Mar/08 Aug/08 Jan/09 Jun/09 Nov/09 Apr/10 Sep/10 Feb/11 Jul/11 Dec/11 May/12 Oct/12 Mar/13 Aug/13 Jan/14 Jun/14 Nov/14 Apr/15 Sep/15 Feb/16 Jul/16 Dec/16 Liquidity is also chasing growth opportunities down the cap curve and some of the mid and small caps have risen sharply. That said, we remain positive from medium to longer term perspective owing to inherent structural strengths of the economy, bottoming of corporate profitability and prospects of domestic flows. Source: Bloomberg, SBIMF Research

10 FIXED INCOME MARKET

11 Global rates snapshot for February Year Gsec Yield (% mth end) 2015 end 2016 end Nov-16 Dec-16 Jan-17 Feb-17 Developed market 3m Change (in bps) % change in 2017 YTD (in bps) US Germany Italy Japan Spain Switzerland UK There has been a subtle shift in the direction of global bond yields over the last six months with markets doubting the incremental effectiveness of additional QE/Monetary easing on aggregate demand. With expectations of ramped up government spending, higher growth and a tighter pace of Federal Reserve rate hikes have led the dollar to soar to 13-year highs and bond yields to rise higher. Source: Bloomberg, SBIMF Research

12 Emerging Market Bond yields- February Snapshot Bond yields depicts movements on both sides in the Emerging markets. India and China depicted the rise in bond yields while bond yields fell or remain flat for other key EMs YTD % change in 10 Year Gsec Yield 3m Change 2017 YTD (in (% mth end) 2015 end 2016 end Nov-16 Dec-16 Jan-17 Feb-17 (in bps) bps) Emerging Market Brazil China India Indonesia Korea Malaysia Philippines Russia South Africa Taiwan Thailand Source: Bloomberg, SBIMF Research

13 India Rates Snapshot for February 2017 Dec-16 Jan-17 Feb-17 m-o-m change (in bps) Change YTD (in bps) 1 Yr T-Bill M T-Bill year GSec M CD*** M CD*** Yr Corp Bond* Yr Corp Bond* Yr Corp Bond* Yr IRS Yr IRS Overnight MIBOR Rate INR/USD # -1.9 # Crude Oil Indian Basket** # 3.9 # Indian bond yields rose dramatically in February as RBI changed its monetary policy stance from accommodative to neutral. 10-year G-sec rose by 46 bps to 6.87% by February end. Overnight MIBOR rates, however, fell due to maturing of cash management bills and resultant surplus liquidity in the banking system. Other Money market rates also remains low as RBI refrains from rolling over CMB maturities. Crude oil prices rose 1.1% over the month and 3.9% YTD. Rupee has stabilized at ~67 levels depicting 1.9% appreciation YTD. Source: Bloomberg, PPAC, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the data are % month end; *Corporate bond rate is for AAA rated bonds,*** Refers to PSU Banks CD rate; # INR and Oil price changes are % change

14 CPI inflation CPI Inflation softened considerably to 3.2% in January due to fall in food prices % y-o-y Jan-12 May-12 Sep-12 Jan-13 May-13 CPI target range 4% + 2% Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 CPI % y-o-y Core CPI (CPI ex food ex fuel) CPI: Transport and communication CPI Food Latest Inflation print (3.2% in December) depicted considerable softening in prices primarily due to fall in, pulses, fruits and vegetable. Demonetization has likely to cause temporary fall in inflation due to reduced cash availability and hence reduced spending. This has lowered the prices perishable food items and may keep the prices of discretionary goods and services (16% weight in CPI basket) under check. However, the effects may be transitory and a large portion of CPI basket may remain unaffected from demonetization (with apprx 45% food, 10% fuel and light and 10% housing rentals). FY18 Outlook: Average CPI inflation has been declining every year since FY13 and makes 5% target for FY17 comfortably achievable. However, going sustainably below 5% to 4% is going to be challenging as a) core CPI has remained sticky at ~5%, b) global commodity prices and consequently WPI are firming up, c) food prices still depend on vagaries of monsoon, d) the uncertain impacts of GST still looms, e) 7 th Pay commission effects is yet to fully unfold, and e) government is gradually turning more supportive to rural economy via MGNREGA and higher MSPs. That said, both government and RBI is extremely mindful of inflation and take pro-active measures to keep it under check. Source: CSO, SBIMF Research

15 Commodity prices In 2015, all the commodities registered a price decline mainly due to China, global growth slowdown and excess capacity. In 2016, price rose across most commodities (barring Uranium, wheat and corn) % change in 2015 % change in 2016 Despite 2016 price rise, overall commodity index still far lower than 2014 highs Jan/05 Jan 2010=100 Sep/05 May/06 Jan/07 Sep/07 May/08 Jan/09 Sep/09 CRB Food Index May/10 Jan/11 Sep/11 May/12 Jan/13 Sep/13 CRB Commodity Index May/14 Jan/15 Sep/15 May/16 Jan/17 In 2017, commodity in general could continue to face upside pressures as global growth recovers % change YTD in 2017 Natural Gas Tin Gasoline Heating Oil Gas Oil Brent WTI Sugar Coal Coffee Soybeans Corn Wheat Cotton Copper Gold Nickel Zinc Uranium Palladium Aluminium Platinum Silver Iron Ore Source: Bloomberg, SBIMF Research,

16 Currency Rupee depicted appreciation bias in January and February in line with other Emerging market currencies Turkey Lira Philippine Peso Indonesian Rupiah Hungarian Forint Malaysian Ringitt Chinese renminbi Indian Rupee Thai Baht Colombian Peso Polish Zloty Mexican Peso % change in 2015 % change in 2016 % change YTD Brazil Real African Rand Taiwanese Dollar Russian Rouble Korean Won DXY stabilized close to 100 levels Jan/2001 Nov/2001 Sep/2002 Jul/2003 May/2004 Mar/2005 Jan/2006 Nov/2006 Sep/2007 Jul/2008 May/2009 Mar/2010 Jan/2011 Nov/2011 Sep/2012 Jul/2013 May/2014 Mar/2015 Jan/2016 Nov/2016 DXY Index- monthly average Rupee appreciated by 1.9% YTD and holds at~67 levels Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Indian Rupee Source: Bloomberg, Antique, SBIMF Research

17 Fiscal Account: Higher SDL supply offsets the contained centre borrowing Centre has been lowering it fiscal deficit for 6 years in a row. FY18 fiscal deficit targeted at 3.2% of GDP Lowering of fiscal deficit and resorting to other sources of financing deficit leads to contained G-sec supply 6,000 5,000 4,000 3,000 2,000 1, RE BE Fiscal Deficit (Rs. Bn)- LHS Fiscal Deficit (% GDP)- RHS Gross Market Borrowings (Rs Tn) RE BE Net Market Borrowing (RS Tn) States, however, are failing to achieve their deficit targets leading to higher SDL supply * 7.00% 6.36% 6.00% 5.00% 4.00% 3.00% 2.00% 2.87% 4.16% 2.87% FY17 BE FY17RE FY18BE 4.63% 3.54% 3.49% 3.49% 3.51% 3.44% 2.56% 2.53% 2.29% 1.79% 2.16% 1.69% 5.62% 4.27% 4.27% 2.84% 2.99% 3.23% 2.75% 2.20% 1.00% 0.00% -1.00% -0.12% -0.02% -0.02% Bihar MP Kerala WB Jharkhand Gujarat Haryana Rajasthan Aggregate (8 states) Source: unionbudget.nic.in, JMFL research, SBIMF Research, Note: Only 8 states budget for FY18 available thus far

18 Policy Rate Outlook The MPC (Monetary Policy Committee) surprised the market participants in the Feb 17 review by not cutting the rates and also changing the stance from accommodative to neutral The market was not at all prepared for a change in stance by the MPC given the backdrop of uncertainty regarding growth post demonetization and inflation being within the RBI s target of 5% by March-17. The RBI cited sticky core inflation, adverse global factors and transitory effects of demonetization on growth as the reasons for maintaining the status quo. The RBI lowered its March 2017 CPI inflation projection to below 5% (from 5% with upside risks earlier). Further out, it expects CPI inflation to be % in 1HFY18 and % in 2HFY18. The RBI MPC has explicitly committed to lowering CPI inflation closer to 4% on a durable and in a calibrated matter. On growth, the RBI lowered its FY17 GVA growth projection to 6.9% with balanced risks (from 7.1% with balanced risks). For FY18, it lowered its GVA growth projection to 7.4% (from 7.9% with downside risks earlier) Jun-05 Feb-06 Oct-06 Jun-07 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Feb-14 Oct-14 Jun-15 Feb-16 Oct-16 Repo Rate (mth end, %) By keeping the stance neutral RBI has keep all the options open (Rate hike, no cut and rate cut) depending on the incoming data mainly on inflation. In our opinion, given the outlook on inflation and growth, additional Policy rate cuts are unlikely in Source: RBI, CSO, SBIFM Research

19 Debt Market Outlook Market yields are likely to be conditioned by RBI s revised policy stance and explicit commitment to achieving the 4% CPI mid point target. Domestic demand supply equation of bonds & banking system liquidity and credit demand. Evolving global landscape of lesser/gradual withdrawal of monetary accommodation, potential fiscal policy measures, dollar strength and relatively higher bond yields. The government has done a fine balancing act by keeping net market borrowings unchanged in spite of a marginal relaxation in fiscal deficit targets. The union budget also extended the deadline of the concessional withholding tax of 5% for the offshore investments in Indian government bonds to 30 June 2020 from 30 June Furthermore, it clarified that the indirect transfer taxation will not apply to category 1 and category 2 of foreign portfolio investors. This would be attractive for offshore bond investors Jan-11 May-11 Sep-11 Jan-12 Average spread between G-sec and Repo in last 10 years: 75bps May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May year GSec yield (mth end, %) Repo Rate (mth end, %) Sep-16 Jan-17 With surplus liquidity, no RBI O MO purchases and neutral policy stance, the yield curve would remain steeper with long end yields likely to reset higher in the coming months. The focus on gradual reduction of public debt as announced by the FM, potential enhanced tax compliance arising out of more formalisation of economy and tax reforms such as GST should enable public finances to be on a sound footing and augur well for the bond yields over the medium to long term. Source: Bloomberg, SBIFM Research

20 Thank you

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