MONTHLY UPDATE APRIL 2018
April 2018 The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions. Equity Markets - Seth Klarman Indices 28 th Mar 2018 30 th April 2018 1 Month 1 Year BSE Sensex 32,968.68 35,160.36 6.65 17.52 S&P CNX Nifty 10,113.70 10,739.35 6.19 15.43 BSE 100 10,502.61 11,152.97 6.19 15.34 BSE Mid Cap 15,962.59 17,012.03 6.57 14.96 BSE Small Cap 16,994.36 18,401.67 8.28 19.71 Source: Bloomberg Indian equity markets posted strong pullback returns during the month of April with large cap indices gaining 6.19%-6.65% mom. BSE mid cap index was up 6.57%, while BSE small cap index was up 8.28% during the month. The Sensex was up 17.52% while Nifty was up 15.43% yoy as at the end of April 18. The BSE mid cap was up 14.96% yoy and BSE small cap index was up 19.71% yoy, thus outperforming the large cap indices. Performance of major global equity indices was mixed during the month with returns ranging from negative 2.48% to positive 6.84%. CAC 40 gained the most by 6.84% while Shanghai Composite declined 2.48% during the month. For the month of April, all the sectoral indices except Oil & Gas sector posted positive returns. IT sector gained by 12.12% followed by FMCG at 9.87% whereas Oil & gas sector declined 1.27%. FIIs were net sellers to the tune of Rs7,195cr of equity stocks in April 18 while DII s invested Rs8,511cr. Among DIIs, Mutual funds bought Rs10,078cr. In debt market, FIIs sold a net of Rs11,868cr in domestic debt during the month. Macro Economic Data Industrial production growth marginally decelerated to 7.1% in Feb 18 against 7.4% growth in Jan 18. The marginal decline was majorly led by fall in mining output which declined by 0.3% in Feb 18 vs. 0.2% growth in Jan 18. Among other components, growth of electricity output (4.5% in Feb 18 vs. 7.6% in Jan 18) and that of primary goods output (3.7% in Feb 18 vs. 5.8% in Jan 18) decelerated. However, growth in capital goods output (20.1% in Feb 18 vs. 12.8% in Jan 18) and infrastructure & construction goods (12.6% in Feb 18 vs. 7.0% in Jan 18) accelerated.. Core sector output growth moderated to a three month low of 4.2% in Mar 18, following a 5.4% growth in Feb 18. Cement output growth (13% in Mar 18 vs. 23% in Feb 18) and refinery output (1% in Mar 18 vs. 7.9% in Feb 18) witnessed a moderation in growth. Electricity output growth remaind steady at 4.5% in Mar 18. Importantly, there was a sharp surge in coal output growth (9.1% in Mar 18 vs. 1.3% in Feb 18), highest in the last 5 months. 1
CPI inflation marginally eased to 4.3% in Mar 18 from 4.4% in Feb 18, led by seasonal fall in food inflation from 3.5% in Feb 18 to 3.0% in Mar 18. Fuel inflation dropped from 6.9% in Feb 18 to 5.7% in Mar 18. Notably, core inflation increased marginally to 5.4% in Mar 18 from 5.2% in Feb 18. Also, WPI inflation remained steady at 2.5% in Mar 18. Trade deficit widened to $13.7bn in Mar 18, up from $12bn in Feb'18. In FY18, trade deficit has jumped to $160bn, which is 46% higher than $109.7bn trade deficit in FY17. Non-oil & non-gold trade deficit also widened to $98bn in FY18, which is nearly 40% higher than $70bn in FY17. Exports declined by 0.6% yoy in Mar 18 to $29.1bn following a 4.5% jump in Feb 18. Imports grew by 7.1% to $42.8bn in Mar'18 against 10.4% increase in Feb 18. The current 10-year benchmark yield increased from 7.40% as of end-march 2018 to 7.77% at the end of April 2018. Indian Rupee depreciated sharply by 2.3% during Apr 18 as it closed at 66.7 from 65.2 as of 28th Mar 18. Macro-economic factors like increasing crude oil prices and FIIs outflows were the key reasons for the sharp depreciation Commodities (USD) 1 Month One Year Gold -0.73 3.71 Silver 0.21-5.06 Crude Oil 8.16 47.15 Copper 1.39 18.68 Primary Aluminum 12.50 17.97 Lead -3.13 3.16 Nickel 2.63 44.44 Tin 0.36 6.41 Zinc -4.49 19.21 Trend in the major commodities was mixed in the month of April. Primary aluminum gained the most at 12.50% while Zinc declined the most by 4.49%. On a year on year basis, all major commodities except Silver posted positive gains. Crude oil has risen the most by 47.15% followed by Nickel at 44.44%. Source: Bloomberg Observations RBI left the policy rates unchanged in the April policy and the voting pattern was also similar to the February policy. The large downward adjustment in their inflation forecasts for FY19 came as a surprise for the markets. However from the minutes, it appeared that commentary is turning more hawkish ahead of June. IMD has forecast a normal rainfall in 2018. This is the the third consecutive year of normal rainfall forecasted by IMD with rainfall at 97% of LPA (long period average). The moderate La Nina conditions developed in the equatorial Pacific during last year started weakening in the early part of this year and currently have turned to weak La Nina conditions and therefore is not expected to have any impact on the South West Monsoon GST collections for Apr 18 crossed the Rs.1tn mark coming in at Rs. 1.03tn higher than Rs. 893bn in Mar 18. However, the buoyancy in tax collection can be one-off as it is likely due to increase in year-end tax filing. The government expects collections to improve after the introduction of the interstate e-way bill system in major states from April 18. 2
Outlook Equity market performance was driven primarily by bottom up factors, even as the macro backdrop remained under pressure, reflected in deteriorating Bond and Forex market performance. India 10 year bond yield increased meaningfully by 37bps in April to 7.7% and USDINR depreciated in April by 2.3% at 66.7. Yields rallied early in the month as the RBI cut its inflation forecast but surged subsequently as the MPC commentary revealed a hawkish bias on inflation risks and signaled a possible withdrawal of accommodation from Neutral stance ahead. USDINR depreciated on fears of widening trade deficit, rate hike by US Federal Reserve and rising crude oil prices. On the global front we are witnessing heightened volatility across all asset classes globally. Markets are beginning to factor in three more Fed rate hikes even as the growth narrative has changed to moderation in recent weeks. Crude oil too has moved up to USD 75/bbl on the back of geopolitical risks coupled with unprecedented discipline exhibited by OPEC. Meanwhile proposals to levy competing tariffs have led to fears of trade wars escalating. US 10 year bond yield touched 3% in April. The Indian economy is finally recovering from last year s twin shocks of demonetization and GST. GDP growth should accelerate to 7.3% YoY in FY19 from 6.4% YoY in FY18. Growth indicators (IP, PMI) are sustaining the pick-up seen in recent months as the impact of GST and demonetization is abating. IMD s initial forecast of a normal monsoon is good news at the margin, particularly for the rural economy. Capex has shown some select signs of reviving after a weak couple of quarters. Headline inflation prints remain soft, albeit core inflation is picking up at the margin. As per the Ministry of Finance, the total gross GST revenue collected in the month of April stood at Rs.1.03trillion. This is a positive data point as this is first print after the roll out of E-way bill and is better than the run rate of 0.85-0.9 trillion over the past few months. Outcome of Karnataka state elections and MSCI rebalancing will be keenly monitored by investors this month. Elections are due in various large states in Madhya Pradesh, Rajasthan and Chhattisgarh in CY18 and national elections should be held in early 2019. While there is uncertainty in the near term due to rising bond yields, depreciating currency and elections over next year corporate earnings excluding Financials have considerably improved over past few quarters and momentum looks sustainable with improving growth trajectory. We expect Bank s Balance Sheet clean up act also to be completed in March quarter driven by RBI s revised asset guidelines which should further enhance growth momentum. While Indian market valuations at 19X FY19(E) are at a premium to long term average they must not be considered expensive given acceleration in earnings growth ahead. We continue to remain optimistic from a medium to long term point of view. 3
Debt Markets Update May, 2018 April Highlights Bond yields hardened again inthe month of April after a respite in the previous month. The immediate trigger was the release of the minutes of the last Monetary policy meeting, where the members expressed their concerns over the path of inflation and signaled a higher support for withdrawal of policy accommodation. Over the remainder of the month, bond yields recovered some of the losses on the back of value buying but yields failed to garner much of traction. The absence of PSU banks, skewed the demandsupply balance adversely. The 10yr benchmark GSec started the month at 7.40% androse all the way upto7.77% by the end of the month. Meanwhile, the Indian Rupeedepreciated from 65.18 to 66.13against the US Dollar. The IIP for March came in lowerat 7.1%, compared to 7.4% in February. The growth was primarily driven by the manufacturing index which came in at 8.7% in February. The electricity index for February came in drastically lower at4.5% as compared to 7.6% in February. On the use based index, basic goods came in much lower and showed a print of 3.7% vs 5.8%, while intermediate goods came in marginally lower than the previous month but managed to stay well above negative territory showing a positive print of3.3% from 4.9% in February.Consumer durable goods also came in lower at 7.6%in February, from 9.4% in January. Consumer non-durables sub-index, however,easedsignificantly to 7.4% from 10.5% in February. Headline CPI inflation, for March, eased and came in lower at 4.28% from 4.44% in February.The fall was mainly due to decrease in the food and fuel & light prices. The food index came in lower at 3.01% in March versus 3.38% in February. Underlying the food inflation, vegetable inflation fell and came in at 11.70% from 17.57% and the pulses inflation continued in the negative zone at -13.45% as compared to -17.35% in the previous month. The fuel and light index also moved marginally lowerto 5.73% from 6.80% and housing index showed a marginally higher print to8.31% from 8.28%. The miscellaneous index came in a bit higher at 4.16% from 3.85% in the month of March. On a MoM basis the core inflation rose and came in at 5.40% from 5.17% in the previous month. Headline WPI inflation came in a tad lower at 2.47% in March from 2.48% in February due to the reversal seen in primary product prices. Primary articles inflation moved down sharply to 0.24% in March as compared to 0.79% in February. The manufactured products category was also a tad lower in March at 3.03% vs 3.04% in the previous month. The fuel and power index showed a much higherprint of 4.70% as compared to 3.70% MoM. Core inflation however came in marginally lower at3.78% in Marchvs 3.87% in February. India s trade deficit widened to $13.7bn in March up from $12bn in February. In FY18, trade deficit has jumped to $160bn, which is 46% higher than $109.7bn trade deficit in FY17. Non-oil & non-gold trade deficit also widened to $98bn in FY18, which is nearly 40% higher than $70bn in FY17. Exports declined by 0.6% yoy in March to $29.1bn following a 4.5% jump in February. Imports grew by 7.1% to $42.8bn in March against 10.4% increase in February. 4
Market Outlook The bond market continues to face the problem of missing anchor market participant, the role played by PSU banks before January 18. Excess SLR, elevated NPLs and high MTM losses have almost halted trading activity by PSU banks. Systemic liquidity is also skewed which resulted in higher borrowing cost for banks which are active in credit lending. While the markets are pricing in the possibility of about 50 bps rate hikes during the year, we expect that RBI will be slow and guarded in raising rates as we expect inflation to broadly stay within RBI s projection band and the economy to see a modest pick-up in growth. The current elevated yield levels are very attractive as market is demanding a high premium for the risks. Market is waiting for the anchor investor (PSU banks) to return to market or RBI to buy bonds in the secondary market to infuse liquidity. Given the tightness in liquidity and the requirement to add reserve money in the system, we expect OMO purchases of about Rs One trillion over the course of the year. Buying by RBI and PSU banks will help in stabilizing the bond market. Given the current volatility we expect bond yields to trade in the range of about 7.4% to 7.9%. The key risks to our view is a steep rise in crude oil prices and aggressive selling by FIIs if the Rupee depreciates significantly. 5