MONTHLY UPDATE FEBRUARY 2018
February 2018 One of the reasons so many people get burned in the market is because they start buying as they see prices going up. Equity Markets - Robert Kiyosaki Indices 31 st Jan 2018 28 th Feb 2018 1 Month 1 Year BSE Sensex 35,965.02 34,184.04-4.95 18.93 S&P CNX Nifty 11,027.70 10,492.85-4.85 18.17 BSE 100 11,419.07 10,864.95-4.85 18.22 BSE Mid Cap 17,364.21 16,562.59-4.62 22.21 BSE Small Cap 18,716.77 18,127.93-3.15 32.41 Source: Bloomberg Indian equity markets posted negative returns during the month of February with large cap indices falling between 4.85-4.95% mom. BSE mid cap index was down 4.62%, while BSE small cap index was down 3.15% during the month. The Sensex was up 18.93% while Nifty was up 18.17% on a yoy basis. The BSE mid cap is up 22.21% yoy and BSE small cap index is up 32.41% yoy as of end February 2018, thus outperforming the large cap indices on a yoy basis. Major global equity indices too were down during the month with returns ranging from negative 1.87% to negative 6.21%. HANGSENG declined the most by 6.21%, while Nasdaq declined the least, among the major global indices. For the month of January, all the sectoral indices posted negative returns. However sectors like IT, Metals, FMCG and Healthcare outperformed the key benchmark indices. FIIs has sold to the tune of Rs12,491cr into Indian equity markets in Feb 18 while DII s invested Rs17,813cr. Among DIIs, Mutual funds bought Rs13,246cr. In debt market, FIIs sold a net of Rs2,771cr in domestic debt during the month. FIIs have net bought Rs4656cr in Indian equity FYTD till end-feb 18 and in debt market, FIIs have bought a net of Rs1,25,383cr. DIIs have net bought Rs104,994cr in Indian equity FYTD, with MFs buying Rs1,27,425cr till end Feb 18. Macro Economic Data GDP grew 7.2% in 3QFY18 against 6.2% in 2QFY18, led by 13% growth in investment. Govt. consumption increased 6.1% in 3QFY18 vs. 2.9% in 2QFY18 and 12.3% in 3QFY17. On the supply side, GVA grew 6.7% in 3QFY18 vs. 6.2% in 2QFY18 led by Manufacturing (up 8%) and construction (up 6.8%). Agriculture sector also grew 4.1% in 3QFY18, up from 2.7% growth in 2QFY18. Mining activities, however, continued to remain weak (down 0.1% vs. 7.1% in 2QFY18). Electricity growth also moderated to 6.1% in 3QFY18 from 7.7% in 2QFY18. Industrial production growth increased by 7.1% in Dec 17 against 8.4% growth in Nov 17. The growth was majorly led by sharp increase in capital goods output which increased by 16.4% in Dec 17 vs. 10% in Nov 17 and manufaturing output which continued to grow at a 1
high rate of 8.4% in Dec 17 after a 10.7% increase in Nov 17. Among other components, growth in electricity output (4.4% in Dec 17 vs. 3.9% in Nov 17) and that of in primary goods (3.7% in Dec 17 vs. 3.2% in Nov 17) also contributed to the high growth in IIP. Core sector output growth accelerated to 6.7% in Jan 18, following a 4.2% growth in Dec 17. The growth was mainly led by sustained increase in output of cement (20.7% in Jan 18 vs. 18.9% in Dec 17) and electricity output (8.2% in Jan 18 vs. 4.4% in Dec 17). More importantly, coal output which declined by 0.1% in Dec 17 increased by 3% in Jan 18. However, Fertilisers output declined by 1.6% in Jan 18 against 3% growth in Dec 17. CPI inflation marginally eased to 5.1% in Jan 18 from 5.2% in Dec 17, led by seasonal fall in food inflation from 4.9% in Dec 17 to 4.6% in Jan 18. The softening of food prices was majorly led by i) a sharp seasonal fall in vegetable prices (down 6.2% m/m) and ii) a decline in sugar prices (dropped 2.1% m/m). Housing inflation further inched up to 8.3% in Jan 18 from 8.2% in Dec 17. Notably, core inflation remained unchanged at 5.1% in Jan 18, same as Dec 17. Trade deficit widened to $16.3bn in Jan 18, a 4 ½ -year high, up from $14.8bn in Dec'17. On a cumulative basis, trade deficit during Ap-Jan 18 stood at $136.9bn, which is 30% higher than FY17 s full year trade deficit of $105.7bn. Non-oil & non-gold trade deficit also widened to $88bn during Apr-Jan 18 vs. $59bn during Apr-Jan 17. Exports grew by 9.1% yoy in Jan 18 to $24.4bn following a 12.5% jump in Dec 17. Imports grew by 26.1% to $40.7bn in Jan'18 against 21.1% increase in Dec 17. Notably, gold imports declined 22.1% yoy to a 17-month low of $1.6bn in Jan 18. Govt. fiscal deficit widened to Rs.6.7tn during the first ten months of the fiscal FY18, overshooting the full year s revised fiscal deficit target of Rs.5.9tn (3.5% of GDP) and reached 114% of the overall target. Revenue expenditure during the current fiscal till January came in at Rs.15.8tn, 81% of the full-year revised estimate. Capital expenditure was Rs.2.6tn, or 96.7%, of the full-year revised estimate. Total expenditure was Rs.18.4tn, 83% of the government s full-year estimate of Rs.22.2tn. The current 10-year benchmark yield has risen to 7.73% as of end-february 2018 from 7.43% at end-january 2018. Indian Rupee depreciated by 2% during Feb 18 as it opened at 63.9 as of 1st Feb 18 and closed at 65.2 as of 28th Feb 18. Commodities (USD) 1 Month One Year Gold -1.99 5.61 Silver -5.33-10.36 Crude Oil -6.35 16.02 Copper -2.63 16.04 Primary Aluminum -3.94 10.81 Lead -4.21 10.86 Nickel 1.40 25.59 Tin -0.69 11.99 Zinc -2.61 22.04 Trend in the major commodities was negative in the month of February with Nickel being an exception. Crude oil dropped the most by 6.35%. On a year on year basis, all major commodities except Silver continue to post positive gains. Nickel has risen the most by 25.59% while Silver is down 10.36%. Source: Bloomberg 2
Observations HDFC Standard Life Insurance RBI kept its policy rates unchanged in line with street expectations however inflation forecasts were puhsed up and growth forecasts pared down indicating somewhat difficult policy challenges going forward. GST collections for Jan 18 came in at Rs. 863bn slightly lower than Rs. 867bn in Dec 17. The government expects collections to improve further after the introduction of the interstate e-way bill system from mid-april 18. As of Jan 18, 1.03cr taxpayers have been registered under GST. Outlook February was an eventful month characterized by a significant rise in volatility. A higher than expected increase in bond yields in the US in the recent months along with rhetoric around trade barriers and tariff wars have been the key reasons. Metal commodity prices have remained firm thanks to production cut discipline in China. However, imposition of import tariffs by the US, potentially followed by retaliatory actions by impacted nations, clouds the outlook. Oil prices, as expected, have cooled off a bit as the rising shale output has counterbalanced production cuts by OPEC. Oil prices remain an important variable from India macro stability point of view. There has been some improvement in consumption in recent months post the initial disruption caused by the implementation of GST. However, it's still early days and the system has taken longer than expected to stabilize. Given that E-way bill and invoice matching are yet to be enforced, jury is still out on how far out the steady state is. GST collections also continue to be subdued for the same reasons. But despite these hiccups, there seems to be some recovery on the ground which is visible in decent growth in auto sales, cement dispatches, steel production, consumption of petrol and diesel, electricity production, etc. This is also reflected in the recently released IIP data and Manufacturing PMI; Services PMI, however, has been very volatile. Q3FY18 results showed respectable earnings growth after several quarters. While the headline numbers at the index level look subdued because of still poor performance by PSU banks and higher provisioning by private corporate banks, the underlying trends, even adjusted for low base of demonetization, look encouraging. The bankruptcy resolution process has made some progress with a few cases having been resolved. With recapitalization of PSU banks, it appeared that banks will finally be able to provide for the haircuts and the outlook thereafter would be good. However, the recent fraud involving PNB has completely altered the scenario resulting in quite a few PSU banks yet again likely falling short on the capital front. After the imposition of Long Term Capital Gains (LTCG) in the budget, there have been concerns on flow of money into equity funds. The net inflow number for February was good yet again. However, it's too early to call a trend and this remains an important variable to watch. FIIs have once again started selling aggressively making January an exception. Given the election heavy calendar and rising bonds yields globally, this too will have a bearing on the overall liquidity conditions in the equity markets. Despite the uncertainty in the short term, we believe that the medium term outlook of the Indian economy and consequently the equity markets is quite good. As the benefits of GST and cleanup of bank balance sheets start becoming clear, we should see improvement in 3
growth indicators. Indian market valuations at 18x FY19 earnings, are at a slight premium to historical mean levels. But given that we expect a cyclical recovery going ahead, these multiples should not be considered as very expensive. We continue to remain optimistic from a medium to long term point of view, despite our near term concerns. 4
Debt Markets Update March, 2018 HDFC Standard Life Insurance February Highlights Bond markets were volatile in February. The G-Sec 10yr benchmark tradedbetween 7.43% and 7.73% during the month, as the Union Budget, the sell-off in the US 10 yr treasury notesand uptick in the oil prices dampened the bond market sentiments.the Union Budget at the beginning of the month soured sentiments as the fiscal deficit for the current year slipped from 3.2% to 3.5%, while the next year target was again higher, at 3.3% against the FRBM target of 3.0% deficit. The RBI policy, later in the month, maintained status quo on rates, which helped the markets regain some of the lost ground. But as the month progressed, the lack of demand from the state owned banks, who have been grappling with losses on their treasury portfolio, was more evident.the G-Sec 10yr benchmark finally closed at 7.73% against 7.43% at the end of the previous month. Liquidity conditions continued to remain negative to neutral in the month of February. The IIP for December came in lower at 7.1%, compared to 8.4% in November. The growth was primarily driven by the capital index which came in at 16.4% vs 10.0%in December and manufacturing index which came in at 8.4% as compared to 10.7% in November. The mining index for December rose to1.2% as compared to 1.1% in November. The electricity index, howeverdeclined and came in marginally lowerat 2.4% as compared to 3.9% earlier. On the use based index, basic goods came in higher and showed a print of 3.7% vs 3.2%, while intermediate goods came in marginally lower than the previous month but managed to stay well above negative territory showing a positive print of6.2% from 6.5% in December.Consumer goods also shot up and came in at 14.7%in December, from 14.9% in November. Consumer non-durables sub-index also easedsignificantly to 16.5% from 23.4% in December. Headline CPI inflation, for January, eased and came in lower at 5.07% from 5.21% indecember. The fall was mainly due to decrease in the food and fuel & light prices. The food index came in lower at 4.58% in January versus4.85% in December. Underlying the food inflation, vegetable inflation fell and came in at 26.97% from 29.13% and the pulses inflation continued in the negative zone at -20.20% as compared to -23.47% in the previous month. The fuel and light index moved marginally lowerto 7.73% from 7.90% and housing index moved higher to8.33% from 8.25%, driven by the adjustment in prices post the 7 th Pay Commission implementation. The miscellaneous index came in a tad higher at 3.80% from 3.79% in the month of January. On a MoM basis the core inflation came in at 5.10% from 5.13% in the previous month. Headline WPI inflationcame in lower at 2.84% in Januaryfrom 3.58% in December due to the reversal seen in primary product prices. Primary articles inflation moved down sharply to 2.37% in January as compared to 3.86% in December. The manufactured products category was marginally higher at 2.78% vs 2.61% in the month of January. The fuel and power index showed a much lower print of 4.10% as compared to 9.16% MoM. Core inflation however came in marginally higher at3.50% in January vs 3.17% in December. 5
India s trade deficit came in higher at $16.30bn in February as compared to $14.90bn in January and $10.40bn in December. Exports grew for the sixth consecutive month in January, albeit at a slower pace at 9.0% to $ 24.4bn, while imports rose 26% to $ 40.7bn. One of the key reasons for the sharp jump in imports is the rise in oil imports to $11.7bn 43% YoY. YTD trade deficit has reached $131bn compared with $88.0bn in the same period of previous year. Outlook Last month two important events happened from the bond market s perspective. The Government relaxed the fiscal deficit target for FY18 and FY19. However, gross market borrowing at close to INR 6 trillion was almost unchanged from FY18, which is positive from supply point of view. The MPC signaled that it was willing to wait for longer than market s expectations before initiating any rate action. At current levels (180 bps above Repo rate) bond yields seem to have priced in at least two rate hikes (25 bps each) in next 6 months. The rise in global bond yields, the spurt in consumer price inflation, and concerns about significant fiscal slippage, heightened by the recent spike in crude oil prices and approaching general elections did cause the rise in bond yields but it is the quantum of the rise in yield that makes it attractive given the inflation and growth outlook in next six months. We do not expect any rate hikes in next few quarters as we expect inflation to broadly stay within RBI s projection band assuming normal monsoon. The current elevated yield levels are very attractive as market is pricing in a very high premium for the uncertainty. Liquidity conditions indicate that probability of OMO purchases by RBI, is high as system is consistently moving away from surplus liquidity to deficit on account of rise in currency in circulation. On the food inflation front a steep MSP hike seems unlikely as the FM has indicated the base for cost calculation and the required target pricing is close to the current levels. Crude oil prices have also eased from the recent highs around $70/bbl. The US has stepped up its output and is the largest oil producer and is offsetting the OPEC supply cut which had initially pushed crude prices higher. While we expect inflation to rise in next quarter, it is expected to start easing again on account of base effect and phasing out of onetime HRA increase and GST rates. On the supply front, we expect that the new borrowing calendar would include a greater proportion of floating rate bonds so that the duration risk wary banks can return to market. Overall we expect RBI to stay on the sidelinesas long as inflation stays within its projected band of 4.5% to 5.6%. Given the current volatility we expect bond yields to trade in the rage from 7.40% to 7.80% till start of fresh borrowing in next fiscal. The key risks to our view is a steep rise in crude oil and selling by FIIs if currency depreciates significantly. 6