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Wednesday, January 10, 2018

Some throwback to equity market... Yesteryear

Equity Market Update

After a flattish 2016, Indian equity markets were up 28% and closed on a record high in 2017. Global equity markets also fared well in 2017. Successful implementation of GST, recapitalization of PSU banks, Moody’s upgrade of India’s sovereign rating to Baa2 from Baa3 were key events. Globally, geopolitical tensions, rising commodity prices especially crude, US rate hike thrice in a year etc. made news.

A summary of key developments of 2017 is as follows:
  • Successful implementation of GST
  • Moody’s upgrade of India’s sovereign rating to Baa2 from Baa3
  • India’s ranking moving up 30 notches to 100 in the World Bank’s ease of doing business survey for 2018
  • Bounce back of real GDP growth to 6.3% in 2QFY18 after falling to 5.7% in 1QFY18 post demonetization
  • Progress on cases referred to National Company Law Tribunal (NCLT) on track. Steel, that accounts for 20-25% of Gross Non-Performing Assets (GNPA), has high interest from bidders under NCLT process
  • Real Estate (Regulation and Development) Act, 2016 (RERA) implemented
  • Announcement of recapitalization of PSU banks
  • Announcement of Bharatmala scheme, Saubhagya scheme etc
  • US Federal Reserve raised the federal funds rate thrice in 2017
Key Highlights of markets:
  • Flows remained strong with FIIs and DIIs investing US$7.7 bn and US$13.9 bn in CY2017 respectively
  • Record money raised through IPOs, QIPs, rights issue, etc
  • Emerging markets outperformed most developed markets
During the year 2017, key commodities moved upwards. Crude was up ~14% and steel, zinc aluminum, copper, lead were up 15-35%.

Economic & Equity market outlook – Growth should accelerate, earnings outlook to improve
  • Most economic indicators are healthy and economy is in good shape
  • Capex in roads, railways, power T&D has seen material improvement
  • Capex in Housing, urban infrastructure and defence should now improve
  • Industrial capex is likely to recover within a year led by metals, fertilizers etc
  • Economic growth should improve from current levels as impact of demonetisation and GST is behind
  • Earnings outlook is improving with improvement in operating margins, lower interest rates, peaking NPAs and higher metal prices
  • Steel that accounts for 20-25% of GNPA has high interest from bidders under NCLT process; Conclusion of this process would positively impact banks, private capex and steel
Equity markets have lagged nominal GDP growth and are consequently at attractive market cap to GDP ratio. In P/E terms too, markets are trading near 17.5x CY18 (e) and 14.5x CY19 (e) (Source: Bloomberg Consensus), which are reasonable, especially given the low interest rates.

Debt Market Update

The calendar year 2017 has been a difficult year for the Indian debt market. The key macroeconomic events during the year were implementation of GST (goods & services tax), Rs 2.11 lac crores recapitalization plan for public sector banks, 25bps rate cut by the RBI, upgrade of sovereign credit rating by Moody’s, and three rate hikes by the US Fed.

The yield on 10-year benchmark ended the year at 7.33%, up by 88 bps for the calendar year 2017. The yield on 10-year AAA-rated Corporate Bonds ended the year at 7.86% as against 7.46% at the end of 2016. Thus, corporate bond spreads ended the year at 40 bps as against 91 bps at the beginning of the year.

The huge surplus of liquidity built up post demonetization reduced substantially during the year 2017. As against ~Rs2.25 lac crs of surplus liquidity absorbed by RBI at the beginning of the year 2017, about Rs.25 thousand crs of liquidity was injected by RBI at the end of year 2017. The overnight rate ended the year at 6.20% as against 6.25% as at end of 2016.

INR appreciated by ~ 6% during the calendar year 2017 to close at 63.87 versus the USD in Dec’17 as against 67.92 in December 2016. FIIs have purchased close to US$ 30.61 billion in Indian debt and equity markets in calendar year 2017 as compared to outflow of ~US$ -3.19 billion during calendar year 2016.

The average retail inflation CPI during calendar year 2017 was 3.16% as against 4.94% during calendar year 2016. CPI inflation began the year at 3.17% and bottomed out in Jun’17 at 1.46%. Since then CPI has increased to 4.88% YoY in Nov’17. Core CPI (excl. transport & communication, food & fuel) ranged between 4% to 5.25% during calendar year 2017.

During the second half of the calendar year 2017, G-Sec yields moved higher due to concerns arising over fear of fiscal slippage, rising international crude oil prices, higher US bond yields and OMO (open market operation) sales by RBI.

The government announced additional borrowings of Rs73,000 crs (Rs50,000 crs through dated securities and Rs 23,000 crs of T-bills) by Mar’18 which confirmed market fears of fiscal slippage. Consequently, the 10-year benchmark yield moved up sharply and ended the month at 7.33%, higher by 27bps over the previous month end.


The forthcoming Union Budget and next credit policy review are key events to watch out for. In our view the likely firming up of inflation in the near term, uncertainty associated with GST collections, next year’s fiscal deficit target as well as the rise in crude oil prices, will keep RBI on pause mode for the remaining part of this fiscal year.

Source for various data points: Bloomberg and Reuters.

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