Head of equity at Quantum mutual funds, Atul Kumar, notes that in the month of January 2018, S&P BSE Sensex climbed 5.6% on a total return basis. S&P BSE Midcap and S&P BSE Smallcap indices saw negative returns during the month after outperforming S&P BSE Sensex for a long time. 2.57% and 2.66% was decline in BSE Midcap and BSE Smallcap indices respectively. Reliance Industries stock rose 4.37% in January month.
He believes that sectors which underperformed during the month were telecom, auto, and power. Aggressive new tariffs announced by Reliance Jio last month has likely hurt the telecom industry. IT, banking and capital goods were among the sectors which gained most in January.
FIIs during the month invested USD 2 Bn in Indian equities. Domestic institutions were buyers to the tune of USD 63 Mn. While MFs were net buyers of USD 1.2 Bn, insurers were net sellers of USD 1.1 Bn. The Indian rupee appreciated 2% during the month versus US dollar.
Globally economic growth has been strengthening. There has been a synchronized activity pick up in developed economies, particularly the US and Europe. Interest rates, which were closer to zero earlier, are in the process of climbing up. As we have pointed out earlier, increase in interest rates in the developed world can negatively impact equity prices in emerging markets such as India. Excess money coming to EMs could stop as investors are able to get returns in home markets.
Union budget was announced by Government on 1st February. Boost to farm economy was key deliverable from the budget, expected given this was the last budget before elections. There are also plans to cover a large part of the population under free health insurance provided by Government, though it is unclear how resources are found for it. A negative for equity investors was the introduction of long-term capital gains of 10% on the sale of Equity shares/units of Equity oriented Fund if more than Rs 1 lakh. Since there is no indexation allowed for capital gains, even inflation will be taxed.
The government has set a fiscal deficit target of 3.3% for fiscal 2019, higher than 3% planned earlier. Minimum support prices (MSP) has been set at 1.5 times input costs, this could raise the price of food items. Together with crude oil which has been rising, there is a risk of inflation rising in the economy.
Many listed companies have announced their results for the 3rd quarter of fiscal 2018. Overall financial parameters such as topline and profits have seen an increase over last year. Better performance is helped by lower base given demonetization in Q3’17. Many capital goods companies are reporting healthy growth in order flows. Much talked about recovery in profitability could finally be around the corner.
There has also been an infusion of Rs 880 Bn in PSU banks during the month, part of Rs 2.11 Trn recapitalization plan for PSU banks. Weaker banks got a larger share of the pie. This money is likely to help them to meet higher provision requirement as well as provide capital for future growth.
Barring a few sectors, valuations of stocks are at high levels. While share prices have run up, earning of companies haven’t caught up. High level of liquidity globally has driven up stock prices. Markets have fallen recently, however, not much value has emerged yet. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors can expect a decent return from equities over a long period in future. Valuations, however, leave moderate upside in the near term. Cash levels in our equity schemes remain higher than historic average, as there are very few buy ideas. Investors at this point should continue SIPs but refrain from taking a large fresh position in equities.
