saw a large amount of volatility in global markets and India bore the brunt of the same. While news flows around China c
Equity Outlook January saw the Sensex contract by 4.8% to 24871. The month saw a large amount of volatility in global markets and India bore the brunt of the same. While news flows around China continued to unnerve the markets again, dovish reads on the Federal Reserve (Fed.), European Central bank (ECB) and the Bank of Japan (BoJ), helped offset partially the weakness. On the domestic side, more states agreeing to join the revival scheme UDAY for power distribution companies were a positive. The Indian markets saw a net outflow of $(1.5)bn. in January. The rupee saw a depreciation of 2.5% to 67.79 and the dollar strengthened by 1% during the month. Global January witnessed the global markets getting unnerved again around China and its consecutive weak fixing of the Yuan. Crude saw swings of 1/3rd both ways during the month, giving rise to renewed concerns around global growth. The IMF’s continued downward revision of growth added to the volatile backdrop. Currency concerns and the seeming change in the dynamics of crude were the broad drivers of January’s volatility. On growth, US GDP was seen closer to market expectations. Consumption, investment and exports saw a drop, while residential investment appeared to have held up. US growth amidst global weakness, labour market strength and their final trickle down into US inflation would indicate the Fed.’s rate guidance into the year. Central banks The central banking space was dominated by the ECB, BoJ and the Fed. The ECB language appeared to hint at March easing, the BoJ continued to increase its monetary base and introduced negative rates. The current global market volatility is giving the markets an increasing expectation of a dovish Fed. On rate guidance from these central banks, while the BoJ action appears to be a bit muted for now, the Fed. appears likely to raise rates by 50bps or less in 2016 and more certainty around ECB March action. The central banking space broadly saw 7 holds (Canada, New Zealand, Korea, Poland, Brazil, Malaysia, Turkey) and 2 rate cuts (Japan and Indonesia). Malaysia and China were seen to inject liquidity into the markets to reduce liquidity tightness. Monetary easing headroom for the Emerging Markets (EM) would now depend on inflation and the fiscal. However, those EMs that witnessed significant currency depreciation are seeing inflation pressures creep in. This will restrict their ability to use monetary policy for growth. Nevertheless, in India, the upward pressures that the CPI would see are not currency related and are likely to remain fairly contained. The RBI therefore looks towards the fiscal space that the government may provide in its budget in February. Domestic The domestic macro space saw mixed prints. The shift in the festival season, weather disturbances in the south of the country and an unfavourable base led to a sharp drop in the industrial production index. Retail and wholesale inflation on the other hand continued to gradually bottom out as the favourable impact
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of oil was seen to optically wane. The month however saw positive news flows and action with the government listing out the first 20 smart cities that would see an aggregate investment of Rs.510bn. over the next five years. The government also announced its plan to roll out the DBT subsidy for kerosene from Apr.’16. Attempting to alleviate the country’s fiscal health, 15 states agreed to join the program to revive state owned distribution companies, through the UDAY scheme. On foreign investment, January saw French firms committing to invest $10bn. in India over the next five years. Flows January started with muted outflows from EM equity and debt, but progressing into the month, the outflows accelerated before stabilising by the end of the month. The month saw EM bond outflows to the tune of $4bn. and equity outflows of around $9.4bn. The equity outflows appear to have a concentration around GEM and Asia-ex Japan funds. Indian equity markets on the other hand, saw an outflow of $1.7bn. from equity and a marginal inflow of $0.2bn. in debt. Outlook RBI continues to be supportive of growth while the Government’s commitment to spur the infrastructure investment cycle is already reflecting in the current fiscal spends. The new Govt. has been laying the foundations for the road to sustainable growth through broader reforms & efficient administration. We have already entered the next business cycle and the soft commodity prices, especially oil, is visibly translating into fiscal comfort and business confidence on margins. While one maybe concerned about soft earnings growth seen, a detailed analysis shows corporate earnings (ex commodities) improving at a healthy pace. Softer inflation and better growth will gradually lead to a shift in the saving pattern of Indian households from physical to financial with a sharp bias towards equity. Mutual funds are well positioned to absorb this incremental shift. Corporate earnings are set to enter a positive growth trajectory driven by the domestic recovery. Our funds are very well positioned to reap these benefits. Every bull market is interspersed with both time and value corrections while reasons could be varied. Currently the growth concerns in many emerging economies and fund redemptions triggered by low oil & energy prices have impacted markets. However, India stands taller, with the twin deficits well contained, inflation well under control, bottomed out growth, a relatively stable currency and an extremely strong political mandate. Every point of volatility would be an opportunity to buy India. The recent correction in the markets underlines the same. With every turn of the markets, the India-differentiation story gathers more interest, momentum and conviction in that order. This would get louder in the coming quarters and a stable rupee would give comfort to the inflows. We continue to remain positive on our equity markets with a medium to long term outlook.
February 2016
Equity Desk
Sundaram Mutual Fund
