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Improving macro-economic factors support stock market valuation

Improving macro-economic factors support stock market valuation

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Indian benchmark indices BSE Sensex and Nifty 50 touched all time high levels of 32109.75 and 9913.30 respectively on 14th July, 2017, delivered returns of approx 21% in CY17. The long awaited GST implemented on 1st July, 2017, is one of the biggest indirect tax reform of India. Implementation of GST will benefit industry, government and consumer as it will lower the cost of goods and services give a boost to the economy and improve ease of doing business. The tax will boost the country’s fiscal health in the long term.

India’s robust macro fundamentals are yet to translate into strong earnings performance for the corporate sector. The Indian earnings story has been impeded by several one-off policy events in the recent past, such as asset quality review in FY16 and demonetization in FY17. The story continues in 1QFY18, with the implementation of GST resulting in an adverse impact for some business to consumer sectors, as they witnessed destocking in the months of May and June.

However, the benchmark index BSE Sensex has gained 22 percent so far in dollar terms in the current calendar year. This indicates that India is now one of the expensive Asian markets measured by price-to-earnings. The rally sent the value of Indian equities close to $2 trillion, but back in 2007, it rose to as high as 170 percent, while at a more recent peak in 2010 it stood at 122 percent.

The market is strongly supported by improving macro economic factors. Low inflation rate, controlled fiscal deficit, rising consumer demand, improving tax discipline and good rainfall in the last two years offer very good opportunity for companies to perform well for the next decade. Current Account Deficit and GDP; India’s current account deficit (CAD) narrowed during last fiscal to 0.7 percent of the GDP from 1.1 percent in 2015-16 on the back of the contraction in trade deficit.

There is expectation of higher economic growth of 6.8 percent in 2017-18 and 7.5 percent growth in 2018-19, good corporate earnings for CY19 on the back of likely synchronised upswings in the infrastructure and consumption sector in India. Further, increasing support from exports valuations look reasonable. Though the growth rate of 6-7 percent is still less than the growth rate of 8-9 percent in its earlier bull market phase of 2004 to 2007, it is almost double the global growth rate of 3.1 percent estimated by IMF.

India has fewer numbers of two wheelers, four wheelers per person as compared to its Asian and global peers, it has fewer hospitals per 10,000 persons in the vicinity, its per capita cement and metal consumption per person is low, its infrastructure needs improvement. This indicates that all these sectors have growth potential.

We are bullish on the banking and financial sector on positive macro-economic numbers. Retail inflation eased to 1.54 percent in June as retailers were giving discounts in the market ahead of GST rollout. Inflation numbers stood at 2.18 percent in May. However, India’s factory output in May slowed down for the first time in three months. The index of industrial production (IIP) in May rose 1.7 percent compared to a year ago, slower than the 3.1 percent growth seen in April.

Activity in the eight core industries of the country, which form almost half of the index, rose 3.6 percent during May. These numbers are unlikely to enthuse the market, but were largely in line with expectation as production activity slowed ahead of GST implementation.

AU Small Finance Bank listed on 10th July, 2017 made high of Rs 725.50 against the issue price of Rs 358, gained 102.65 percent post its listing. We are bullish on this stock.

We continue to remain bullish on Reliance Industries after the company restated it tarrif plan for its telecom services Jio. The stock touched a new nine year high and closed above Rs 1,500 mark.
The stock was the leading contributor in market indices moving higher. Oil stocks witnessed higher volume after oil minister Dharmendra Pradhan confirmed that the move to create major oil company by merging ONGC, HPCL and MRPL which will be completed in FY18. Investors should continue to keep an eye on these stocks.

Tata Global Beverages hit 3 year high of Rs 176.70 grew by 4.41 percent post news of restructuring within the Tata group. The move is expected to increase liquidity in the company. Recently, listed company HUDCO, which saw a gain of 14.8 percent on news that it is considering a debenture issue, is among the stocks which investors should keep a watch on.

Currently, the Nifty 50 is trading at a P/E of 25.17 (x) which is the highest level of CY17 as compared to lowest P/E of 21.94 (x) of January 2017. Nifty is slightly expensive at current levels, but we are entering an era where the country can transform meaningfully.

Going ahead, Indian equity markets will trade with positive bias as the fall in WPI as well as CPI inflation raised hopes for rate cut by RBI in August monetary policy. The Q1FY18 quarterly result announcements of corporate bigwigs and progress of monsoon rains will also dictate the direction of the markets. Further, US Federal Reserve chair Janet Yellen, in a House testimony, signalled that the approach to higher rates will be steady, which is positive for Indian equity markets.

Contributed By
Mrs. Anita Gandhi
Whole Time Director at
Arihant Capital Markets Limited

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