Download January 2017 - Franklin Templeton India

Equity Market Snap Shot
Anand Radhakrishnan, CIO – Franklin Equity
Global Markets
Most of the emerging equity markets outperformed the developed market peers in January
led by region specific cues. Rising global commodity prices boosted Brazilian equity index
to a 5 year high in January (7.4%), making it the top performer of the month. Hang Seng
index rallied on positive Chinese manufacturing data, even as weak domestic exports data
weighed on the Chinese SSE composite index. Strengthening Yen and uncertainty about
the US policies pulled down the Nikkei index. Lack of detail on fiscal policy stance of the
new US government weighed on the market sentiments, capping gains made by the US
equity markets. Expectations of enforcement of protectionist policies by the incoming
president of the US sparked fears in some regions including Europe and select pockets of
Asian economies. Strengthening of Pound Sterling, on account of the UK beginning to
break away from European Union's single market, pulled the FTSE index lower.
The Brent crude futures (-3.3%) showed a negative trend in January. Metals including Zinc
(11.5%), Copper (8.5%) and Aluminum (6.5%) gained during the month whereas Steel
ended flat.
Monthly Change %
MSCI AC World Index
FTSE Eurotop 100
MSCI AC Asia Pacific
Dow Jones
Nasdaq
S&P 500
Monthly Change %
2.68
-0.99
4.94
0.51
4.30
1.79
Xetra DAX
CAC 40
FTSE 100
Hang Seng
Nikkei
KOSPI
0.47
-2.33
-0.61
6.18
-0.38
2.03
Domestic Market
Indian equity market indices saw a pre-budget rally in January with the exception of
Information Technology (IT) sector. The broad-based rally was driven by encouraging
corporate results and optimism around a disciplined budget. Frontline indices (BSE Sensex
and S&P Nifty 50) gained 4%-4.5% whereas broader indices (BSE 200, Nifty 500) rose by
5.5%. Mid and small cap segments continued to outperform with 7%-7.5% gains. Cyclical
sectors including Metals (15.5%), Consumer Durables (12.4%), Realty (8.4%), Capital
Goods (8.2%), Auto (7.6%) and Banks (7.5%) continued to lead the market rally. The IT
sector (-5.8%) was badgered by fears of restrictions being imposed on the existing H-1B
Visa policy by the new US government.
Rupee strengthened by 0.1% against the USD during the month on dollar sales by foreign
banks and exporters. Portfolio flows by foreign investors stood marginally negative in
January (USD 6.39 mn or INR 0.46 bn). Contrarily, net positive flows of INR 47.49 bn from
domestic institutional investors supported the market during the month.
Macroeconomic scenario and corporate earnings
Macroeconomic indicators showed signs of improvement with a pick-up in the
manufacturing and services activities, moderation in retail inflation, lower trade deficit and
positive growth in industrial activities.
PMI: Manufacturing PMI rose above the threshold of 50 in January 2017 driven by a surge
in new orders and output to 50.4 (49.6 in Dec). Moderation in the downturn in services
sector activity in January 2017 reflected in a weaker contraction in new business flows.
Services PMI rose from 46.8 to 48.7. Index for industrial production posted a strong gain
of 5.7% for the 12 months ended in November 2016 attributable to a low base effect.
Electricity (8.9%) and manufacturing (5.5%) sectors were primary contributors to this gain.
Capital goods (15%) and Consumer Durables (9.8%) rose on low base effect. Trade deficit
lowered to USD 10.3 bn in December following a 5.7% rise in exports and a modest ~0.5%
rise in imports. Rise in oil imports (14.6%) was countered by a milder increase in non-oil
imports (~3%). Gold imports dropped by 48.5% (YoY December 2016). Retail headline
inflation for the 12-month period ended in December 2016 lowered to 3.4% in December
(3.6% in Nov) on falling consumer food price inflation (1.4% in Dec from 2.1% in Nov
2016). WPI inflation rose 3.4% in December (3.2% in Nov) driven a rise in fuel inflation
(8.7%) and manufacturing inflation (3.7%) which negated the modest rise in the primary
articles inflation (0.3%)
Q3FY17 earnings trend is crucial for gauging the first impact of demonetization, especially
on the consumer sectors. Higher provisioning expenses are expected to weigh on banking
sector results. Of the results declared so far, impact of currency exchange program has been
lower than anticipated with topline growing in tandem with market expectations. Key
earning trends include mixed volume growth with the currency transfusion program having
impacted low end consumption (mostly FMCG), no disproportionate impact on the
discretionary spending and margin expansion observed in sectors other than consumer,
technology, healthcare and mid-caps. Management commentaries for autos, staples and
durables suggest normalization of activities by March quarter. Sensex EPS growth is
expected to improve from 5.6% (FY17) to 18.9% (FY18) (Bloomberg estimates). The 1-year
forward PE for Sensex at 16.2x (Bloomberg consensus estimate) commands moderate
valuation level (within 1 standard deviation of 10 year average).
Union Budget – a disciplined approach adopted towards achieving sustainable
growth in consumption
The budget brings a long term focus on growth which is spelt out in its three-pronged
agenda of 'Transform-Energize-Clean'. This is further accentuated by an increased outlay
for infrastructure which has the highest multiplier effect on the economy, a strong emphasis
on enhancing the digital focus in the country, support to small and medium enterprises,
social measures and reforms to curb black money as enumerated in the budget proposal.
This budget comes in the milieu of a growth shock delivered by demonetization, rising
global crude oil prices and a modest room available for further monetary easing. Unlike the
previous Union budgets by the NDA government where-in the focus was primarily to
support growth acceleration, this one endeavors to strike a balance between social
spending and capital expenditure growth. Avoiding populist measures to boost
consumption as widely anticipated by the market, the budget has judiciously managed the
expenditure, displaying fiscal prudence (3.2% target for 2017-18 and 3% for next three
years).
Fiscal prudence implies lower market borrowings and in turn softer interest rates. Cheaper
borrowing rates are expected to boost discretionary consumption in the Indian economy
which is currently trying to emerge from the slowdown effects of currency transfusion
program. Incremental outlay for infrastructure sectors (INR 3.96 Lakh Crore) is expected
to boost capital goods, transportation infrastructure and allied sectors. Thrust on
affordable housing by granting infrastructure status to the sector and extension of tax
benefit to developers operating in the affordable housing segment is expected to boost
Real estate sector. Consequentially, Housing Finance Companies (HFCs) could benefit
from a potential rise in housing demand. Softer interest rates and higher NPA provisioning
could be beneficial for banking segment. Move towards digitization and allocation to
improve internet connectivity in rural areas is expected to benefit telecom sector. Measures
to improve farm incomes (enhanced agricultural credit limit, increased crop insurance
coverage and platform to improve realizations for the farmers' produce), skill
development and employment generation schemes should work towards improving rural
income and lead to a boost in consumption demand for consumer discretionary sectors.
The equity market has reacted positively to the budget. Against the market concern of an
increase in the long term capital gains for equity from the present 1 year to 3 year, the
finance minister kept it unchanged which led to an immediate relief rally in the equity
market. We view the budget as being disciplined in that it focuses on long term growth
while sticking to the stated fiscal trajectory with greater emphasis on more productive
capital expenditure (infrastructure) as evident from a near 13% rise in the capital outlay
(excluding defense) in 2017-18 over RE 2016-17. Tax buoyancy in the current year is
attributable to higher tax revenues from the Oil sector. If oil price remains range bound, we
expect the tax buoyancy to not deteriorate. The budget builds in a reasonable level of tax
buoyancy from a growth in personal tax, accounting for an improvement in tax compliance
in the next year.
Outlook
While the macroeconomic situation looks robust from the medium-to-long term
perspective, some near term events may cause interim volatility in the equity market. GST
roll out and the resultant change in taxation would be a key event for the economy. The
draft GST compensation bill calls for the centre to underwrite 14% revenue growth for
states for five years. If passed in the parliament, this could pose some risks to achieving the
stated fiscal targets, along with any adverse global oil price movement. Protectionist
policies expected to be imposed by the US government may increase global risk aversion,
thereby posing a downside risk to Indian equity market.
The IMF projects a GDP growth of 7.2% (FY17), 40 bps lower than the previous forecast
on account of a slowdown in the growth momentum led by a sluggish investment recovery
and private consumption. However, India continues to be fastest growing major economy
among emerging markets supported by improving macroeconomic environment.
The effects of currency replacement program have begun to recede as the economy is
going through remonetization. A rise in the manufacturing PMI numbers (Jan 2017),
acceleration in rural wages (Nov 2016), increasing public capex, rising FDI levels,
conducive inflation, low interest rate regime and benign deficit situation put together augur
well for the economy. This view is reiterated in the growth projection for FY18 by IMF
which remains unchanged at 7.7%.
From an investor's perspective, equity funds with core exposure to large cap and prudent
risk-taking in mid/small cap space may be well positioned to capture the opportunities
presented by prevailing valuations in the market and expected earnings growth. Further,
the investments can be staggered to benefit from the intermittent volatility in equity
markets.
Monthly Change %
S&P BSE Sensex
3.87
Nifty 50
4.59
Nifty 500
5.68
Nifty Free Float Midcap 100
7.40
S&P BSE SmallCap
7.38
Templeton Equity View
Vikas Chiranewal, CFA, Sr. Executive Director Emerging Markets Group
No News is Good News
Union Budget 2017 maintained policy continuity in most areas – Fiscal prudence, focus on
infrastructure, housing & rural spending, focusing on tax administration rather than tax
rate changes and promoting a formalized/cashless economy . Taxes on Equity markets
were thankfully not changed as initially feared. Fiscal prudence and steps on formalizing
the economy strengthens the continuing trend of low inflation and low interest rates.
Corporate earnings reported thus far have not been as weak as some early
indicators/anecdotes post demonetization were suggesting. Some impact of
demonetization will still be there in the current quarter earnings due to longer supply
chains, demand lags in some sectors. External environment on the other hand continues to
remain rather challenging with rising protectionist rhetoric coming especially from the US.
Indian IT and Pharma which have large exposure to the US markets may see increased
tariffs, restrictions, costs and demand disruptions depending on the nature of new
regulations. Last few months have seen net selling from the Foreign portfolio investors
while the domestic institutions have been receiving inflows to balance the picture.
@ Nifty Midcap 100 has been renamed as Nifty Free Float Midcap 100 w.e.f. April 01, 2016 and CRISIL Balanced Fund Index has been renamed as CRISIL Balanced Fund – Aggressive Index w.e.f. April 04, 2016.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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