December 2017



• Indian equity market fell in November. Sensex was down by -0.2%, while NIFTY returns fell by 1% during the month. MSCI India (US$) was down 0.8% in November, while MSCI- EM was up 0.15%.

• Small and mid-caps continued to outperform the broader market. BSE small cap index was up 3.6%, and the mid-cap index was up 2.0%.

• November witnessed FPI flows to the tune of US$3.0bn into equities, the second consecutive month of inflows, and for the first time in seven months FPI inflows into equity outpaced debt.

• Although sentiment remains largely positive, both in India and globally, Indian equity markets will closely watch the outcome of the Gujarat elections. Sustained domestic flows should continue to provide support.

• On the growth front, GDP growth reversed a five quarter declining trend and rose 6.3% y-o-y in 2Q FY18. GVA growth rose 6.1% y-o-y in 2QFY18, up from 5.6% in the previous quarter. But nominal GDP continued to stay sub-10% and will accordingly have its bearing on the corporate earnings performance. On the other hand, one can argue that corporate profitability at 2.9% of GDP (vs. the historical average of 5.4%) has hit its rock bottom and should only mean-revert from here on.

• Earnings recovery is absolutely critical for the rich valuations to sustain (Sensex at 21 times 1 year fwd earnings). In the present scenario we remain cautious and would continue to focus on bottom-up stock picking.

• From a longer-term perspective, India growth story remains intact. Initial wrinkles in reforms such as IBC, GST and RERA should iron out over the next year and place India on a higher productive potential. Higher growth on the back of the productivity gains resulting from structural reforms should be longer lasting.


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