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Dear Investors,

Markets continued to rally during January 2018 with BSE SENSEX registering further gains of 6%.  SENSEX gained 1,900 points to close at 35,965 level. The rally was led by large caps. Midcap indices underperformed with declines of 2-3%. Amongst sectors, IT and banking were top performers while Auto and Power sectors underperformed.  

Besides India, most global stock markets saw sharp rally. Both emerging and developed markets rallied during the month. Russia, Brazil and Hong Kong markets were up 10-11%. US markets were up 6% during the same period, while UK was the worst performing ,with decline of 1.4%.

The month started with robust auto sales and strong print in Purchasers Managers Index (PMI) data. Positive news continued with strong rebound in IIP data, broadly in line results and allocation of PSU recapitalization funds.

IIP growth in November recorded a robust growth of 8.4% against 2% in October. Sector-wise, manufacturing growth surged to a record high of 10.2% led by a 2.8% sequential increase. Mining grew 1.1% while electricity grew 3.9%. On use-based basis, capital goods continued to print the fourth consecutive positive growth at 9.4% while Infrastructure and construction sector also grew sharply by 13.5%. While consumer durables grew by a mere 2.5%, consumer non-durables grew by 23.1%.

CPI inflation accelerated to 5.2% in December from 4.9% in November, led primarily by adverse base effect and pickup in core inflation. Food inflation picked up to 5% compared to 4.4% in November. On a sequential basis, though, the food index was down 1.3% month-on-month. Core inflation picked up to 5.1% in December (from 4.7% in November). The sequential uptick was witnessed across housing and health while education and personal care witnessed a drop in prices.

Separately, Central Statistical Office (CSO) released advance GDP estimates for FY18. Real GDP growth is estimated to be at 6.5% in FY2018 vs 7.1% in FY17. Estimates indicate moderation in growth of agriculture and allied activities. Industrial sector growth may  slow down. Services may   see some improvement.

Quarterly results have been better than expected. Of the Nifty companies, which have reported results so far, half of them have reported better than expected profits. Earnings growth in the commodities sector was the highest, followed by consumer good and financials. Growth overall is widespread and backed by improving economic activity.

FPIs flows were positive to the tune of USD2bn. This compares with net inflows of USD8bn reported during calendar year 2017.  Mutual funds flows were net positive to the tune of USD786mn, while Domestic institutions had outflows last month.

Currently, Nifty, on consensus earnings, is trading at PE(x) higher than historical levels. As per market consensus, earnings growth of 17% CAGR may be expected for two years, which could see some moderation going forward. We remain cautiously optimistic on equity markets.

Sanjay Chawla
Chief Investment Officer
Source: Bloomberg, Economic Times
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