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Dear Investors,

Month of July saw stock markets registering all-time highs. Normal rainfall in most parts of India, retail inflation falling to eight months low, hopes of rate cut in the upcoming RBI policy meet in August and dovish statements from Federal Reserve Chair Janet Yellen lifted the Indian equity market to scale fresh all-time highs. Federal Reserve kept interest rates unchanged and said it expected to start winding down its massive holding of bonds relatively soon in a sign of confidence in the US economy.

During the month of July 2017, BSE SENSEX was up 5% while Nifty crossed the 10,000 mark. YTD of Indian equity markets are up about 24%. This might look high, but it is appropriate to highlight that India is following global trends. Barring Russia and South Africa, almost all-emerging markets are up in their twenties. Notable exceptions are Brazil and Turkey. Both the markets are up nearly 50% on YTD basis.

We believe that current markets are driven more by liquidity. While FII flows of late has slowed down, domestic flows are strong. FII buying moderated in July with net inflows of USD393mn which compares to the YTD total of USD$9.1bn. Domestic institutional investors, continue to remain buyers led primarily by mutual funds with net inflows of USD742mn in July taking the YTD total to USD4bn. 

Locally inflation (CPI) continued to surprise, while Index of Industrial Production (IIP) figures disappointed. IIP, which seemed to be up trending in March and April at over 3% came in at 1.7%. This was surprisingly lower than market expectation. The fall probably could be attributed to fallout of the GST implementation and destocking in the system leading to lower primary sales. Out of the three sub-indices, mining registered negative growth rate of 0.9% YoY while index heavyweight manufacturing registered subdued growth of 1.2% YoY. Electricity generation recorded sharp growth of 8.7% YoY bolstering headline industrial production growth.

CPI inflation declined further to 1.5% YoY in Jun’17, after falling to 2.2% YoY in May’17. Food index that remained in deflation at -1.2% YoY led by a sharp fall in prices of pulses and vegetables, was the key reason behind the historic low CPI print. Core inflation that excludes food and fuel components, also softened led by a sharp fall in transport inflation.

Overall the inflationary pressure has receded. The inflation has undershot RBI’s lower end target of first half inflation projection of 2%. In the second half, inflation may move up due to base effect and better growth prospects. In the next policy, RBI may cut REPO rates further due to lower inflation and benign growth. After that, RBI may be on a long pause on the REPO rate. The interest rates may trade in a narrow range as the market has almost factored in a rate cut in the upcoming monetary policy.

On P/E basis Nifty is trading at 19x Dec 2017 and 16x Dec 2018 consensus earnings. Historically this has ranged between 11-23x.  During the previous peak in 2007, equity markets were trading at 22x one year forward multiple. The street expects earnings to grow at CAGR of 17% over FY17-19E vs low single digit recorded over last 2-3 years. We are cautiously optimistic on the market. We do expect the consensus earnings to be downgraded in coming quarters. This would make the markets look a tad more expensive than what we currently believe it to be at this juncture.

Sanjay Chawla
Chief Investment Officer
Source: Bloomberg, Economic Times
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