DSIJ Mindshare

Cruising At 29000 And Climbing

THE BACKGROUND AND ROAD AHEAD

A great sense of euphoria has now gripped all across the nation as equity markets have been shinning following positive political developments and also set of reforms introduced by Narendra Modi led NDA government in the Centre. On March 14, the markets opened touching their record highs taking cues from the outcome of Uttar Pradesh state assembly elections where BJP thrashed the ruling Samajwadi Party and its newly-wed coalition partner Congress thus reiterating the sense of political stability in the minds of the countrymen and especially the retail investors. The big question at this time dominating heart and mind of every retail investor is: where do the markets go from here.

We at Dalal Street Investment Journal explain how retail investors should act in capital markets keeping various triggers in mind.

One should be ready with cash and act with the advantage of market sentiments. In simple words, during negative triggers, investors should invest in a staggered manner to hedge risk and take an opportunity for averaging buying price.

There are various domestic as well as global macroeconomic events which are going to impact the markets in the coming financial year. Markets acts irrationally when events such as demonetisation occur. Moreover, it is very difficult to predict future moves that will push markets down. Investors should act wisely and enter in the markets to get the right pricing and valuations overall.

CURRENT SITUATION

The Indian capital markets are near all-time highs. BSE Sensex and Nifty have increased almost 15 per cent in FY17 till date.

During the current financial year, there were too many headwinds such as Brexit, demonetisation, unexpected Trump victory. These events dragged down markets, but markets soon recovered. These events created negative sentiments and short term impact. Meanwhile, Indian capital markets have to increase as per corporate earnings and favourable business environment in the country. In the global context, American stock markets also increased more than 17 per cent in FY17 till date. Dow Jones is trending at all-time highs after Trump's swearing in.

If you look at the Brexit event which was a historic move with a little difference of vote. Brexit shook up UK's equity market along with the global markets. However, FTSE 100 rose more than 20 per cent in FY17. The process of exiting from Europe will start in a couple of months. The exit date is totally dependent on Article 50 timeline.

The House of Lords, who have already started their voting process on Article 50 could potentially block the bill, but it is more likely to threaten to block the bill in an attempt to leverage amendments - such as the position of EU citizens in the UK, amendments that the House of Commons unilaterally failed to pass. At the same time, Prime Minister Theresa May wants to trigger Article 50, a clause of The Lisbon Treaty in March 2017, which gives a country two years to decide the terms of the departure. This gives rise to the possibility of Brexit happening around Spring 2019, providing all the negotiations are complete in that estimated time.

Investors should not act recklessly on various negative triggers in the markets and sell off their investments entirely. The Brexit vote was unexpected and Indian capital markets corrected more than 2.33 per cent on an intra-day basis on June 24, 2016. One should analyse and forecast how such events may impact and when.

On the domestic front, the unexpected move of demonetisation, which was a positive move for the long term, acted as short term jolt to the economy. The earnings of select sectors were impacted for just one quarter and slowly these will be normalised going forward.

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FIVE STATES' ASSEMBLY ELECTIONS

After BJP came to power in Uttar Pradesh, the most influential state for the government to push its reforms agenda. The semi-final for the government for 2019 election has been successfully completed. The number of Rajya Sabha seats of the NDA regime will increase in future which will help the government clear the deadlocked bills in the second half of its tenure. At the same time, there will be no speed beakers for execution of the projects, which is the key part for the second half the BJP-led government till Lok Sabha election in 2019.

OUTLOOK

Indian equities are showing a bit of flexibility on the back of improving macroeconomic fundamentals, expectation of lower interest rates and the structural reforms being implemented by the government. Corporate earnings are showing initial signs of recovery and are expected to gather momentum in FY18. While we believe the Indian capital markets are in a structural bull run, there can be bouts of volatility. The policies of the new government in the US could potentially impact Indian exports. Similarly, the risk of US interest rates going up could impact emerging market flows.

GLOBAL TRIGGERS

Protectionism is the new emerging trend across the globe, as against India's policy of opening up economy to the global players. The era of free economy is hindering the growth of global economy going forward.

Elections in France and Germany might have to deal with a revival in protectionist anti-immigration rightwing political parties. In the emerging market space, the direction of the Chinese economy will continue to be a crucial factor. Recent economic statistics show China's economy picked up a bit of steam,, boosted by the government's infrastructure spending and property sales.

EMERGING MARKETS

After the turbulence and heat of the commodity markets, the emerging markets started recovering in calendar year 2016. However, as the year progressed, positive factors, such as improving commodity prices and economic stability, led to strength in the emerging markets. As a result, emerging markets were among the top performing markets in 2016.

Interestingly, the flow of investment in equity markets from both domestic institutional investors along with foreign institutional investors have been equal with both investing almost the same amount in FY17.

The markets have been trading in a broad range since January 2016. FPIs withdrew funds in the last quarter of 2016 owing to uncertainty surrounding the US election, the US Fed increasing interest rates, and other uncertainties around the globe. The highest spot of investment destination has emerged on the back of no negative triggers in the near future. The demonetisation impact on industry earnings remained limited for Q3FY17. Going forward, structural improvements and reforms, implementation of GST, corporate earnings growth, may determine the amount of investments FPIs make in our markets.

GST IMPLICATIONS

GST is to be rolled out in the country from July 1. The implementation of the prolonged reform would be a key achievement of the government. If government misses the deadline for implementation of the GST by September 2017, then the government will have to go back to the Parliament for status quo ante or seek a presidential extension.

There is anticipation of a slowdown in the economy for one quarter after implementation of the GST. It may be a demonetisation type of situation which impacted just one quarter.

The exact rates applicable to particular goods and services have not been finalised and this will likely happen over the next few weeks. Based on the current tax rates for key product segments across sectors and the proposed GST rates, we expect most sectors to gain or otherwise in a limited way.

The shift in demand from the unorganised sector to the organised sector will benefit in the coming times. Sectors such as plywood, ceramic tiles, batteries, etc. will stand to benefit.

The sectors which have long value chain from basic goods to final consumption stage with operation spread in multiple states such as FMCG, pharma, consumer durables, etc. should benefit. Some automobile companies could gain from GST implementation if the GST rate on their products is 18 per cent and they are able to retain the benefits of lower rates. However, the higher rate of 28 per cent would be a negative in relation to expectations.

The services sector, like telecom could face marginally negative impact from the higher service tax rate of 18 per cent, as against 15 per cent currently.

TRUMP POLICIES

From the capital markets point of view, two sectors such as information technology (IT) and pharmaceuticals will get impacted in future. In the medium-term, Donald Trump's geostrategic agenda will favour India. The trade war between the US and China will likely benefit India as most of the manufacturing may shift to the country. The US may not support Pakistan financially which means less border trouble. This, in turn, can help India reduce its defence spend.

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RATE CUT CYCLE

RBI has now indicated that interest rate cut is not likely anytime soon. Our country, which is growing at a fast pace, cannot maintain low rates for long because we need capital expansion to fuel the growth. The inflation fears will always be there. This time, not many people were surprised after RBI did not go for a rate cut. The only surprise was that they changed their stance to neutral from accommodative. There will be less cash in the system as they move towards sucking liquidity from the markets. How and when they do that is what markets will track for the next several weeks.

CRUDE OIL PRICES

The crude oil prices are hovering near USD 48 per barrel. The crude prices started increasing after OPEC's deal with non-OPEC oil-exporting countries to cut production. The prices will crash again if the alliance does not hold. The proxy wars going in Syria, and between some of the nations in the Gulf, may not favour production cut going forward. It is very hard to predict at what prices crude may trade in FY18, but we are predicting that it may go up to USD 60 per barrel, and on the downside, it will be limited up to USD 40 per barrel.

In the context of the Indian economy, the rising crude oil prices may impact fiscal deficit of the country in FY18. India imports 80 per cent of its oil needs. With oil imports getting costlier, the rupee will depreciate more at a time when dollar is also getting stronger.

INDUSTRY EARNINGS FORECAST

The Indian economy is slowly recovering and we expect the earnings cycle to recover in FY18. The demonetisation of the currency has impacted the FY17 earnings to some extent, but this is likely to be temporary. We at Dalal Street Investment Journal expect some disruptions around the time when GST is likely to be implemented in H1FY18. However, we expect earnings to recover at a much faster pace during H2FY18. The benchmark index stocks will have earnings growth of single digit in FY17 and we forecast that it will double in FY18. Recovery has been seen on the back of firm commodity prices, stable macros and lower interest costs, which will help boost their revenue growth in FY18. The Indian economy is driven by consumption and it is likely to increase in upcoming fiscal. However, some distraction is likely in the operational profit margin of the companies owing to the steep rise in commodity prices.

WHAT SHOULD INVESTORS DO

At this point, domestic markets are trading at high level. We can say that one should ride the bull till the very last. One should always try to get into the markets where there is an opportunity for short term correction and buy in a staggered manner.

The implementation of GST in FY18 should also help the companies in the organised sector as the companies in the unorganised sector would lose the cost advantage due to tax avoidance. With positive macros and interest rates expected to decline further, the longterm potential of Indian economy remains intact, despite the near-term challenges.

The sectors that will outperform benchmark indices are private banks, auto and NBFCs in FY18.

CONCLUSION

If we consider data of last 20 years picked up from the pages of history of the equity markets, we find an interesting fact emerging. During 20 years, eight times Sensex posted over 20 per cent jump during 12-month period. If we consider data of the years, 1999, 2003, 2005, 2006, 2007, 2009, 2012 and 2014--we note that Sensex jumped in the range of 79 per cent in the year 2009 to minimum 25 per cent in 2012. Interestingly, while we talk about Modiwave taking markets up, above and steeply, we also need to keep in mind Sensex had posted a whooping 79 per cent jump in just 12 months and UPA government was in charge of the country. 

Meanwhile, our thorough and exhaustive research reveals now that there is no much reason why the Sensex should not post a minimum 20 per cent rise in the coming 12 months considering so many positive factors around us including Modi magic.

The Nifty has traced out an impressive long-term uptrend and could even reach the 11,000--mark. We are experiencing a bull run and there is no obstacle to stop the bull going forward. The benchmark indices could give more than 20 per cent returns in FY18.

On March 14, the benchmark indices hit all-time highs owing to the big victory of BJP in state assembly elections. BSE Sensex and Nifty increased more than 2 per cent each and touched 52-week highs.

In the near term, there may be setbacks for the capital markets as the US Fed may raise interest rate owing to the positive macroeconomic data in the US economy.

The incremental interest rate may entice foreign institutional investors to pull back investment from emerging markets for the short term. Meanwhile, India is the favourite destination for investment for FIIs among the emerging markets.

On minimal negative setbacks, Nifty is going to form support levels at 9000. The gains for the markets are going to be stretched in future. We are guiding investors that one should enter right now in the markets and reap fruitful returns in future. We are forecasting that markets will experience Modi Version 2 rally ahead, eyeing 2019 elections.

Sectors to focus in FY18

INFRASTRUCTURE

1.Government has allocated Rs.3,96,135 with a growth of 10 per cent in FY18.

2. Roads and highways allocation up to Rs.64,900 crore

3.Rural roads construction work to accelerate to 133 km/day in FY17 from 73 km/day in FY14

4.Tailway expenditure increased 8 per cent to Rs.131,000 crore. At the same time, government will lay down 3500 km railway lines in FY18 as against 2800 km in FY17.

BANKING

1.Banking space is quite enchanting after demonetisation in the country

2.Private banking sector has an advantage over public sector banking space in the case of bad loans

3.Public sector banking players are struggling with non-performing assets, but consolidation will be helpful in FY18

4. Digitisation will help the sector to engage more customers and drive more banking in unbanked space

NON-BANKING FINANCIAL SERVICES

1.NBFC space, particularly with regards to housing finance companies, will be focused as the government aims to implement ‘Housing for All' by 2022

2. There are no NPA issues, plus the demand is robust due to government's focus.

3. Cost of funds is also coming down because of lower interest rates

AUTO ANCILLARY

1.GST may fuel growth of auto ancillary industry

2.BS-IV III and BS-IV IV mandatory implementation norms will increase demand in future

3.International business to drive growth for the domestic auto component makers

4.Impact of demonetisation is going to ease from Q4FY17

LOGISTICS

1.GST to help logistic companies to minimise expense and boost operational profitability

2.Government readies multi-modal transport play to reduce logistics costs

3.Post-GST, there will be time saving up to 30 per cent to 40 per cent of logistic costs incurred due to stoppages at various tolls and check posts

4.Government is setting up 35 multi-modal logistics parks at an investment of Rs.50,000 crore, and developing 50 economic corridors

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