Equity Commentary - March, 2015
Indian equity markets scaled new highs during the first quarter of 2015, as the S&P BSE Sensex and CNX Nifty surpassed the 30,000 and 9,000 mark, respectively. However, volatility continued to be the theme of the quarter and markets corrected towards the end of the quarter. The CNX Nifty Index rose by 2.51%, during the quarter. On one hand, Markets were enthused by positive deployments in the domestic markets such as improving growth, moderation in CPI and WPI, rate cuts by RBI and policy push by the New Government. On the other hand, market volatility continued to be led by global factors such as growth challenges in Eurozone, China and Japan, risks of Greece de-stabilizing the Eurozone and the uncertainty of the timing and impact of rate hikes in the US.
Initially, markets corrected sharply in the month of January 2015 as a left-party win in Greece raised concerns of the country’s exit from the Eurozone. However, positive domestic developments drove a recovery in the markets. India’s IIP for Nov 2014 grew more than expectations by 5.2% YoY. India’s HSBC manufacturing PMI for Dec 2014 also came at a two year high. CPI and WPI for the month of December 2014 were also better than expectations at 5% and -0.5% respectively. In a surprise move ahead of its policy meeting, RBI cut repo rates by 25 bps to 7.75%, which was attributed to the moderating inflation. Markets were also enthused by the Euro 1.1 trillion Quantitative Easing programme of the ECB, under which Euro 60bn of Euro denominated bonds would be purchased on a monthly basis. The US Federal Reserve in its policy meeting noted improvement in growth and labor indicators, while continuing to maintain a patient stand on its outlook on raising interest rates. Global growth outlook remained muted. The IMF cut its 2015 global growth estimates by 30 bps to 3.5%. Eurozone’s manufacturing PMI for Dec 2014 came in slightly lower than expectations at 50.6, while China’s HSBC Manufacturing PMI for the month of Jan 2015 continued to remain in the contraction zone at 49.7. China’s GDP for 4QCY14 came in better than expectations at 7.3%, while the GDP for the year 2014 stood at 7.4%. Crude oil remained volatile and touched the USD 45/bbl levels on account of growth concerns and news about the death of the Saudi King Abdullah.
In February 2015, markets rallied during the second half on the hope of positive announcements in the budget and encouraging global cues. RBI cut the SLR by 50bps to 21.5% keeping its key benchmark rate unchanged in its Feb 2015 policy meeting. India’s PMI for the month of Jan 2015 remained strong at 52.9. India’s GDP data for 3QFY15 grew by 7.5% under the new series, while the CSO estimates were pegged at 7.4% for FY15. The IIP for Dec 2014 came at 3.2%. Both CPI and WPI for the month of Jan 2015, under the new series, continued to surprise positively at 5.11% and -0.95% respectively, mainly led by falling fuel prices. The Government launched the coal block auctions, for which it received good response from power, metal and cement companies. The 14th finance commission recommended an increase in State’s share in Union tax revenues to 42%, which was accepted by the Government.
On the back of slowing growth, China cut their reserve requirement rate by 50bps to 19.5%, the first cut since May 2012. The US Federal Reserve Chair Janet Yellen indicated a dovish stance on interest rates till inflation and wage growth remained low, in her testimony to the US Senate. In the Eurozone, the finance ministers approved Greece’s package for an extension to the country’s bailout agreement by another four months, after it agreed to various reform measures. On the back of these positive newsflows the United States, United Kingdom, Germany and Sweden saw their national stock market indices hit life highs. Indian markets also rallied towards the end of the month led by steep budget expectations.
In March 2015, the market touched fresh life highs after the Union Budget was presented. The Union Budget was largely seen as balanced, despite lacking any sweeping policy announcements. The revenue forecasts were seen as more pragmatic. Despite higher than estimated fiscal deficit target for FY16, other positives such as increased allocation for infra, roadmap to reduce fiscal deficit, increased social security allowances, deductions for pension spends and roadmap to reduce corporate taxes, supported the market rally. Once again, the RBI surprised the markets with a 25bps repo rate cut, ahead of its policy meeting, which was attributed to faster than expected disinflationary trend and improving quality of fiscal adjustment. India’s CPI for Feb 2015 came slightly above expectation at 5.37% on account of slight increase in food inflation. India’s WPI for the month of Feb 2015 at -2.06% continued to contract faster than expectations. The IIP positively surprised at 2.8% YoY for the month of Jan 2015. There was significant progress in the budget session where the Lok Sabha passed 14 bills. The Insurance Bill, Coal Bill and the MMDRA Bills, were the key Bills to secured nod from both houses of parliament. The Government also secured around Rs 1.1 trillion from the telecom auctions.
Markets corrected sharply during the second half of the month in line with global indices. In the US the unemployment rate for Feb 2015 dropped to the lowest level since May 2008, leading to fresh fears that the Federal Reserve could raise interest rates sooner than expected. The dollar pushed to a new 11-year high against the Euro hitting the 100 mark. In its policy meeting, the US Federal Reserve removed a reference to being "patient" on the timing of interest rates hikes though it sounded cautious on the health of the economic recovery. The Eurozone manufacturing PMI for Feb 2015 was below expectations at 51, while India’s Manufacturing PMI came at 51.2.
On the BSE sectoral front, majority of the indices closed in green. S&P BSE Healthcare was the top gainer, rising by 17.64% followed by S&P BSE Capital Goods and S&P BSE IT, which rose 11.99% and 7.75%, respectively. Meanwhile, S&P BSE Metal was the major laggard, down 11.97%.
The Indian economy is amid a macroeconomic turnaround with all major drivers in place.
In the near term markets can be volatile and consolidate, on the back of sharp rally in 2014, given the following near term risks:
1) Some of the key bills such as GST bill and Land acquisition bills need consent from both houses of the Parliament. Any delay in the same could affect market sentiment negatively.
2) While the Eurozone has implemented quantitative easing measures, delay in recovery of growth could have a negative rub off on the markets
3) Markets are still in process of assessing the impact and the timing of hikes in interest rates in the US, which could create volatility
However, over the coming year and beyond, there are sufficient levers in place for the cyclical recovery to gain momentum and enough scope for a further rally in the equity markets
1) The increasing fiscal flexibility has enabled the Government to increase productive spends in infrastructure creation. The increasing share of the State Governments in tax revenues will further create a multiplier effect on growth
2) The Government continues to focus on reforms and removing bureaucratic and policy bottlenecks will help to resuscitate growth. The measures taken over the past year would likely start bearing fruit in 2015 and 2016
3) Decline in commodity prices has multi fold benefit by keeping fiscal deficit under check, moderation in inflation and also reduces input costs for multiple industries and drive earnings growth, which are not fully captured in current valuations
4) With easing inflation, RBI has already cut key benchmark rates, which will further drive earnings growth