Indian stocks: In the right position at the right time

Sanjay KumarPNB MetLifeGlobal markets have seen heightened volatility this year on account of concerns over US Fed rate hike, weakening global growth and volatility in commodity and crude oil prices. This has led to multilateral agencies such as IMF and World Bank downgrading their global economic growth forecasts. Concerns of a steeper-than-expected slowdown in China intensified at the beginning of this year, thereby spurring fears of a consequent global slowdown. This resulted in a significant sell-off in commodity markets. This was followed by an unexpected rate cut by Bank of Japan, taking policy rate into negative territory. The European Central Bank and Bank of England also responded to rising growth concerns with expanded monetary easing. After a turbulent start to the year, global investor sentiment has improved over last couple of months, as policy makers reiterated their commitment to support growth. Ample global liquidity amid expectations of supportive monetary policies by global central banks has led to a rally in global equity markets. India has been no exception. Indian equity markets have been rallying some time now, with August being the sixth successive month of positive returns. Sensex is up more than 22% from February lows. Mid-caps have significantly outperformed, with 35% return over the same period.Global triggers apart, domestic drivers that have underpinned this rally are: 1) Government’s adherence to fiscal consolidation, 2) RBI’s new liquidity framework, 3) expectations of an above normal monsoon and favourable progress through the season, 4) an improved policy environment with passage of GST Bill, Bankruptcy Bill, relaxation in FDI norms and implementation of Seventh Central Pay Commission (7CPC) recommendations, 5) expectations of shift in RBI regime to a more dovish one, and 6) expected recovery in corporate earnings.Fundamentally, India is relatively better placed compared to the broader emerging market pack. The Indian economy has seen significant improvement over last few years. Economic growth has been recovering gradually. Inflation has come down from low double-digit levels a couple of years back to mid-single digits, thereby enabling the central bank to reduce policy rates. India’s twin-deficit (fiscal deficit and current account deficit) situation has also improved over the years. This, coupled with improving forex reserves, has significantly reduced India’s external vulnerability, thereby providing stability to INR amid rising global uncertainty. These developments have rendered stability and strength to India’s macro-economic fundamentals.Even as various multilateral agencies have cut global economic growth forecasts, they have broadly retained their positive stance on Indian economy. Asset quality issues of the banking sector and weak private investments remain key points of concern. Consumption has been picking up gradually as seen from several high-frequency indicators such as automobile sales, fuel consumption, airline passenger traffic, consumer durables production and indirect tax collections. Higher salaries of public sector employees post implementation of 7CPC recommendations and an above normal monsoon is likely to further drive consumption. Investment cycle, however, may take a couple of years to show a meaningful revival.Indian markets may remain volatile in the near-term led by global developments, particularly actions and commentaries by global central banks. However, amid expectations of loosening of global monetary policies, liquidity is likely to remain ample, thereby facilitating foreign capital inflows. On the domestic front, continued progress in monsoon, performance of corporate earnings over coming quarters and smooth passage and implementation of GST bill by centre and states are key triggers for equity market. While equity markets have run up significantly, valuations do not appear stretched given India’s improving macro-economic fundamentals and recovery in earnings cycle. After last few years of weak growth, we expect corporate earnings to show a meaningful recovery in FY17. This is likely to be led by continued pick-up in demand and decline in interest costs. This, along with improving macro-economic fundamentals, bodes well for equity markets.