Risk taking ability for equity investment is improving in the market with optimism over recovery in the economy led by stimulus, festive demand, good monsoon and lower interest rate
India’s real Gross Domestic Product (GDP) growth is expected to slide to a 7 year low of 6 percent in FY20. The Reserve Bank of India (RBI), which had projected India’s real GDP to grow by 7.2 percent at the start of the fiscal, has scaled down its forecast to 6.1 percent during the last six months.
Many international institutions too have substantially revised downward their forecast for India, the worst being 5.8 percent by Moody’s.
The growth had started to slow down two years back due to global factors. The impact got bigger this year due to sharp deceleration in domestic demand in consumption and investment.
Latest data shows job cuts in industries, particularly in auto, textiles and gems and jewellery. Business environment has got unfavourable and investment hit by disinterest over capex due to policy issues & weak consumption. While capital investments by government weakened due to its fiscal constraints.
All the negative factors of India economy are known and expressed in the weak outlook forecast. Today, consensus is deeply negative regarding the economy and equity market. It seems that all the issues of the economy are largely factored across the board.
But the equity market was lack lustering in the last 1.5 year with no real growth in value. It is time for equity market to do better in the coming period as the worst may be factored in the reality.
Government has come-up with open intention to support the economy. They cut the effective corporate tax rate by 10 percent to existing corporates and ~18 percent for new investment, with a hope that corporates will invest the savings in future capacities.
However, during the year it seems that most of the corporates will distribute these gains to the shareholders through dividends. They will start investing as utilization improve with clear signs of improvement in consumer & export demand.
The ongoing economic data continue to be weak. Nifty50 preview shows flattish PAT growth of just 1 percent on YoY and 6 percent on QoQ basis. This is due to significant de-growth in auto, metal and telecom sectors. Finance, cement and pharma are expected to do better this quarter due to weak Q2 last year as a result of NPA problem, reduction in cement prices & price erosion in US pharma market.
The strong performance in the Banking and NBFC is led by improvement in credit off-take and net-interest margin. Rise in cement prices and lower fuel costs are expected to benefit large cement companies. However, volumes are expected to be flat owing to economic slowdown and floods in different parts of the country.
The pharma sector is expected to do better on account of price hikes in domestic market and lower price erosion in the US market. The woes in the auto sector are expected to continue hit by lower consumer demand and bloated inventory.
A combination of low commodity prices, weak demand, and above-normal monsoon is impacting metal companies. The IT sector is expected to report muted earnings growth due to external macro challenges and increase in employee cost.
This could be short-term trend, earning expectations has improved post the corporate tax cut. GDP growth is expected to recover to 7.0 percent and 7.5 percent by 2021 and 2022, respectively, while EPS growth starts from H2FY20. A careful trend will volatility may continue in the equity market during the short-term, as expectation builds-up for FY21 led by start of capex led by FDI and private consumption.
We had three key reasons impacting the global economy & market, US-China trade talks, Brexit and geo-political issues. We are hearing positive developments regarding Trade-wars and deal between UK & EU. World economy was slowing down due to sarcasm over trade & investments.
This hangover is likely to reduce as a final deal is reached between the parties. FIIs view will change from negative to positive on emerging markets and inflows will grow better.
In India, Government’s intention to correct the economic situation with tax & stimulus measure is positive. And statement to provide further fiscal stimulus in the future as per the need of the economy is lifting the sentiment of the market.
Risk taking ability for equity investment is improving in the market with optimism over recovery in the economy led by stimulus, festive demand, good monsoon and lower interest rate.
The start to Q2 result for the broad market has been mixed while for banking sector it has been marginally better led by base effect, reduction in provisioning & positive vibes over NPA resolution. The outlook has improved for the future with improvement in liquidity and operational cost.
The negativity is that slippage is still happening but given attractive valuation, banking sector will do well and outperform the market in the future. Seems that a majority portion of negative factors are largely digested in the domestic market today.
The Author is Head Research at Geojit financial services.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.