September was another volatile month for the financial markets. Performance across equity and debt markets was fairly volatile. The month saw some bit of economic recovery, especially in terms of IIP and manufacturing data. The last couple of quarters have seen a downfall in the economic activity which was earlier hurt by demonitisation and now further damage done by GST implementation. The same was visible in the muted earnings number of the companies in the June quarter. The lower GDP growth of 5.7% has now led to discussions on whether there is a need for fiscal stimulus.
It’s been a good quarter for global equity markets, with the economic data continuing to point to a healthy global economy. U.S. indices and other developed markets around the world were up. These results are surprising given recent events. The U.S. was hit by some of the worst storms in history. Plus, the North Korea crisis persists, with credible talk of a nuclear war. There is a rising concern globally, but still, the markets continue to respond to the fundamentals, like strong consumer confidence and business investment. The Fed continues to suggest that another rate rise is on the cards for December. Meanwhile, the European Central Bank (ECB) looks set to announce a further slowdown in the pace of its own QE programme. Going forward the world needs to adjust to the reduction in excess liquidity that we have witnessed in the last 10 years.
From a domestic economy stand point, economic momentum sputtered in the first quarter of FY 2017 as growth slid to the slowest rate in three years. The external sector saw poor performance as it was hit by a strong rupee and confusion over the implementation of the Goods and Services Tax (GST) led to a slowdown in general. However, the impact from the GST implementation should be temporary, and growth should be seen gaining steam post couple of quarters. We saw some rebound in core IIP and manufacturing data last month. It appears increasingly likely that the government could fall short of its fiscal targets for the year, as the deficit rose to ~96.2% of the full-year target in August. There are now speculations that the government is mulling a fiscal boost of around Rs.40,000 crore. This could mean a significant breach of the 3.2% fiscal target for the current fiscal. The last attempt to boost the economy through fiscal expansion backfired. Hence, we believe given the current scenario, a fiscal stimulus may not be the answer, the focus should be on implementation of key policies, even though it may take time to bear fruits of success.
As far as equities are concerned, June quarter earnings reflected the underlying weakness in the economy. We have already seen downgrades for FY18 earnings numbers. This is when other emerging markets have seen earnings estimates revised up this year. India has seen ~10% cuts to Nifty estimates for the FY18. Recognising the near-term risk of high valuations and slowing earnings growth, the FPI’s have withdrawn around $3.5 billion from Indian markets in the last couple of months. The impact of FPI has not been seen yet due to the strong DII flows cushioning the fall. However, we believe DII flows too can get affected if we see a correction in the market. Having said that, the outlook is still positive for Indian equities from a long term perspective but it is important to recognise the near term risk-reward in the markets and invest accordingly. We expect a muted index level performance with specific bottom up strategies doing well. Given the situation, it is best to stagger equity investments.