Market Outlook-March 2016


Market Outlook - March 2016

Economic Update

Growth: 3QFY16 real GDP growth has dwindled to 7.3% in December. Index of Industrial Production (IIP) has declined by 1.3% in comparison to -3.4% in November due to a decline in manufacturing activities and incessant rains in South India. Capital goods continued to decline sharply by -19.7% in comparison to -24.4% in Nov.

Inflation: Januarys Consumer Price Index (CPI) came in at 5.7% in contrast to 5.6% in December as food inflation soared to an 11-month high. Core CPI eased marginally to 5.4% from 5.5%. Wholesale Price Index (WPI) shrunk for the 15th consecutive month as it came in at -0.9% in contrast to -0.73% in the previous month due to food inflation.

Trade Deficit: January trade deficit narrowed to an 11 month low of $7.6bn against $11.7bn in December on the back of a sharp decline in the imports of petroleum products and electronic goods.

Union Budget: Fiscal targets of 3.9% for FY16 and 3.5% for FY17 were maintained. Focus on boosting rural income with expenditure on irrigation and employment guarantee schemes were note worthy. Bank recapitalization number was unchanged at Rs.250bn for FY17. A lower capital expenditure budgeted for FY17 could lead to higher revenue expenditure due to optimum utilization of funds.

Railway Budget: Railway ministry announced a capex plan of Rs.1.2tn for FY17 as opposed to Rs.1tn plan in FY16E. Passenger earnings growth forecast is at 12.4% in defiance of 7.6% in FY16E. Freight earnings growth was forecasted at a dry 5.4% as against 5.7% in FY16E. On the funding side, budgetary support stood at Rs.450bn in comparison to Rs.400bn in FY16. Market borrowings of Rs.200bn were denoted.

Equity Markets

Indian markets (BSE-100 was -7.5% in February) remained insipid on account of weak global cues and widespread global sell-off leading a subdued Q3 earnings. The Union Budget exhibited the governments outlook of fiscal integration with a focus on revitalizing rural demand. The reasons for the BSE to perform below par are (1) Continued fears of a global slowdown, (2) concerns over spiraling bad loans of Indian banks, (3) disappointing 3QFY16 corporate results, (4) weak oil prices and (5) nervousness ahead of Union Budget triggered the fall in February.

February saw a marginal uptick in deal activities with 9 deals amounting to $967mn. This was mainly led by the governments 5% stake sale in NTPC for $735mn. In the primary market, Initial Public Offer (IPOs) of Quick Heal Technologies ($66mn), Precision Camshafts ($60.5mn), TeamLease Services ($62.5mn) were completed during the month. Foreign Institutional Investments (FIIs) remained huge sellers in February as risk sell-off and subdued Q3 earnings resulted in net outflows to the tune of $1.2bn from Indian equities. FIIs net outflows Year to Date (YTD) amounts to $2.9bn. In contrast, purchasing flourished from domestic investors as net inflows in February raked in $1.5bn, taking their YTD tally to $3.4bn. Among Domestic Institutional Investment (DIIs), Mutual funds took the lead in buying which accounted for inflows of $642mn. Domestic Insurance companies also were buyers in February and accounted for $892mn inflows.


Domestically, the Union budget seems to have found resonance with investors as the Finance Minister stuck to the fiscal deficit target of 3.5%. While higher allocation towards capital expenditure was missing, a strong push to propel the rural sector (allocation to Agriculture and Rural Development Ministry +30%) can help resurrect the consumption dynamics of rural India, with a limited risk of higher inflation even as capacity utilization remains low. With the UP state election next year, we do not expect any slippages in government spending on rural initiatives, thereby aiding companies with some much require rural exposure. We believe that the corporate earnings cycle, which has now remained lackluster for 2 years, should begin to show initial signs of recovery during FY17

Key events to watch out for ahead: (i) RBIs policy on 5th April to meet market expectation of a rate cut after a fiscally conservative budget; (ii) Legislative Assembly Polls in Apr-May16 in the states of W Bengal, Tamil Nadu, Kerala and Assam (iii) Monsoon rainfall from June-Sep16: after 2 years of below-normal monsoons (iv) Potential GST Bill passage in Monsoon Session of Parliament

MSCI India trades at a premium of 42.5% vs. MSCI Asia ex-Japan, down from ~60% in Sep15 (5yr average of 32%). Valuations are at 15x FY17 earnings, which we believe is attractive, given that we expect a cyclical recovery going forward. We remain optimistic over medium to long term

Fixed Income Market

Bond yields were volatile during the month. 10Y G-sec yields moved in the range of 30 bps. In the monetary policy, though RBI mentioned an accommodative stance on the rates, it conditioned the next policy action to fiscal consolidation

The Bond market was shaky and highest ever single day borrowing of State Development Loans (SDLs) at year high spreads of 100 bps (spreads were at 55 at the start of the month) caused a sell off

However, the Union Budget FY17 surprised market with 3.5% fiscal deficit target and lower gross borrowing of INR 6 trillion. Bond market recovered and 10Y G-sec rallied by 20 bps as market started expecting a rate cut post budget. Corporate bonds also experienced a selloff, especially from FIIs and mutual funds. Spreads on Non Banking Financial Company (NBFC) bonds widened even more as SEBI issued stringent exposure limits on the sector

At the month end, the 10-year benchmark (old) G-Sec closed almost flat at 7.79% against close of 7.78% in previous month; it touched year high of 8.08% during the month


The key factors for bond market going forward would be SDL borrowing, UDAY bond issuances and liquidity management by RBI

Lower fiscal deficit number of 3.5% and lower gross borrowing of INR 6 trillion have provided much relief to the market

However, there is no clarity on state finances, so higher than expected SDL borrowings may still take place and this would be bond negative. On UDAY bond issuance there is no clarity on time and treatment of bonds in banks books

On the liquidity front, RBI has been relying on term repos and has used Open Market Operations (OMOs) occasionally. Going forward, muted Foreign Portfolio Investment (FPI) flows might push RBI to step up OMO purchases. Higher OMO purchase would ease supply pressure and push yields lower

CPI Inflation has not posed any threat so far and is likely to ease going forward. We continue to believe that CPI inflation can sustain at round 5%-5.5% with higher growth, thus allowing RBI to ease policy rates in future.

Source: Bloomberg

This document is for information and illustrative purpose only. Any advice, opinion, statement of expectation, forecast or recommendation mentioned herein shall not amount to any form of guarantee that HDFC Standard Life Insurance Company Limited has determined or predicted future events or circumstances.


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