The month of February saw both Nifty and Sensex giving reasonably good returns once again (3.7% and 3.9%respectively) after January. So the year 2017 does seem to be going well for investors.

The general bullishness has pushed markets close to their all-time highs.

A major role in this push has come from DIIs, who are slowly but surely increasing their ability to displace FIIs in setting the market direction. According to Financial Express, “Between October and now, [DII which include] insurance companies, mutual funds and financial institutions have purchased shares worth $5.7 billion.” That’s not all, “December alone saw $1.5 billon of retail inflows into MF schemes” (source: ICICI Securities).

This may be a temporary side-effect of demonetization, as part of cash savings is finding its way into equity markets. But interestingly, markets seem to be getting comfortable with limited perceived aftermath of demonetization, headwinds faced by several sectors and uncertainty around several big-ticket events/issues in near term.

Post-Demonetization GDP Growth Surprises

India’s GDP grew by 7% in the December 2016 quarter. This was surprisingly high given that demonetization was expected to slow down the growth in this quarter.

But it will be wise to wait-and-watch and see what 4th quarter results have to offer. Though many are raising questions about government’s estimates of this higher-than-expected growth, government is confident about Q4 too. It has retained its advanced estimate for FY 2016-17 at 7.1%, which is much higher than what economists and experts are predicting.

It’s possible that the strategic timing of demonetization and fiscal stimulus have helped in retaining growth despite demonetization. Or perhaps, the fear of demonetization and its adverse impact have indeed been overdone.

State Assembly Elections

At the time of writing of this newsletter, the results of elections in 5 states have been declared.

In its biggest test yet, BJP has achieved a landslide victory in Uttar Pradesh assembly elections winning 325 out of 403 seats. It has also achieved majority in Uttarakhand and is in a strong position to stake claim (with support of local parties) to form government in Manipur and Goa as well. In Punjab, Congress surprised everyone with a strong showing which blew away the threat from Aam Aadmi Party.

These elections (primarily Uttar Pradesh’s) were expected to indicative of trends for 2019 general elections.

A strong BJP showing is a vindication of the demonetization decision. It sends a strong signal that policies of BJP have mass support and it’s likely to continue in power even after 2019, ensuring political stability.

This auger well for the economy as the government, which is considered pro-economy, can continue on its political and economic reforms path with people’s support.

Domestic and US Interest Rate Scenario

Despite overwhelming expectations, the RBI decided not to cut policy rates in its Bi-Monthly February Meet. More importantly, it hinted that the 2-year old rate-cut cycle is coming to an unexpected and early end. As evident, the concerns of a resurgent inflation are to be blamed for this abrupt end.

The means that it is unlikely that rates will be cut anytime soon and definitely not in April. Also, as summer approaches, policy makers will keep an eye on how monsoon develops.

On global level, market participants have more or less built in the assumption of a rate hike from US Fed in coming weeks.

R&R View on Economy

The backdrop for economic assessment going forward will be the corporate results of fourth quarter. The Q3 results are already hinting that most parts of the economy are recovering faster than expected. A good showing in Q4 again will put any doubts to rest.

Global events like Britain ‘finally’ leaving EU (Brexit), President Trump’s unpredictable rhetoric, US Fed’s rate plays, etc. will continue generating interest amongst market participants and economists alike.

Domestically, the result of State Election is expected to set the stage for markets during next few weeks. Forecast for the south-west monsoon is expected to start coming from late March. Though the importance of monsoon for the economy is slowly reducing, it’s still a keenly tracked data point that has the power to impact policymaker’s moves.

R&R View on Markets

Though markets have been doing well post-demonetization, it’s also true that overall valuations have moved much higher than historical averages. Though pockets of investment-worthy stocks still exist in this market, such pockets are far spaced out now.

An article in Mint also pointed out that India’s share of world market cap stood at 2.5% in February, which is above its long-term historical average. This is another indicator of the premium Indian equities are commanding at this point of time.

Given that many factors are still in favourable position (like low inflation, low crude oil prices, economy’s resilience to demonetization, etc.), we believe that Indian markets are still well positioned to benefit from improvement in economic fundamentals.

On that note we end this newsletter and as always, appreciate you for taking time to read this message. Do share your views/comments by email/comment section below.

Regards
Team Research & Ranking