Indian markets took a breather in August after ‘a straight line’ growth since start of 2017. Nifty and Sensex delivered -1.6% and -2.4% on a monthly basis.

This was the steepest monthly loss in the current year as multiple factors weighed down on the markets – rising geopolitical stress, indications that growth forecast might not be met, management turmoil in IT giant Infosys, SEBI going after shell companies, etc.

Nifty Monthly Returns Chart

But still, the overall YTD returns continue to remain above average at 21% and 19% for Nifty and Sensex respectively.

Global Political Temperatures Rise

The tension between US and the unpredictable North Korea continued to escalate as the Asian country led by Kim Jong-un demonstrated its military might via missile and nuclear tests.

Some are of the view that this show of power may simply be to provoke the US and spark negotiations. But still, given the past history of rash and unadvised decision making by both North Korean leader and his US counterpart Donald Trump, the risk of a full-fledged war cannot be ruled out and signs are troubling to say the least.

The impact of this souring relation will not remain limited to these two nations alone. US trade relations with China could also be affected. Around 90% of North Korea’s international trade dealing is with China. So if China chooses to further restrict trade with them, then this could put a huge pressure on the Koreans.

On the domestic front, the standoff between India and China near Bhutan has slowly de-escalated as India smartly played its cards via the BRICs and other tactical routes.

GST Collections Begin Positively

GST tax collections began on a good note with GST worth Rs 92,283 crore being collected in July from just 65% of the total taxpayer base. This comes as good news for the government which was loudly advocating that the medium term benefits of GST will far outweigh the near term disruptions.

Even a DBS report stated that India’s tax revenues will benefit from a widening tax base and robust advance collections in FY-2018. This augurs well for the economy in the long run.

Slowing Economy?

In April-June, India’s growth slipped to a three-year low of 5.7%. Common consensus is that this is primarily due to the lingering effect of demonetization and disruptions caused by GST-related uncertainties.

But nevertheless, the dip in growth and the release of RBI’s annual report reignited the debate on the state of the Indian economy. Many are of the view that demonetization hasn’t succeeded in fulfilling the objectives for which it was undertaken and unfortunately, has contributed to the deceleration in economic activity.

But we think that this wasn’t entirely unexpected. This and other reformative attempts by the government to bring about a structural change in the economy – by way of crackdown on black money, Benami properties and increasing formalization would in any case have slowed down the growth for some time. So it’s only logical that GDP growth numbers are reflecting the same now.

The government’s objectives are admirable but it will be interesting to see how it takes up the challenge of reviving the economy. Some feel it’s time for a fiscal stimulus. Now if that were to happen (via a sufficiently large fiscal push), then it will help growth in the short run no doubt. But there are issues with that approach. Fiscal interventions come at a cost and even then, there are no guarantees that they will reignite the economy in a sustainable manner.

We feel it’s still too early to write off these reformative steps taken by the government. Such large sized changes do come at a cost. And it may not lift growth for next few quarters, but these steps are surely strengthening the foundation for a sustainable economic recovery and future growth.

R&R View on Economy & Markets

Even after the small fall in August, the overall markets continue to trade at significant premiums to their historical averages.

But we stand by our previous view that markets are still not as overvalued as they were around early 2008. Even if the markets were to take a breather or time-correct for few more months, it will not result in a large price correction. Having said that, a 5-10% kind of corrections is fairly normal and long term investors should not get worried about it. Rather they should follow a proper investment approach by buying into tranches over a period of few months.

The global events (especially geo-political tensions) can have impact on Indian markets. But given that India’s macro fundamentals have improved considerably in last 3 years, it makes it easier for the economy to absorb external shocks. And given the huge flow of investments coming from MFs, the markets will have sufficient support if need arises.

In our view, few quarters of slow growth does not change the bigger story. India is moving on to the next phase of productive growth and formalization of the economy. And given that the macro stability remains in check, it’s fairly clear that the stage is set for sustained long-term growth.

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 Equentis