Beruflich Dokumente
Kultur Dokumente
INVESTMENT
OUTLOOK
January 2017
2017 INDIA INVESTMENT OUTLOOK
WHAT’S INSIDE
• On the macroeconomic front, while there was a sharp recovery in the global crude oil prices (23%), consumer price
index (CPI) inflation remained benign and twin deficits remained contained. Metals rallied in 2016, bouncing back from
the 2015 lows and on expectation of a revival in Chinese demand. Weak credit growth during the year further
aggravated by demonetization move, posed headwinds for the Banking sector. Discretionary spending showed a
negative growth trend in Nov-Dec period on muted demand on account of the note ban move.
• FPI (Foreign Portfolio Investors) flows into Indian equity markets for CY2016 stood at a 5-year low of USD 2.90bn
(INR 187.82bn). Further, FPIs remained net sellers to the extent of USD 6.5bn (INR 442.97bn) into fixed income
markets during the year. Interestingly, DIIs (Domestic Institutional Investors) ploughed in INR 372bn into Indian
equities during the year surpassing the net flows from FPIs.
• On the equity market front, a slowdown in the Chinese economy, UK’s vote to exit the EU, weakness in global trade
growth, policy normalization by the US Federal Reserve, rise in global commodity prices and the US elections weighed
on the market movements during the year.
• Indian fixed income markets which started the year on a cautious note, had a lot to cheer in 2016 especially post
demonetization. The steep drop in 10-year benchmark yield by around 113 bps during the year stands out amongst
developed and emerging markets.
Cumulative FPI flows at 5-yr low; DII flows surpasses Resurgence in global commodities in 2016
Inflows INR Cr Cumulative FII, DII inflows CY2016 BSE Sensex
FPI - INR 187.82 bn 29000
Commodity trends in CY2016
50000
70%
28000 61% 59%
40000
60%
27000
30000
50%
26000
20000
40%
25000
10000
30% 23%
0 24000
DII - INR 372 bn
20% 17%
23000 14%
-10000
9%
10%
-20000 22000
01/Jan
14/Jan
28/Jan
10/Feb
24/Feb
13/Jun
24/Jun
08/Jul
21/Jul
09/Mar
22/Mar
05/May
18/May
31/May
10/Oct
25/Oct
07/Nov
21/Nov
02/Dec
15/Dec
28/Dec
06/Apr
22/Apr
03/Aug
17/Aug
30/Aug
14/Sep
27/Sep
0%
Gold Brent Crude Aluminum Zinc Copper Steel
Cumulative FPI inflows Cumulative Domestic Institutional inflows BSE Sensex (S/Met.ton) (S/lbs)
• A slowdown in Chinese economy, UK’s vote to exit the EU, weakness in global trade growth, policy normalization by the
US Federal Reserve, rise in global commodity prices and the US elections weighed on the Indian equity markets during
the year.
• Despite global events impacting risk sentiments during the year, domestic positives supported the market such as normal
monsoons, a rise in the area under cultivation for winter crop (YoY 5.9% by December), moderating inflation and
implementation of 7th pay commission which are expected to boost consumption.
• Commodities rallied in 2016, bouncing back from the 2015 lows and on expectation of a revival in Chinese demand.
Policy reforms led growth – Interest subvention of 3% and 4% for housing loan announced in December 2016 may boost
low cost housing segment. Post the fixation of tax structure by the GST council, GST law now awaits implementation in
2017. This simplification of tax structure along with reforms pertaining to land, labor, infrastructure sectors and modification
in FDI policy could contribute to sustainable growth over medium term.
Global factors including commodity price movements, economic policies of the new government in the US and monetary
policy stance of global central banks could have a bearing on capital flows to emerging markets like India. A likely rise in
inflation pressure in the US from wage rise and expansion in the economy should elicit future interest rate hike actions by
the US Federal Reserve in 2017. Global growth rate is likely to improve, led by the US and other emerging economies in
2017 which could benefit the Indian export oriented sectors. That said, India’s lower linkage to global economies makes
the domestic macro factors and fiscal trends the key catalysts to determine growth.
Improving fiscal situation, inflation rate, exports growth, rising FDI flows point towards fundamental stability in the economy
which augurs well for long term equity investing. Domestic corporate earnings volatility may increase as corporates
attempt to tide over the impact of currency replacement program. Earnings for FY17 are expected to be lower than
estimate with EPS growth likely at around 10%. Consensus earnings growth for FY18 is expected to be healthy at high
teens. The fundamental strength of the economy and attractive valuation levels of the market (1 year forward P/E for BSE
Sensex at 14.7x, moderate levels implying low risk) present a positive outlook for equity. Periods of interim weakness in
equity market should be considered as investment opportunities for long term investors. We recommend a systematic
investment in diversified equity funds & hybrid funds to benefit from the current volatility and participate in the growth
potential of Indian equities.
INR depreciated vis a vis US dollar But, Foreign Exchange Reserves remain robust
Source: Bloomberg, PPAC, CGA, Morgan Stanley (MS) Research estimates, CMIE, RBI, MS Chartbook – December 2016
*CRP stands for Currency Replacement Program
• On the macroeconomic front, while there was a sharp recovery in the global crude oil prices (23%), consumer price
index (CPI) inflation remained benign and twin deficits remained contained.
• The banking system has been flooded with liquidity post the announcement of Currency Replacement Program
(CRP). Subsequently, deposit growth has picked up post CRP.
• The rupee has depreciated close to 3% against the dollar. We believe RBI’s reasonable foreign exchange reserves
may provide some cushion against Rupee depreciation in 2017.
The liquidity in the banking system has improved post demonetisation which
would henceforth result in lower deposit and lending rates.
Santosh Kamath
• Given the cash rich nature of our economy, we could see some slowdown in
Chief Investment Officer
the overall economic activity thereby weighing on the GDP growth. Fixed Income - India
• The trade-off between 1) likely positive impact of demonetization in form of
lower interest rates over medium to long term and 2) pick-up in macro-
economic growth, once the consumption gathers momentum, will be
instrumental in shaping up the direction of interest rates in 2017.
CPI inflation which had been muted in 2016, fell to a two year low more recently due to softer food inflation.
• Given the good monsoon season and expected slowdown in consumption post currency replacement program,
we believe that March’17 inflation could undershoot RBI’s target of 5%.
• Conversely, the RBI seems to be concerned about inflationary risks. In its Dec monetary policy review, the RBI
surprised by leaving policy rates unchanged stating that growth pain on account of demonetisation is ‘transitory’ and
that there is enough demand in the system to make it worry over inflation. Going ahead, the RBI will assess durability of
the fall in inflation for implementing further interest rate cuts.
The rupee has depreciated close to 3% against the US dollar, however, it was among the better performing emerging
market currencies in 2016. While higher crude oil prices and expectations of stronger U.S. growth coupled with earlier and
more aggressive interest rate hikes in the US may impact INR, however, contained twin deficits, improving domestic
macroeconomic indicators and RBI’s reasonable foreign exchange reserves may provide some support.
Although India is in a relatively better position among the emerging economies, there are risks which can weigh on the
Indian bond markets.
• Faster than expected raise in interest rates by US Federal Reserve, rising political uncertainty in Europe and OPEC’s
deal on production cut could spike up the oil prices, impacting the global bond markets.
• Meanwhile, at home the actual economic impact of the currency swap program will become clear in 2017 and the date
of implementation of the goods and services tax (GST) could be pushed ahead.
The infusion of fresh deposits in banking system (post demonetization) is likely to shore up demand for G-Secs by banks,
which could eventually augur well for bond prices. We recommend investors (who can withstand volatility) to consider
duration bond/gilt funds for medium to long term horizon. Although, the lack of growth in private sector capex has delayed
the pick-up in credit cycle, our corporate bond funds continue to offer reasonably high portfolio yields providing higher
accrual income opportunities for the short-to-medium term.
Mutual Fund investments are subject to market risks, read all scheme related
documents carefully.