| Indian Equities The Opinion - Poll Effect | ||
· Investor sentiment remains vulnerable to adverse news flows in EMs; India in a relative sweet spot
· Interim budget was a feel-good event for Indian financial markets; the first budget of the next government may not the luxury of being ambitious
· 2004 / 2009 union budgets saw a mix of tax hikes and market supportive announcements
· Rates markets supportive of equities; FII buying resumes in Equities , accelerates in Debt
· Expected announcements on political manifestos and recent policy measures likely to support investor sentiment for investment cycle linked companies
· Political hope seems to be getting priced in ; Since the start of opinion polls in early November, Industrials is the third best performing sector with the worst performance on earnings expectation change
· Mid caps are outperforming large caps; sectoral performance differential indicate early phase of confidence revival.
India in a relative sweet spot. A combination of weaker-than-expected economic indicators and undesired political developments kept investors cautious on EMs last week. News flows on Chinese PMI, political unrest in Ukraine / Venezuela weighed on investor sentiment. India seems to be relatively better placed. Monthly indicators on growth, inflation and the interim budget surprised positively, on low expectations. Indian equities outperformed its peer group last week. The surprise element was the outperformance of domestic sectors – Industrials and Financials.
Union budget to have limited flexibility for financial markets. The Finance Minister surprised markets positively, yet again. The fiscal deficit number of 4.6% of GDP in the interim budget looks commendable in a pre-lection year. Internals of fiscal consolidation however is not as satisfactory. Planned expenditure has been cut significantly for the second consecutive year. Cuts in the Excise duty are expected to help impacted cyclical sectors. After the national election, annual Union budget will be presented in June – July. Last two union budget post the election indicates that:
· Fiscal deficit number may get revised. In FY 09-10, the fiscal deficit target was increased from 5.5% to 6.8%. In FY 04-05, the fiscal deficit target was kept same @ 4.4 %.
· Fiscal compulsion may necessitate some tax hikes. In FY 09-10, with selective rationalization in excise duty, MAT was increased from 10 to 15%. The announcement on investment linked incentives seen in FY 09-10 appears timely again.
· The need for innovative measures to boost investor/ corporate confidence persists. In FY 04-05, the highlight was abolishing the long-term capital gain tax and introduction of Securities Transaction Tax (STT). Short term cap gain tax was reduced to 10%.
Limited monetary support for Equities. In a sharp contrast to last year, when India’s rates markets were the main source of weakness for equities, this year it’s a source of relative strength. India rates markets have been one of the most resilient among key EMs. INR is largely unchanged YTD and long bond yields have been relatively range bound. Stable twin deficit, confidence in RBI’s timely measures and the direction of inflation trajectory have all aided the trend. Near-term outlook herein remains supportive for equities. The minutes of RBI’s January Technical Advisory Committee meeting indicate that four members suggested status quo on rates, two a 25 bps rate hike and one member a 25 bps rate cut. One member also indicated that the Central Bank should provide sector specific support. The details suggest that the discussion seems to be centered around the known limitation of monetary policy in controlling inflation and the need to support growth revival.
FII turn significant buyers of Indian debt, net buying in equities also. Risk indicators stabilized last week. EMBI spreads remained unchanged compared to the last week but is 25 bps higher vs. last month. Flows into key EMs accelerated. India also saw increased FII flows. The more notable in portfolio flow seems to be the debt flows. FIIs have invested over US$ 2 bn over the two weeks. Stable currency and RBI’s definitive focus on inflation seems to be helping fixed income flows into India. The equity money flow indicator suggests preference for domestic sectors - Financial and Industrials over Materials and defensives (Consume Staples and Health Care).
Opinion polls are slowly getting priced-in. National election is widely expected to be THE binary event of the year for Indian equities. The political arena has been getting more action packed over the last quarter and the trend is likely to accelerate. Political parties are likely to announce their party manifestos shortly. These manifestos may have some short-term impact on equity performance. So far, the trend in opinion polls seems to have had limited impact on equity performance. To list a few indicators:
· Since the start of opinion polls indicating the possibility of a clear verdict in early November, MSCI India (US$) has declined 4%. But, has outperformed MSCI EM by 4%. The outperformance can be partially attributed to political hope as fundamentals of growth / inflation remain largely unchanged.
· Sectoral details indicate an interesting picture. Industrial is the third best performing sector after IT Services and Healthcare despite having seen the maximum cuts in earnings estimates.
· The trend in aggregate analyst recommendation suggests incrementally constructive bias. Rating upgraded have been mostly in sectors with better than expected earnings performance. ( Chart below).
· Also, domestic investor sentiment seems to have improved. Mid caps have out performed large caps. Sectoral performance of mid-caps indicate that confidence revival is still in early stage. Note that only Industrials under performed large cap peers. (Chart below).
Figure 1: Changes in % Buy Recommendations for Nifty companies since October 2013
Source: Bloomberg
Table 1: Mid Cap vs. Large Cap sectoral performance
Nifty
|
BSE Mid Cap
|
Mid Caps vs. Large Caps
| |
Consumer Discretionary
|
2%
|
6%
|
4%
|
Consumer Staples
|
-7%
|
-3%
|
4%
|
Energy
|
-6%
|
-1%
|
5%
|
Financials
|
-9%
|
-6%
|
3%
|
Health Care
|
1%
|
21%
|
20%
|
Industrials
|
7%
|
4%
|
-3%
|
Information Technology
|
16%
|
19%
|
2%
|
Materials
|
-8%
|
-4%
|
4%
|
Telecommunication Services
|
-22%
|
3%
|
25%
|
Utilities
|
-5%
|
-3%
|
2%
|
Median
|
-5%
|
1%
|
7%
|
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