Notwithstanding the volatility during the last one year, the Indian stockmarket has done well since last Diwali and handsomely rewarded investors, especially those who had opted for stock/sector specific investment approach into Autos, NBFCs, Media and Private Banks. At the index level, during Samvat 2072, Nifty has given a return of about 12%, while Midcap and Small-cap indices outperformed the benchmark with gains of 27% and 22% respectively.
Notably, India outperformed the MSCI emerging market index by 2%. The relative out performance indicates the global and domestic investors’ outlook towards the Indian economy over the medium to long term despite a challenging global backdrop. There have been a host of global and domestic factors that dictated the market performance during the year. The slowdown in China and Yuan devaluation, US interest rate hike (and more on the cards), the surprise Brexit vote, dovish central bank policies, low / negative yields and slowdown in overall world developed economies were the main cause of concern for global investors. On the other hand on the domestic front, the relative strength of the Indian economy with its robust macro fundamentals, falling interest rates, plethora of reforms including the passage of GST and several other factors made India a not-to-be-missed market for investment by global investors.
Going forward too, we believe there are several important factors, which should help Indian equities perform much better :
– Retail inflation stood at 4.3% in September, 2016 which is expected to remain under 5% until March, 2017. The main cause of high inflation had been high food prices. On account of normal monsoon in 2016 and efforts to improve the supply chain side, food inflation is expected to remain under control despite some inflationary pressure expected from GST implementation.
– 2016 witnessed a normal monsoon after two years of drought, which should lead to healthy revival in demand from both rural and urban areas. Consumption theme is expected to perform well on back of this expected surge in demand.
– Since January 2014, the Reserve Bank of India has reduced the key repo rate by 175 bps. Although banks have passed on the benefit of 100-120 bps to the borrowers, they are expected to pass on further benefit in the coming months. Lower rates will not only help support consumption recovery but will also aid in revival of investment capex, which has been subdued since last 3-4 years.
– Globally low commodity prices augur well for the Indian economy. Being major importer of crude oil, lower crude prices has had a significant positive impact on India’s fiscal balance, which is unlikely to wane away in a hurry considering the outlook on global crude oil price over the next few quarters.
– Some of the major initiatives by the NDA government namely; passage of the GST bill, land bill, and the real estate bill, the launch of the Make in India campaign, focus on fiscal discipline, infrastructure development, etc. will benefit the domestic economy in the medium to long term.
Thus, in conclusion, going forward into Samvat 2073, we believe the current economic environment is conducive for the prevailing momentum to continue. A slew of reforms including the biggest tax reform post-independence i.e. GST, government’s continued bid to liberalize FDI norms to attract more capital and falling interest rate scenario in the backdrop of a lower trending inflation trajectory will keep sentiments in favor of Indian equities.
In our view, post the recent consolidation, the Indian stockmarket is all set for new record highs during Samvat 2073. Considering the current valuation of the benchmark index at ~15.5x FY18E EPS, we believe the Nifty has the potential to test the 10,200 mark in the next one year, which translates into 17% approximately upside from the current level. Many investment opportunities are available, especially in the Mid-cap space, are well placed to deliver handsome returns in the year ahead.