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Alpha Edge, August 2016 - Mind the gap

We took longer than usual to collect our thoughts for this month’s edition. We wanted to write about GST that was to roll-out and it did. Analyze its impact which we have, making us take a slightly skeptical view of the timing and nature of immediate benefits. They are likely to be inflationary to begin with and delayed by more than a year from now. .


July was led by high optimism with Nifty ending higher by another 4.2%. Post the Brexit vote markets have bounced back surprisingly sharply contrary to the view that it would rattle world markets. Once again bad news became good news with market participants anticipating Central Bank intervention which ECB and Japan gladly obliged. This obviously benefitted markets across the world, especially the EM’s. A part of this came to India with FIIs pumping $1.5 billion into equities & more than $1 billion in debt. US Fed has once again maintained a hold on rates but a guided change which markets believe may not happen owing to the US elections scheduled in November.


From a domestic stand point, the recent rally has been based on three themes - recovery in corporate earnings, normal monsoon rains and passing of Goods and Services Tax (GST) bill. The latest earnings season is a mixed bag with significant & clear turnaround signs being not yet visible. Even though we are witnessing QoQ growth, the quality of it is uninspiring. The likes of other income & and lower costs, which are one time benefits saving many a case, while the more critical sustainable factors like volume and revenue growth are visibly tepid for now. Many results including PSU banks that are still struggling and marred by NPA’s may not change the total picture. Market is currently pricing an optimistic 17% growth built into the valuations which we think will be revised downwards, leading to de-rating of markets that may follow. Time & price correction ahead.


The highlight for now that remains the highly inspiring matter is the way the Modi government engaged the stiff opposition and saw the constitutional amendment through, w.r.t GST. With this, the pace of reform may finally gain momentum for which Modi Government was voted. While the GST implementation is a given, the timing of rollout may take about three more quarters and its benefits, some more time. Largely due to the herculean task of technology infrastructure that needs to be ironed out, center-state arrangements to be finalized & a host of implementation procedures that need to fall in place. All this is worth the benefits that await ONE unified market called India, for a long time to come.


The monsoon season kicked in a bit late but have made up for the delay. This could help in rural demand picking up which has been lacking for the last two years. However the benefits of a good monsoon and the 7th pay commission would kick in with a delay. Especially, rural households are expected to set their houses & finances in order first before a consumption binge.


Overall things seem to be improving for the economy in parts, however the heady days of all round growth of 2003 to 2007 is some time away. We are skeptical of the market mis reading the timing of this and pricing way ahead of time. Our market timing models are about to indicate a high degree of caution like in March 2015. Were those conditions to fully fructify, you can expect a mid –month flash informing you of the same. 


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