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Alpha Edge, May 2017 - Recovery Ahoy!?

Continuing the upward trend of 2017, equity indices touched new highs and stayed in a range in the month of April. The largecap indices were modestly higher for the month as the markets paused to get a sense of the direction ahead. In a flip flop as compared to the previous month, we saw DII’s come back strongly and FII’s becoming net sellers. 

Global equities advanced in April. A broadly positive tone in economic data and encouraging trends in the French election supported the sentiments. The focus shifted from Fed in March, to French elections in April. As French presidential elections took centre stage, it was a battle between Pro Euro and against Euro. Positively surprising the markets, the first round saw Emmanuel Macron taking the lead ahead of one of the other favorites, Marine Le Pen, and eventually winning the elections. Dollar continued its fall on the expectations of populist measures that Trump has indicated. Fall in dollar saw emerging markets outperform developed markets.

From a domestic stand point, volatility in IIP numbers continued as it contracted 1.2% in the month of February. IIP again failed to give any sense of direction as far as the production activity of the country is concerned. Government expenditure and reforms along with consumption has been fueling the growth engines for quite some time now, but that does not seem to get the engines fired yet. The missing piece seems to be the private investment. To get the economy to cruise, government has to ensure that all the four engines of growth—domestic consumption, private investment, exports and public investment, need to fire together. For quite some time private investment has failed to pick up, marred by excess capacities, leverage with banks weighed down by bad loans. Barring private investments, other structural long term drivers in the economy seems to be taking shape thanks to government reforms. The recent one being introduction of RERA act that makes the real estate sector more transparent for consumers, which was being marred by many issues. The move will instill more confidence in consumers and hence could result in increased demand. In a couple of months, GST, one of India’s most far reaching reform since liberalization would go live. GST in the medium to long term would help iron out many issues faced by corporates currently, especially w.r.t. ease of doing business. Maintaining the reform momentum is a key to stronger growth which would eventually lead to higher private investment. The impact of these multiple reforms currently undertaken over the last two years, will now become visible in the short-to-medium-term.

Several long term drivers expected to provide a favorable macro-economic backdrop to India has resulted in Indian markets hitting new highs, much they have started firing the economy. As the outlook for investment in real estate and gold has faded, investors have switched to equities resulting in an increased flow in them. Earnings revival has been trailing expectations for some time now and it has resulted in valuations being pushed above its mean. But the early indications from Q4 seem to indicate a revival making the current expensive valuations, grudgingly palatable. Until the situation becomes very clear, a bout of volatility cannot be ruled out and the same should be used to build medium to long term exposure to equities.

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