Recap – Wealth Edge, November 2017

October proved to be a month where new records were set. We had a stellar month for equities and an equally volatile month for the debt market. As far as equity markets are concerned we have seen a stellar performance of 26% on Nifty in CYTD. We are Looking at the continuous increase in prices in the equity markets along with the economy that has somewhat deteriorated. This phenomenon is where money is making more money rather than the old-fashioned way where capital investment in the real economy would make profits and more money.

Similar to Indian markets, 2017 till now, has been an excellent year for equity markets. However, behind these global market performances, there is increasing evidence of a synchronised global economic recovery. Demand is picking up in Developed markets from ongoing employment gains and the wealth effect stimulus on consumption from rising asset prices. This favourable backdrop probably explains why equities have been able to shrug-off a new cycle of monetary tightening by major central banks along with ongoing geo political risks. Even though we believe the recovery will continue, it is better to temper the optimism. Higher equity valuations—and the absence of a significant market correction for quite some time—make us more cautious now. The eventual unwinding of global central bank balance sheet expansion, slated to begin with the Federal Reserve (Fed) in October, should present challenges. And after a strong run for global equity markets, it is prudent to guard against the trap of complacency and excessive risk-taking.

From a domestic economy stand point, high-frequency indicators point towards regaining of momentum post a dismal start to FY18, especially when growth slid to a three-year low on account of a poorly performing external sector and disruptions caused by the implementation of the Goods and Services Tax (GST). However, private investments still remain weighed down by the stress in the banking system while the front-loading of governments spending in FY18 risks fiscal slippage. The recent announcement of recapitalization of PSU banks and increase allocation towards road building over the next two years has come in as a positive for the economy. Where recapitalisation of banks would allow banks to push for higher credit growth in the economy and the infrastructure expenditure would assist in increasing the overall demand in the economy. However, the benefits are right now sentimental, for it to impact the real economy, successful implementation is of key.

 

As far as equities are concerned, the current quarter has until now managed to meet streets expectation with its second quarter performance so far. But, an important point to note is that we went into the current quarter earnings season with subdued expectations on the back of GST implementation. We are yet to see PSU banks results which would pull down the earnings numbers. We expect a single digit growth number for September quarter. With a full-blown earnings recovery eluding us for quarters, we have seen a gush of liquidity, especially domestic, push the markets to near record high valuations. It is prudent to recognize the near-term risks of high valuations along with lack of meaningful earnings growth and take a cautionary stance. Even though we may see earnings recovery in the next few quarters we believe most of it has been already priced in. This leaves the risk to reward ratio of equity investment at a slight disadvantage form a short-term view.

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