Stock Markets after ending flat for the first half of the year as I had expected started to show some life in July before cooling off driven by a Global Market correction as well as volatility inherent during the results season. The non performance or lack of movement in the parliament on various reform bills has not helped matters. Now we need to consider the key takeways from the results season, global events as well as domestic events to see how things will move for the rest of the year.
The first important data point to consider is the fact that investors in general have been wary of stock markets since the beginning of the year in the global context. Latest figures indicate that US Focussed Equity funds lost a whopping $ 113 billion since the beginning of the year and the out of favour European Equities got inflows of $ 86 billion. The inflows into Europe has been also driven by the continuous fall in the value of the Euro which is supposed to be supportive of growth in Eurozone as the weak currency provides competitive advantages all across at a time of low wage inflation. Emerging Markets have seen outflows of nearly $ 27 billion since the beginning of the year although India has seen inflows of around $ 7 billion. This explains the relatively muted flows of FII’s into the Indian markets over the last few months as EM’s on an overall basis have seen large outflows. On the other hand domestic flows into Equity especially into Mutual Funds have been strong and have averaged Rs 5000 Cr per month.
Now on funds flow the most likely scenario going forward is that domestic flows will continue at this pace. However global flows into equity are likely to pick up very sharply after the fears of the US FED’s rate hike go into the background after the first hike (mostly) in September. The Fear is so great that after the event the global equity markets will see a big return of investor money.
The results season has been interesting as they have been very mixed. For example in the Consumer goods segment while Dabur, Godrej Consumer etc companies reported strong growth with good margins we saw growth was muted for many other companies. However the margins of the companies despite slow growth have moved to almost record levels due to low input costs. This was very evident in a company like Britannia Industries. The same phenomenon was seen in Auto companies where margins have moved up sharply. Capital Goods companies have not seen a revival yet and due to muted growth margins have also not expanded as they should have given low input costs. However the outlook here might improve significantly going forward. Telecom companies have reported decent results and Pharmaceutical Companies have reported mixed results with outperforming companies like Dr Reddy continuing to outperform. Cement company results have been poor due to low volume growth, low capacity utilization despite input cost benefits. As expected metal and commodity companies have not done well at all given global commodity collapse. Private sector banks have done well and the key takeaway from large PSU Bank results have been the cleanup in the balance sheet and the government’s announcement of recapitalization i.e. putting more money into these banks which will be supportive of growth.
Mid cap results have been mixed with some high flying mid caps reported muted results and some companies doing very well. Although the greatest opportunity in the markets as the economy recovers lies in the mid cap side of the market the biggest risk also lies here as we see a large number of companies moving up without any fundamental basis and manipulation take place on a large scale. The other big risk is pump up the stock and then do a placement like QIP after which the stock collapses. I do not want to take names on a public platform however there are many such companies and investors need to be very wary.
The biggest kicker for the Indian economy is the low commodity prices and expected normal agricultural production. The collapse of crude prices provides a fillip of nearly Rs 400000 Crores to the Indian Economy on an annual basis, similarly Coal, Iron Ore, Steel, Edible Oil etc prices are at multiyear lows and India saves a lot in imports of these commodities. This combined with high margins that companies have despite low growth will make sure that inflation will not pick up even as growth picks up as companies will have Operating Leverage i.e. fixed cost spreading over larger production which is positive for margins and profits.
Our interaction with many companies also indicates a significant pick up in ordering and tendering activity across segments. Although its impact on the economy will be seen next year in a big way but some impact of a move in stalled projects is already being seen. I still believe that from September onwards we will see improved numbers coming from the Economy. Although RBI has been slow in cutting rates interest rates are on the way down and will further aid the economy.
Too many people are perturbed on the non passage of bills in parliament. The reality is that recovery and growth will happen either ways.
IN CONCLUSION
In conclusion I believe that the markets are well position for an upmove from now till the end of the year and beyond. The Fear of FED rate hike is a good opportunity to build positions in the markets as funds flow will accelerate after the event. The Indian economy is moving forward slowly and will accelerate through 2016. The upcoming festival season should be good for Automobile and Consumer Good companies. The risk is in some mid and small cap stocks although many companies in this segment offer huge value too. We should see a 10% upside to around the 9300-9500 NIFTY levels by the end of 2015. 2016 outlook should be better than 2015.