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Market Strategy: Monthly Outlook for July 2018
Publish date: 2nd July, 2018
June was an eventful month which kept markets fairly volatile beginning with eyes on central bank’s tightening and tapering plans, followed by trade war related tensions between US and China and then the OPEC meet on oil supply decisions. Domestically, progress of monsoons and rupee movement kept markets on edge.
Valuation
Market valuations were earlier supported by easy money from global markets which has now started seeing reversal as monetary tightening and tapering has begun. This has moved up the yields in global markets which is resulting in net outflows from FPIs (both in equity and debt). With rise in yields – both globally and domestically, cost of capital has resulted in valuation de-rating and henceforth, earnings revival is likely to drive markets higher. Earning revival is likely to be led by sectors such as private sector banking (with faster resolution of NPAs), IT (on rupee depreciation) as well as commodity sector (owing to higher realizations on YoY basis) while downside risks to earnings are likely to come from higher oil prices, higher interest rates and corresponding slowdown in demand revival (if any).
Factors to keep an eye on
Monsoon progress, MSP announcements, inflation, oil price movement, GST collection etc would all be important variables to watch out for in determining fiscal deficit and interest rate movements going forward. Market valuations have corrected in recent months and are trading at 20/17x FY19/20 estimated earnings but volatility is likely to remain owing to negative global cues as well as domestic factors such as elections, pressure on CAD and fiscal deficit from higher crude prices. Mid cap forward P/E is at 19.6x vs 17x for Nifty, 260bps overvaluation over Nifty even after witnessing correction in past few months, which indicates that still more pain is left in mid-cap stocks.
Market strategy
Ideal approach is to use this volatility to add stocks expecting large earnings recovery and likely to benefit from currency depreciation, government spending (Infrastructure companies), rural spending (Tractors, farm products), consumption revival (consumer companies), & Financialization of savings (to benefit insurance companies, mutual funds and broking firms) with a long term view. Key risks to our recommendation would come from adverse outcome from state elections, further rise in oil prices and yields, shortfall in earnings or decline in liquidity from FIIs and domestic mutual funds.
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