After three years of good returns, FY 2016 was a difficult year, with the Nifty Index down by 10.2%. Net Domestic Institutional Investors inflows into equities have been strong at USD 12.4 billion even as Foreign Institutional Investors were net sellers to the tune of USD 2.2 billion. In local currency terms, Indian equities outperformed many Emerging Market peers but underperformed developed markets like the United States. Several factors contributed to this disappointment – delay in implementing key reforms because of political deadlock, slower than expected earnings growth, crash in global commodities prices, a hawkish stance by the RBI due to its focus on inflation and other global factors. Through September 2015 to February 2016, investors were worried about the global commodity crash, US Fed tightening, China slowdown and the possibility of a protracted devaluation of the Chinese currency. Despite a challenging global environment, the Foreign Direct Investment (FDI) inflows were a very robust USD 31.2billion, a testimony to the reforms process initiated by the Government and confidence in India’s long-term growth potential.
In India, a lack of legislative activity was the key disappointment, with the Parliament failing to discuss either the GST legislation or any other substantial economic legislation. Despite the parliamentary logjam, FY16 saw its fair share of incrementally positive steps by the Government:
India’s macro positioning continues to remain strong as it is poised for GDP growth rates higher than most other markets, lower inflation and possibility of rate cuts by the RBI. Though the Government’s estimate of GDP growth for FY 2016 is a respectable 7.6%, other economic data points such as IIP, PMI, electricity demand etc. remain subdued.
The Current Account Deficit has contracted to 1.1% of GDP contributed by lower commodity prices. Thus the Indian Rupee is amongst the best placed currencies heading into 2016 and beyond as portfolio and Foreign Direct Investment flows are likely to continue to be healthy. Inflation has been under control through the year with CPI ranging between 4.0% and 5.5% helped by the deflation in energy prices, even though 2015 was a monsoon deficient year.
In the FY17 budget, the Government was able to demonstrate commitment to fiscal prudence and continued its push towards higher growth, thus increasing chances of further rate cuts by the RBI. Further, structural adjustments such as liberalizing FDI flows, sufficient forex reserves and a narrowing trade deficit have resulted in a very stable external sector, unlike EM peers where net foreign exchange outflows have restricted the ability of respective central banks to undertake monetary easing.
Market Outlook- Flows into equities from foreign investors should continue to be robust. Domestic flows are sustaining despite market fluctuations – we believe that this is just the start of a long-term trend towards preference for financial over physical assets
We are positive on Equities and Fixed income asset classes in India. We continue to remain skeptical on residential real estate as price hikes have run ahead of income increases, thus reducing affordability. In fixed income, we prefer to play duration rather than credit at this juncture. We are thus running a portfolio which has a higher duration than the benchmark.
In equities, our investment philosophy is to buy good quality stocks with visible growth triggers, at a reasonable price. We are positive on industrials especially non-leveraged construction companies, private-sector banks/finance companies and auto/auto-part manufacturers. We have identified sectors which are likely to be growth leaders e.g. road-building, railway, defense, multiplexes, mining equipment etc. and have focused on these segments of the market. We are underweight on utilities, consumer staples and telecom sectors.
With warm regards.
Director and Chief Investment Officer