The BSE Sensex rallied by 8% during June outperforming
global markets. Gradual opening of economic activities, early signs of
normalisation in some consumption sector and likely improved demand in rural
sector led by expectations of normal rainfall
and sowing pattern led to Indian markets outperformance during the
month. Key concerns though were fears of second wave of Covid in US and
escalating tensions between India and China.
Despite the smart rally during the month, on YTD basis
BSE Sensex is down 15%. During the month of June, Midcaps and Small caps
outperformed the broader markets. Amongst sectors Banking, Financials, Auto and
consumer durables outperformed while Healthcare and Consumer staples
A key development has been the
recent flare up on the Indo-China border in the Galwan Valley
of Ladakh. It has heightened geopolitical tensions between the two nations
leading to reports of potential escalation. These events have caused
significant backlash in India, giving rise to a narrative of reducing
dependence on China – both on business and commercial fronts. There are media
reports about Government asking industry to prepare a list of products imported
from China. Some State Governments have already cancelled contracts awarded to
Chinese firms. Government of India has banned 59 Apps for security reasons.
India’s imports from China
have risen steeply from just 2.6% of total imports in FY20 to an all-time high
of 16.4% in FY18 before easing to 14% (USD65bn) in FY20. India runs a trade
deficit of USD49bn with China. From a sectoral perspective Auto,
Consumer Durables, Pharmaceuticals, Telecom, Chemicals and Renewable Power
sector (Solar) seem to be the most dependent in terms of sourcing from China.
Any potential escalation between the two nations could increase
operational/supply-chain risks in the current economic backdrop, even as
economies look to recover from the pandemic.
IIP in Apr'20 contracted by 55.5%, the
sharpest fall in the history. The decline was severe in 21% of IIP, largely
concentrated in consumer durables (-95.7% yoy) and capital goods sectors (-92%
yoy), These two sectors have been struggling way before the Covid-19 lockdown.
As in April the National
Statistical Office (NSO) did not release the provisional CPI inflation data for
May owing to difficulties in data collection. It, however, managed to release
the data for certain sub-groups/groups, following the principles of adequacy. Consumer food inflation moderated
by 120bps to 9.3% in May’20 from 10.5% in Apr’20. This was led by sharp fall in
vegetable inflation to 5.3% against
23.6% in Apr’20. It was expected as lockdown restrictions have been eased.
Apart oils and fats and non-alcoholic beverages, deceleration was seen across
the food group.
In terms of flows, FPI were net buyers to the
tune of USD2.7bn, while MFs sold stocks worth USD493mn. On YTD basis FPIs are
negative USD2.2bn while MFs have bought equities worth USD4.9bn.
Post recent 4Q result season, street has
further cut FY21 EPS estimates by 2-3%. However, current expectations are for
recovery from 2Q/3Q FY21 onwards leading to sharp growth in FY22. Nifty is
trading at 22x FY21E and 16x FY22E vs long term average of 17x. While
valuations look fair, it is on back of expectation of strong FY22 which can be
challenging. We remain cautiously optimistic.
Chief Investment Officer
Sources : Bloomberg, Economic Times
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