1. Stock markets: Valuations stretched, investors should add moderately to equity now

Stock markets: Valuations stretched, investors should add moderately to equity now

FIIs sold $345 million worth of stocks in April. On the other hand, domestic institutions bought stocks worth $1.4 billion. Among DIIs, mutual funds bought $1.5 bn whereas insurers sold stocks worth $100 million.

Published: May 16, 2017 5:11 AM
The BSE Midcap index was up 5% during the month and the BSE Smallcap index appreciated by 6.5%. (Reuters)

In the first four months of 2017, the BSE Sensex has gained 12.6% and in April it grew 1%. However, it was midcap and smallcap stocks which stood out during the month. The BSE Midcap index was up 5% during the month and the BSE Smallcap index appreciated by 6.5%. In the first four months, midcap and smallcap index returns are 23.5% and 27.8%, respectively. Among sectors, cyclical such as real estate, capital goods and oil and gas stood out with highest returns. IT, telecom and metal sectors were the ones that ended in negative territory. After heavy inflows in March, FIIs sold $345 million worth of stocks in April. On the other hand, domestic institutions bought stocks worth $1.4 billion. Among DIIs, mutual funds bought $1.5 billion whereas insurers sold stocks worth $100 million. The rupee appreciated over 1% against the US dollar in April.

Interest rate in the US

On the global front, growth remains subdued in developed markets except the US. The Fed has hiked interest rates once in 2017 so far and has indicated its intention to increase rates twice in the remaining part of the year. Japan and Eurozone so far have been following a loose monetary policy. However, there is a possibility of Eurozone stopping its expansionary monetary policy in the coming months. Rise in the US interest rates can be damaging to equity and financial markets. This may hurt price of equities in emerging markets including India, at least in the short run. A lot of FII money chasing returns could go back as cost of capital increases in their home market.

Quarterly earnings

On the domestic front, many companies are reporting their fourth quarter earnings. The results have been a mixed bag, with some companies doing well while many others’ performance lower than market expectations. While the rollout of GST seems to be on track from July 1, rates of various goods/services are still to be decided under the four tier GST structure. The Met department has predicted a normal monsoon for this year. If it doesn’t turn out to be so, there could be inflationary pressures on the economy. RBI also announced its monetary policy in the month of April. While there was a status quo on interest rates, the central bank remains concerned on inflation picking up. Core inflation has remained sticky in recent times, even though there has been the benefit of falling food prices.

Also Watch:

Fund outlook

We remain optimistic about Indian equities in the long run. India is unlikely to be impacted economically much from the unfavourable situation in other parts of the globe. In fact, it has benefitted from the fall in commodity and energy prices. India is a bright spot in world equities. Demonetisation did not have a big impact on the listed companies, though it needs to be watched in the coming months. India is also relatively less impacted from global protectionist measures as domestic consumption is around 65% of GDP. We are less reliant on exports for economic growth. With the recent run up in equity markets, the valuations look stretched. Investors should add moderately to equity at this point of time.

The writer Atul Kumar is head, equity funds, Quantum Mutual Fund

  1. No Comments.

Go to Top