India outperforms MSCI EM and MSCI Asia in a sharp risk rally in Mar’16: As sentiment for risk assets improved in Mar’16, MSCI India posted a strong rebound, rising by 9.1% in local currency and 12.8% in $ terms. The rally was seemingly driven by an abatement in outflows from global emerging markets (EM) funds, a rally in global commodity prices and improving sentiment for EM equities & currencies on incrementally dovish Fed guidance. MSCI India outperformed MSCI Asia by 170bps but underperformed MSCI EM for a third successive month in $ terms. High beta sectors like BSE Realty (+16.9%), BSE Bankex (+16.3%), and BSE Cap Goods (+14.4%) were top outperformers, followed by BSE Auto (+13.6%), BSE Metal (+11.6%), BSE Oil&Gas (+11.5%) and BSE IT (+11.3%). BSE Healthcare (-0.4%) and BSE FMCG (+8.1%) were the underperformers during the month.
A sharp turnaround in FII flows in March’16
Like most EM peers, India witnessed a sharp rebound in FII flows. For Mar’16, FIIs invested $4.2 bn in Indian equities, which not only recouped the outflows of the first two months of 2016, but also represented the highest monthly FII inflows in more than three years. Other EMs such as Taiwan, S Korea, Brazil also witnessed a significant jump in FII flows at $5.1 bn, $3.1 bn and $2 bn, respectively. While FIIs were net buyers in the month, domestic investors turned net sellers of Indian equities –at $2.4 bn it was the highest monthly outflow since Jan’13. Both mutual funds (MFs) and Insurance companies net sold ~$1.2 bn each, with MFs registering the first net monthly selling in the past 23 months. FIIs continued to be net sellers of Indian debt at $253m.
Macro indicators remain mixed; should help RBI to be accommodative . The macro picture remains mixed, albeit with a positive bias. CPI inflation eased to 5.2% in Feb’16 vs. 5.7% MoM while WPI inflation was unchanged at 0.9%. Foreign trade data posted the most significant incremental improvement, with the contraction in Feb’16 exports declining sharply to -6% y-o-y vs. -14% y-o-y in Jan’16 and the 12-month average of -18% y-o-y. Imports also improved with a decline of -5% y-o-y vs. the 12-month average of -15% y-o-y. Consequently, the trade deficit improved to $6.5 bn– among the lowest levels since the global financial crisis. Credit growth also adhered to the recent double digit trend, coming at 11.3% y-o-y. However IIP growth posted the third straight month of negative outturn at -1.5% y-o-y, taking 3MMA to -2% y-o-y vs. the preceding 12MMA of 4.4%. We believe that the combination of lower CPI inflation, continuing WPI deflation, weak IIP growth, the recent executive decision to lower small savings rate and a reasonably responsible Union Budget should encourage the RBI to be more accommodative.
DB earnings revision ratio improves; Mar’16 earnings season is critical
Earnings raises for the DB universe outnumbered earnings cuts in Mar’16 – for the first time in the past three months and only the second time since 2015. We deem it only an incrementally positive development, as the number of earnings revision was limited to 12 for FY16 and 20 for FY17. DB analysts raised FY16 earnings estimates for eight companies while cutting them for four companies. For FY17e, the raise:cut ratio stood at 12:8. Earnings have disappointed over the past year; we await Mar’ 16 quarter earnings to identify green shoots of recovery in earnings, noting that corporate earnings should benefit from: (i) lower base, (ii) uptick in WPI, (iii) continuing government expenditure and (iv) improvement in select macro indicators such as credit growth, CV demand, steel consumption, diesel demand, etc. DB’s estimate for Sensex EPS was revised up 0.2 %/0.1% for FY16/FY17. Importantly, this was the first positive (albeit modest) revision to Sensex EPS since July 15.