During the month of July, S&P BSE Sensex rose 6.36% on total return basis and the index touched new all-time high in the month. S&P BSE Mid-cap index appreciated 3.98% whereas S&P BSE small cap-index increased 3.7% in the month. So far for the seven months of 2018, S&P BSE Mid cap and S&P BSE Small cap index have fallen 9.64% and 13.43%, respectively. In the same period, S&P BSE Sensex has risen 11.34%.
Among sectors, oil and gas and FMCG were among the better performing during the month. Leading FMCG companies recorded sharp volume growth led by better rural demand. Metals, real estate and telecom were among the sectors which didn’t perform well. Market breadth remains narrow, with Reliance and ITC contributing 44% of gain in S&P BSE Sensex for the month. Only a handful of stocks have driven the markets in 2018.
Foreign institutional investors (FIIs) bought stocks worth $208 million during the month after being sellers earlier. Cumulatively, FIIs have been sellers to the tune of $414 million till July 2018. Domestic institutions (DIIs) were buyers of $613 million. While MFs bought stocks of $803 million, insurers were sellers to the tune of $190 million. In 2018 so far, DIIs have been buyers of $10.1 billion worth of stocks.
Global central bank actions have important effect on the returns from various asset classes. US Fed has raised interest rates twice in the current year and is likely to go for another two rate increases. Rise in US interest rates is likely to cause money pull from emerging markets such as India. This can affect equity markets in India, at least temporarily. Bank of Japan has indicated to maintain its liquidity and low interest rates. Europe also isn’t likely to change its stance from low interest rates in the near term.
On the domestic side, RBI raised interest rates by 0.25% at the start of August, given the inflation pressures seen in the economy. The government went for rationalisation of GST rates on a number of articles, this being the fourth round of rationalisation since it was introduced a year ago. The same has narrowed down the list of goods on which higher rate of 28% was charged, apart from reducing rates on various other goods.
Many companies continue to report quarterly results. Barring few exceptions, most companies have been reporting decent financial performance. Lower private capital expenditure, which dragged GDP growth for a few years could be turning around. Capacity utilisation of companies has reached 75%, and they could be looking at expanding their production. Barring a few sectors, valuations of stocks are at high levels. While share prices have run up, earning of companies are picking up now only after a four-year hiatus. High level of liquidity globally has driven up stock prices. With Lok Sabha elections due next year, stock markets could be spooked by political uncertainty.
Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors can expect a decent return from equities over a long period in future. Investors at this point should continue to invest in equities through SIPs.
Atul Kumar is head, Equity, Quantum AMC