During the month of June, S&P BSE Sensex appreciated 0.50% on total return basis. S&P BSE Mid cap and S&P BSE Small cap indices continued their declining trend. S&P BSE Mid cap index fell 3.47% whereas S&P BSE Small cap index declined much sharper by 7.03%. Small and midcap stocks were doing much better for the past three years compared to large cap indices. Many of such stocks were priced very high and seemed to be in bubble territory. In the six months of 2018 so far, S&P BSE Sensex rose 4.69%, whereas midcap and small cap indices fell by 13.1% and 16.5% respectively on total return basis.
Among sectors, pharmaceutical space was a clear winner followed by IT services. One big healthcare company got approvals for its plant from US FDA. Some other pharma companies also got product approvals, giving a shot in the arm to their stock prices. IT services stocks also rose on depreciating rupee which would boost their revenues. Business prospects of IT companies are also improving.
Power, real estate and capital goods were the sectors that lost most during the month. Rupee maintained its depreciating stance as the US dollar strengthened. FIIs were net sellers during the month of May. They sold stocks worth Rs 377 million during the month. So far in the current year FIIs have offloaded Rs 622 million worth of stocks. Appreciating dollar and reduced liquidity is leading to sale by foreigners in most emerging markets including India.
Domestic institutions have been buyers to the tune of Rs 2.1 billion for the month countering FII action. While MFs bought stock worth Rs 1 billion, insurers stepped up with purchase of Rs 1.1 billion. In 2018 so far, DIIs have been purchasers of Rs 9.45 billion.
Among global events, US Fed increased interest rates by 0.25% during the month of June. There are expectations of two other rate increases in 2018 by the central bank. Other central banks as Japan and Eurozone could also apply brakes. As expected, there has been withdrawal of foreign funds from most emerging markets. This could likely continue in future.
The economic situation in India continues to be more challenging than in the past few years. RBI increased interest rates during the month by 0.25%. Inflation has also moved closer to 5% (4.9% for May) compared to benign environment earlier. The government has intention to increase MSP for food items, which could further fuel inflation. On the positive side, there has been a gradual improvement in performance of many companies. Several data points also suggest good growth in production from factories in recent month. However, some of this could be due to base effect.
Monsoon data so far points towards a normal rainfall. Given better farm prices with eye on the next general elections, agriculture sector could see better prospects. Another state joined the farm waiver bandwagon during the month, which will bring some respite to the stressed sector.
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. Markets have fallen recently; any further correction could make stocks attractive. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors can expect decent return from equities over a long period in future. Valuations, however, leave moderate upside in the near term. Investors at this point should continue to invest in equities through SIPs.
The writer is head, Equity Funds, Quantum Mutual Fund