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Slowing GDP Growth Raises Fear in Markets (Newsletter – September 2017)

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September turned out to be another month of slightly negative returns for broader Indian markets. Nifty and Sensex delivered -1.3% and -1.4% on a monthly basis.

Though it is unnecessary to justify small movements of few percentage points in either direction, it seems that two consecutive months of negative returns are due to the combined effects of jittery geopolitical situations, perceived overvaluation at broader market levels, concerns about GST-related issues and lack of any specific positive triggers.

But given a good rally in the first half of the year, the overall YTD returns continue to remain good at 20% and 17% for Nifty and Sensex respectively.

FII were net sellers in September and sold about $1.6 billion worth of equity. But this was adequately countered by the purchase of $3.2 billion by DIIs. On a YTD basis, FII have purchased stocks worth USD $ 5.5 billion.

Interest Rate Pause

In its latest policy meet, RBI has kept the policy rates unchanged.

The monetary policy stance continues to remain neutral as RBI has made it clear that the rate cuts will restart only if there is an unexpected drop in the economic growth. This in itself, makes any cut in the December policy uncertain.

RBI also shared its concerns about GST implementation, which along with demonetization and PSU bank’s NPA burden, may further delay the revival in investments in the economy.

IPO Frenzy Continues

On back of the current bull run and great returns in last few quarters, the IPO market is in a frenzy.

Companies are coming out with IPOs which at times have sky-high and unjustified valuations. Even then, the issues are getting hugely oversubscribed. Unsurprisingly, companies with mediocre business models too are taking advantage of the appetite for new issues and coming out with IPOs having super-rich valuations

Since the start of 2017, more than about Rs 38,000 crore has already been raised in the primary markets. And interestingly, most of these IPOs are being driven by offers for sale (OFS) rather than fresh issue of capital. So basically, these IPOs are turning out to be good exit option for existing shareholders due to the sharp run up in Indian equities. And the money is not going to add much value to the business as such.

This in itself speaks volumes about this ongoing IPO party.

Even the SME space is witnessing the same trend with 58 SMEs doing their IPOs since April this year.

Jittery Geo-Politics

The stand-off between the US and North Korea continued for another month with no sign of relenting from either side.

It is still unclear how this issue will progress but given recurring provocations by the Korean regime, the risk of US aggression cannot be ruled out in near term.This is one big risk that is being faced by the markets world over.

R&R View on Economy & Markets

There has been a lot of uncertainty surrounding government’s recent reformative steps and how they may impact the economy and the stock market.

Many are of view that low oil prices combined with so-called economic speed-breakers of GST and demonetization are missed opportunities to return the economy to a sustainable path of more rapid growth.

All this might be true to some extent. But we believe that best time to carry out big reforms is when economy is relatively healthy (which is the case today). You cannot do a big surgery on a person who has a very poor health. And same is the case with the Indian economy too.

So in our view, it’s still too early to write off these reforms as unnecessary. It’s true that events like as demonetization and GST have slowed down GDP growth considerably. But this is the obvious side effect of such steps. Few quarters of slow growth do not change the overall growth trajectory. We continue to remain bullish on the Indian economy in long-term.

On that note, we end this newsletter and as always, appreciate you for taking time to read this message. Do share your views/comments by email/comment section below.

Team Equentis

Read more:  How Long-term investing helps create life-changing wealth – TOI

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