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Dear Investors,

Month of November saw increased volatility in stock markets, led by increasing concerns about high oil prices, domestic fiscal slippage and increasing trade deficit. While markets closed down by 1.1%, key positives were rating upgrade by Moody’s and continued buying by both FIIs and domestic mutual funds.  

Amongst emerging markets, China was down by 3.2% and Brazil was down by 2.5%. Developed markets were mixed. USA was up by 0.6%, Japan was up by 1.9% while Germany and U.K were down by 1.6%. In terms of market caps, both BSE Mid-Cap Index and Small cap index outperformed with gains of 1.6% and 3% respectively.

Moody’s has upgraded India’s bond rating to Baa2 from Baa3 and changed the outlook to stable from positive. While Prime Minister Modi’s move last year to remove 86% of the currency in circulation has widely been attributed to be a major cause of the recent growth disruptions, Moody has taken a positive tone towards the recent moves by the administration. India’s ease of doing business ranking has risen by 30 places and the government has been able to push through with their GST implementation. However, most importantly Moody has highlighted that while India’s high debt burden remains a constraint, the reforms that have been put in place will reduce the risk of a sharp increase in debt during a downturn. A rating upgrade will lead to lower cost of borrowings from international markets – positive for Indian infrastructure expansion.

Headline CPI inflation rose to a 7-month high of 3.6% YoY in October compared with 3.3% print last month. The acceleration was particularly notable in food prices with firming up of vegetables, milk, cereals in the festive season. On the services side, inflation for transport and communication however eased, leading to core inflation remaining unchanged at 4.6% during October.

The Index of Industrial Production (IIP) print for September came in lower at 3.8% YoY as compared to the previous reading. The growth figures for August were revised up to 4.5% YoY from 4.3% earlier. Manufacturing segment registered a flat growth. Within the manufacturing segment, 11 out of 23 sectors registered positive growth. 

2QFY18 results were generally good and probably has arrested the downward revision which we have witnessed over the past several quarters. Key positives were lower slippages for Banks, restocking led volume growth by consumer staple companies and strong growth by consumer discretionary companies. For Nifty, earnings were largely in line led by recovery in margins. Aggregate Revenue, EBITDA & PAT growth was at 11%, 13% & 6% respectively. Topline growth missed expectation as pace of post GST restocking was moderate, while EBITDA and PAT were in-line with expectations supported by better margins.

The overall breadth of earnings is positive with 80% of the companies reporting better than its expectations (5%) or inline earnings (45%). Overall 1HFY18 EPS growth is now flat factoring weak 1Q. 2HFY18 should see meaningful pick-up in earnings growth driven by continued restocking, festive season and favorable base of last year (demonetization Quarter). With valuations at 18.5x one year forward earnings (one standard deviation higher than mean), we do not see scope for further re-rating, with earnings growth to drive returns.

Sanjay Chawla
Chief Investment Officer
Source: Bloomberg, Economic Times
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