Like broader markets, the major Indian indices continued their upward journey and hit fresh lifetime highs. In April, we had the 4th consecutive month of positive returns since start of the year.Nifty50 and Sensex are up 13.66% and 12.36% respectively since start of the year. In April, these indices clocked 1.42% and 1.01% returns respectively.

The rally seems to be driven predominantly by fund inflows from domestic investors. In fact increasingly, the domestic fund flows are insulating the markets from vagaries of foreign fund flows.

Mid- and small-cap indices are showing sharper gains than Nifty & Sensex, as investors continue to emphasis more on future earnings growth potential compared to valuations.

But since long-term wealth creation is more about picking the right stocks at the right time, we should not worry much about the broader market movements. There are always pockets of investment worthy stocks available, even in richly valued markets. We therefore, continue to focus on bottom-up stock picking.

RBI gets More Power to Deal with NPA Mess

The problem of NPAs is not hidden from anyone. Infact, estimated at Rs 9.64 trillion, this is arguably the biggest single threat to India’s economic stability.

Now a new ordinance has been passed that empowers RBI to “issue directions to banking companies for resolution of stressed assets” and also “issue direction to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016”.

This means that even if the concerned banks show reluctance, RBI can now force them to act against erring NPA borrowers. So we can reasonably expect resolution process of bad loans to happen in a time-bound manner now. It is also expected that in coming weeks, many state-owned banks would announce deep restructuring of bad assets.

Though many are questioning whether the regulator (RBI) should be directly involved in the resolution process or not, fact is that these are extraordinary times (given the size of problem) and hence, the situation calls for extraordinary measures.

Q4 Corporate Results Better than Expected

As more and more companies have come out with Q4 results, it’s increasingly clear that demonetization did not have as bad an impact as earlier projected, atleast broadly speaking.

But does this point towards the inflection point from where earnings will recover? It is too early to conclude that. Though it is expected that if stable commodity prices, better monsoon and low interest rates continue for a few more quarters, it would probably create a scenario ripe for earnings recovery. Having said that, it will be interesting to see how things pan out as GST goes live soon. Frankly, nobody can perfectly predict the short-term impact on economy as a whole and sectors in specific.

Real Estate Regulation begins with RERA

As Real Estate (Regulation and Development) Act, 2016 (RERA) came into effect from 1st May, it is expected that sector will witness an improvement in practices that will help protect the interests of genuine buyers.

Under the act, all states are expected to have their own regulators and rules governing them. Though many states are far from ready to implement the new law, it is nevertheless a step in the right direction. The Act seeks to address real-estate specific issues of delays, high prices, poor construction quality, etc. And if need be, penalize and blacklist the erring builders/developers.

No doubt the expectations from RERA are huge. That too, in a sector which has been under no regulation for decades. But atleast now, developers and brokers will face ‘some deterrents’ and be forced to get their houses in order.

R&R View on Economy

As already highlighted, the economy seems to be doing well in broad terms given the favorable macroeconomic factors. Also, the fear of growth hitting a speedbreaker seems to have been dispelled with better than expected Q4 results.

But whether these results will translate into a sustained earnings recovery and growth is still not known. Having said that, GST implementation is something that will set the undercurrent for the economy in medium to long term. Though experts are still not clear about its short-term impact, the long-term prospects are fairly positive.

R&R View on Markets

Though we continue to remain long on the wealth creation potential of the Indian economy, it’s imperative to highlight that near term expectations need to be toned down in light of valuation-specific data. And that is because the fundamentals, though not deteriorating are yet to catch-up with the valuations.

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.

Regards
Team Equentis