March marked the 3rd consecutive month of positive returns for major indices. Nifty50 and Sensex gave decent returns of 3.31% and 3.05% respectively.Infact after 2006, this is the first time that Nifty50 has given positive returns for each of the first 3 months of the year. So, as far as equity investors are concerned, 2017 has been a good year for them so far.

End of March also marked the closure of FY2016-17. Both indices delivered handsome returns of 18.9% (Nifty)and 17.2% (Sensex).

BJP’s emphatic victories in state elections (which signals political stability in years to come), expected continuation of reforms agenda,nearing of GST implementation, strong buying by DIIs and surprisingly low impact of demonetization are what have taken markets close to their all-time highs.

Though we are least bothered about where index is headed and more interested in bottom-up stock picking for long-term wealth creation, the general consensus above the economy and overall optimism among market participants cannot be ignored.

GST Rollout Expected by July

It is now quite possible that GST will see light of the day on 1st July 2017 itself. Parliament (Rajya Sabha) has taken decisive steps and passed GST related legislations.

GST has long been hailed as the mother-of-all-reforms and is expected to add a couple of percentage points to GDP in few years time. Though it will be in a form much different from what was initially envisaged, it will still be a big step, as this single-tax regime will replace several state and central taxes when implemented.

Now the major task left for the GST council is to fit various goods and services into different tax slabs.

No Policy Rate Cuts

In its bi-monthly meeting, RBI’s Monetary Policy Committee has decided not to change the policy repo rates.

This status quo was the general consensus too as RBI deems that the current economic environment a little too risky to go for further rate cuts. The upside risks for inflation stem from uncertain monsoon, unforeseen repercussions of switching to GST, oil price upmove, etc.

But apart from controlling inflation, another issue for RBI is to ensure revival of credit growth. For this, it will have to accelerate the resolution of stressed assets – which will be net positive for both banks as well as stressed companies.

As already highlighted in last month’s newsletter too, the prospects of future rate cuts seem low. So any further changes in policy rates are expected to depend on evolving economic situations.

Strengthening Rupee

Rupee surprised everyone by hitting almost a 20-month high of about $1=Rs 64.5 recently. Infact, the appreciation in last quarter is one of the best in last several decades. (Source – Livemint)

The euphoria in currency is not without basis. Minor impact of demonetization (proven by Q3 results), increase in political stability due to ruling party’s state wins, passage of GST, low current account deficit and low oil prices (beneficial for big importers like India) have all played some part in ensuring that rupee gets stronger by the day.

But it goes without saying that this strengthening of Rupee is adding to woes of IT and pharmaceutical companies.

R&R View on Economy

In short term, the event to watch out for will be the Q4 results. It is widely expected that these results will reinforce Q3 results – which will once again prove that impact assessment of demonetization was grossly overdone. A good showing in Q4 will put any doubts to rest once and for all.

But having said that, it is also true that markets are losing their patience waiting for earnings growth.

GST rollout is another important event to keep on radar. Its implementation can significantly accelerate the economy and increase efficiency in various sectors. But these benefits will not become evident in initial phases. Nevertheless, it’s important that government ensures that any chaos arising from transition to GST is handled with care. As any misstep has the potential to derail the economy given the size of project.

R&R View on Markets

The markets have no doubt been doing extremely well in recent months. But without any earnings uptick, the valuations have started breaching overvalued zones, from where things have generally cooled off historically.

But if there is an earning revival in next few months, it will bring back market valuations to reasonable levels without any price correction.

We continue to remain positive about DIIs slowly taking the place of FIIs in setting market directions. But this is a long drawn process and not a one-off event.

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