Dear all,
Brexit woes overrun by strong domestic cues
India's key bench mark indices exhibited heightened volatility in the month of June 2016 on the back of plethora of domestic and global events. Indian markets corrected post the results of Referendum in UK favouring Britain's exit from Eurozone due to fears of negative impact on sectors having business exposure to Britain and Eurozone. However, markets posted a smart recovery due to domestic factors such as the approval of the 7th Central Pay Commission (CPC), FDI reforms, changes to the Model Shop Act and a strong pick-up in monsoon post a late start increased the possibility of a normal monsoon after two consecutive years of deficit rain. Excluding IT (-3.3%) and Teck (-2.5%) index, most of the sectoral indices posted substantial gains in the month. The gainers were led by Realty (+7.9%), followed by PSU (+7.4%), Metal (+7.2%), Power (6.6%), FMCG (5.1%) and Oil & Gas (+4.3%). The 7th CPC has recommended an overall hike of 23.6%, of which 15% will be in basic pay, 63% in allowances and 24% in pension, for ~4.8mn central government employees and ~5.5mn pensioners. While Brexit has caused near-term uncertainty for various sectors, the real impact would be clear only when the terms of the exit are freezed. Investors would keenly await progress on passage of GST in the upcoming monsoon session expected to begin in few days.
Valuations and Outlook: The implementation of the 7th pay commission too is expected to buoy demand growth and strengthen domestic consumption. Further, with the country's reservoir levels at a staggeringly low 17% (31% a year ago), healthy monsoons would lead to good agricultural harvest, aiding in containment of food inflation and higher rural disposable income thereby improving rural consumption. Improving Q1FY17 results would play an important role in increasing investor sentiment. Consensus earnings growth forecast for the CY17 and CY18, revised by -2.9% (MoM) and +0.2% (MoM), respectively. NSE Nifty is currently trading at reasonable valuations of 17.9x CY2017E earnings (vs. historical average of 16.0x). BSE-Bankex is trading at ~1.9x CY2017E P/BV (vs. historical average of 2.1x P/BV), with PSU banks trading well below BV at 0.7 P/BV (~1.1x). We remain positive selectively on Private Banks, NBFCs, high quality capital good and stocks with low leverage.
Regards,
CSEC Research
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