The markets are presently being driven up by various factors. Globally, data from the US have been reasonably strong with the Fed indicating calibration in further rate moves. Even their move to taper $ 4.5 trillion balance sheet by $ 10 billion per month (to start with) has been discounted in the market. The ECB & BoJ have stayed with the current level of rates and asset purchases. The short term rates in China seemed to have peaked, easing things. The data points have also been positive. Most importantly the Q2’17 GDP growth has printed 6.9% year on year.
Domestically, the biggest reform in indirect taxes in the form of GST has taken effect. J&K joined the GST after a lot of deliberations, 22 states have dismantled inter-state check posts and some companies in consumer staples & auto sectors have passed on GST benefits to the consumers. What is worrying is the immediate tinkering of taxes outside the ambit of GST like vehicle registration tax, stamp duty, entertainment tax among others by states diluting the essence of one nation - one market - one tax. We believe that it may take two quarters for normalcy to return to the economy due to GST.
The June services PMI was 53.1, higher by 0.9 points from the previous month, an improvement seen for five months in a row. On the other hand, the June manufacturing PMI clocked 50.9, which was 0.7 points lower than previous month. This weakness was due to moderation in activity due to GST. In spite of this, the June quarter average of 51.7 was 0.5 points higher than previous quarter which indicates that the GDP has passed its trough.
RBI has identified 12 accounts that have huge borrowing and asked the banks to initiate bankruptcy proceedings against them. This might be negative in the short term due to pressure on banks but a definitive positive in the medium and long term scenario. The saga of loan waiver continues with Maharashtra also joining UP and Punjab. The worry is that the total figure of farm loan waiver could be multiple times at this level thus forcing states to increase borrowings, increasing fiscal deficits and diverting money from capex to farm write offs.
The earnings season of Q1’FY18 has kicked off and there have been no major disappointments so far. In the next few days the Monetary Policy Committee (MPC) could cut rates based on the benign trajectory of CPI and lower growth. This could be an important trigger for the market. Corporate earnings are likely to be sub-par in the first half of this fiscal owing to implementation of GST. However the situation is expected to improve in the second half of the fiscal where we expect earnings to recover which could be supported by credit growth. We could see markets consolidate at current levels and investors must have realistic return expectations. Investors should consider Large cap funds such as BSL Frontline Equity Fund and BSL Top 100 Fund, Multi cap funds such as BSL Equity Fund and BSL Advantage Fund, Balanced fund such as BSL Balanced’95 Fund and Dynamic equity fund and BSL Balanced Advantage Fund from our stable.
The author is the Chief Investment Officer – Equity