A TRYST WITH INDIA’S FINANCIAL MARKETS

A GLANCE THROUGH INDIA’S MARKET INDEX Nifty nosedived in FY09 on account of the subprime crises Historical median P/E for Nifty was @17.5 times forward for the above time period. NIFTY was valued @ 27.8 times forward at its peak in January 2008. P/B ratio as of June’19 is 3.77 while dividend yield is around 1.24 percent.

Corporate Earnings Private Capex THE TWO KEY FACTORS ON WHICH MARKETS SHALL RE-RATE Corporate Earnings Private Capex

EARNINGS TO CAGR 14% FOR THE NEXT TWO YEARS We are expecting 14-15% Earnings CAGR for Nifty for FY20 and FY21 as a BASE CASE The BULL case earnings recovery can be 18-20% EPS had clocked a CAGR of 25% pre subprime crisis, However growth rate declined to 10.2% from FY09-13 and further to 3.67% between FY14-19.

Private capex has declined 13 percent year on year basis. Private sector capital expenditure (capex), which rose to Rs.3.7 trillion in 2010-11, has witnessed a declining trend since last past seven years. During 2017-18 private capex has declined to 1.5 trillion the lowest in last 11 years. Private capex has declined 13 percent year on year basis. Current overall utilization level stands at 75 percent.

DOMESTIC MACRO FACTORS AT PLAY

Q4 GDP GROWTH RATE LOWEST IN 4 YEARS

DOMESTIC SAVINGS TO GDP ON A UP-TREND India's Gross Savings Rate was measured at 30.5 % in Mar 2018, compared with 30.3 % in the previous year. 

CURRENT ACCOUNT DEFICIT Current account deficit has been falling Q-o-Q and has reached USD -6.9 bn as compared to -16.9 bn in Sep’17. CAD widens to 2.5 percent of GDP in third quarter.

GROSS FIXED CAPITAL FORMATION GFCF has been revised downwards to 9.2 per cent for the current fiscal, from the earlier forecast of 10.3 per cent. Although the average 9.5 per cent investment growth during FY17-FY19 is quite healthy compared with the average 3.6 per cent GFCF growth over FY14-FY16,

MANUFACTURING PMI India manufacturing sector grows at the fastest pace in three months for May’19 on account of improved output and new orders

EXTERNAL DEBT TO GDP India’s external debt falls to USD 471.3 bn due to decrease in commercial borrowings and NRI deposits External debt/GDP ratio stands at 20.1 percent for 2018.

FOREX RESERVES India's forex reserves comprise Foreign Currency Assets (FCAs), gold reserves, Special Drawing Rights (SDRs) and India's reserve position with the International Monetary Fund (IMF). India’s forex reserves has declined from USD 4.219 billion in Jan’19 to USD 3.96 billion in June’19. Import cover has increased from 9 months in Oct’18 to 11 months in Feb’19.

FISCAL DEFICIT Pertinent to note the Government strategy on the fiscal glide path and whether the 3.4% figure shall be held up. Prudent measures on the capital account front and shoring up of Direct/Indirect tax revenues to be observed.

EXTERNAL FACTORS

EXTERNAL FACTORS Rising crude oil prices could further increase imports and put pressure on India’s current account deficit on account of geo political tensions in the middle east. The escalating trade war between the US and China, and rising protectionism have cast a shadow on India’s prospects for higher exports.

GLOBAL YIELD MOVEMENT Treasury yields was rising for most parts of 2018 on account of US FED rising interest rates by four times in 2018 touching an high of ~3.1 percent. However, the growth outlook looks gloomy for US as the tensions between US and China is not slowing down. A rate cut by US FED is likely on the cards in later half of 2019. US Yield curve has already showed signs of inversion over the 3 month and 3 year US bonds. German 10 Year bund yields have also turned negative in 2019.

US FED DOT PLOT Source: CNBC

RBI INTEREST RATE TRAJECTORY Source: Thomson Reuters

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