Equity PerspectiveJanuary 2018

Equity Markets - Review

Equity Roundup – Movement in DecemberClosing Price 1-Month Return (%) Year To Date Returns (%)

U.S

S&P 500 2673.61 0.98 19.42

Nasdaq 6903.39 0.43 28.24

Dow Jones 24272.35 3.83 22.82

Europe

DAX 12917.64 -0.82 12.51

FTSE 100 7687.77 4.93 7.63

Asia/Pacific

Nikkei 22764.94 0.18 19.10

KOSPI 2467.49 -0.36 21.76

Hang Seng 29919.15 2.54 35.99

Domestic

Sensex 34056.83 2.74 27.91

Nifty 10530.70 2.97 28.65

BSE Mid cap 17822.40 5.35 48.13

BSE Small cap 19230.72 5.50 59.64

BSE 100 11029.78 3.03 31.52

BSE 200 4678.86 3.34 33.26

Data as on 31st Dec’17

Equity Roundup - Sectoral Performance

7.5%

6.6%6.1%

5.8% 5.7%5.1%

3.7% 3.6%

2.6%2.2%

0.8% 0.6%

-0.1%

-2%

0%

2%

4%

6%

8%

METAL Realty AUTO HC CD IT CG FMCG PowerIndex

Oil & Gas Bankex Energy PSU

*S&P BSE Sectoral Indices movement between 30th Nov’17 to 31st Dec’17

• Year 2017 finished on a jubilant note. The Sensex and Nifty, both, scaled fresh record highs during the year. The Sensex for the first time inthe history closed above 34,000-mark. Positive global market sentiments and healthy domestic fund flows supported the equity markets in2017, even though there was some deterioration in macro-economic indicators.

• Investors became optimist on improving economy and hopes of higher corporate earnings results.

• Expectations of a more rural-focused Union Budget, following the victory of BJP in Gujarat and Himachal Pradesh assembly elections, furthersupported sentiment. .

• However, upside was limited on back of rising global crude oil prices and concerns of fiscal slippage. Market sentiments were furtherdampened after lower goods and services tax collections in Nov 2017 fueled concerns that the government may not be able to meet its fiscaldeficit target for the current fiscal.

• All an all, Sensex rose by 2.7%, while Nifty surged 3.0% during the period (30th Nov’17 to 31st Dec’17).

• Broader indices outperformed both - Sensex and Nifty. BSE Mid Cap rose 5.4%; while BSE Small Cap gained 5.5% during the same period.

• On the BSE sectoral front, barring PSU; all other indices ended in green. Metals was the major gainer followed by Realty and Auto.

Equity Roundup – Key Takeaways

Equity Roundup – Events Timeline

32,500

32,700

32,900

33,100

33,300

33,500

33,700

33,900

34,1001

-Dec

2-D

ec

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ec

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ec

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ec

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ec

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ec

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ec

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ec

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ec

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MPC raised its inflationexpectation to 4.3%-4.7% forsecond half of 2018, which inturn weighed on marketsentiment

Industrial production growth hita 3-month low in Oct 2017 andretail inflation rose to a 15-month high in Nov 2017, raisedconcerns over inflation outlook

Investors cheered the ruling party’svictory in the key state elections inGujarat and Himachal Pradesh

Investors became optimist onimproving economy and hopes ofhigher coporate earnings results.Expectations of a more rural-focused Union Budget furtherbuoyed sentiment

Positive global cues too buoyedinvestor sentiment following thepassage of U.S. tax reform bill, aimedat reducing corporate tax rates

Announcement of government’sadditional borrowing programme;raised concerns of missing the fiscaldeficit target

Equity Roundup – FII and MF Net Flows

• FIIs trend got reversed and they turned net sellers in Dec after two consecutive months of buying with net outflows of Rs. 58.8bn. The totalnet inflows from FIIs for the year 2017 stood at Rs. 487.5bn. Mutual Funds continued to remain buyers with net inflows of Rs. 83.3bn inDec17; while, for the entire 2017; MFs remained heavy buyers and bought equities worth Rs. 1170.4bn.

• Improved earnings and economic data, relaxation in GST provisions and public sector banks recapitalization move; supported the FII flowsduring the month.

(58

.8)

19

7.3

30

.6

(11

3.9

)

(14

2.9

)

51

.6

36

.2

77

.1

(22

.1)

33

7.8

10

4.9

(10

.1)

(84

.9)

83

.312

0.8

99

.9

17

4.6

17

9.4

11

8.0

92

.0

93

.611

2.4

23

.7

20

.452

.391

.8

-300

-200

-100

0

100

200

300

400

Dec'17Nov'17Oct'17Sep'17Aug'17Jul'17Jun'17May'17Apr'17Mar'17Feb'17Jan'17Dec'16

FII Invst Monthly (Rs bn) MF Invst Monthly (Rs bn)

Indian Economy - Review

November IIP growth rises to 17-month high of 8.4%, retail inflation surges to 5.21% in December

Industrial output zooms 8.4% in November; India's manufacturing output rises in December to 54.7

Wholesale price inflation slows to 3.58% in December; CPI Inflation spurts to 17-month high of 5.21% in December 2017

3.4%

5.3%

6.6%

5.7%

3.9%

2.3%

0.9%

1.9%

3.2%2.6%

3.6%3.9% 3.6%

3.4% 3.2%3.7% 3.9%

3.0%

1.5%

2.4% 3.4%3.3% 3.6%

4.9%

5.2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-17

Dec

-17

WPI CPI

-2.40%-0.70%

0.70%-1.90%

5.70%

-0.10%

3.30%

-1.20%

3.75% 3.10%1.70%

-0.10% 1.12%

4.50% 3.80%2.20%

0.57% 1.76%

7.30%

3.98%1.02%

-1.4% -0.8% 0.2%

4.00% 4.70%

-7.4%

-1.2%

-2.7% -1.7%0.6%

10.3%

-13%

-8%

-3%

2%

7%

12%

Au

g-16

Sep-16

Oct-1

6

No

v-16

Dec-1

6

Jan-1

7

Feb-17

Mar-1

7

Ap

r-17

May-1

7

Jun

-17

Jul-17

Au

g-17

Sep-17

Oct-1

7

No

v-17

Dec-1

7

IIP PMI

RBI Keeps Repo Rate on Hold at 6%, Inflation Forecast Increased

• The six-member Monetary Policy Committee (MPC) of Reserve Bank of India, headed by Governor Urjit Patel; as widely expected kept repo rate unchanged at6.0% in its fifth bimonthly monetary policy meeting of FY18. Consequently, MSF (Marginal Standing Facility Rate) and Bank rate remained unchanged at 6.25%each.

• The RBI revised its inflation projections for Q3 & Q4 marginally upwards by 10bps from 4.2%-4.6% in October policy to 4.3%-4.7% in the December policy. While,The RBI retained its Gross Value Added (GVA) growth projection for FY18 (year-ending March 2018) at 6.7%, with balanced risks.

• The RBI said that the implementation of farm loan waivers by select states, partial roll back of excise duty and VAT in the case of petroleum products, anddecrease in revenue on account of reduction in GST rates for several items may result in fiscal slippage with attendant implications for inflation.

• The RBI’s policy stance was in line with expectations, maintaining a word of caution on the upside risks emanating from high commodity prices, global financialinstability, HRA related increases, rising input costs and fiscal slippage.

18.0

19.0

20.0

21.0

22.0

23.0

3.5

4.5

5.5

6.5

7.5

8.5

Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jun-16 Oct-16 Feb-17 Jun-17 Sep-17 Jan-18

CRR % Repo % Rev Repo % SLR %(RHS)

Equity Markets - Outlook

Indian Equity Markets surges on back of improving economy and hopes of higher corporate earnings results

• Indian equities closed 2017 as one of the best performing markets. The midcap index was up 48%, small-cap index up 59%, as compared to Niftywhich was up 28%. This was despite the disruptions witnessed due to demonetisation and GST.

• On the data front, India's wholesale price inflation cooled to 3.58% in December led by a softer rise in food inflation . WPI had risen 3.93% inNovember and 2.1% in December last year. The rate of inflation based on WPI Food Index consisting of 'Food Articles' from Primary Articlesgroup and 'Food Product' from Manufactured Products group decreased from 4.1% in November to 2.91% in December

• On the other hand, India’s retail inflation continued to rise and hit a fresh high, growing 5.2% in December, mainly due to hardening housing,fuel and food prices, while it is now inching towards RBI’s upper tolerance level of inflation at 6%. Among the CPI components, inflation of foodand beverages accelerated to 4.85% in December 2017 from 4.41% in November 2017 mainly contributing to the increase in CPI inflation.

• India's November factory output expanded at its fastest in just over two years, driven by robust growth in manufacturing and affirmingexpectations of stronger second half growth in FY18. The index of industrial production (IIP) rose 8.4% in November from 2% in October.

• Thus, accordingly, while we continue to remain overweight on equities as an asset class, given the recent rally we may witness volatility andaccordingly it would be prudent to cut down on returns expectations. Profit booking can be undertaken at higher levels and we suggest longterm investors to enter equities in a staggered manner and can also go through the SIP route. Investors looking to invest in diversified equityschemes could invest in large-cap oriented schemes. Conservative investors can park the funds in liquid scheme and enter through STP.

Investment strategy

• Faster reforms implementation by the government toboost the manufacturing & industrial growth could drivethe economic revival in the medium term.

• While, India remains attractive investment destinationowing to its fundamental positives; however, the biggestareas of concerns would be worsening macros, delay inresumption of GDP growth, sustained rise in interestrates in developed economies and geopolitical concernscould keep the markets volatile in the near to mediumterm.

• Aggressive investors can enter at current levels and canhedge the portfolio for the correction.

• A conservative investor can enter the market by investingin liquid or debt funds currently and then transferring theportfolio at sharp movements.

• Low GST collection and rate revision, rising crude oilprices, and a slew of government measures aimed atstimulating growth need to be monitored closely for anypotential fiscal slippages.

• Near term triggers can come from forthcoming corporateearnings and the Union budget along with geo-politicalnews flows on North Korea and US, release of key globalmacroeconomic data points, oil prices and change inmonetary policy stance could intermittently impact theIndian stock market.

• While India remains attractive investment destinationowing to its fundamental positives, geopolitical concernsand monetary policies worldwide could keep the fundflows volatile in the near to medium term.

• While we advise profit booking at higher levels, wesuggest long term investors to enter equities in astaggered manner and can also go through the SIP route.Conservative investors can park the funds in liquidscheme and enter through STP.

Near to short term Medium to long term

Thank YouEmail: investmentadvisory@tatacapital.com

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