Market Commentary October 26, 2017

Global equity markets continue to be supported, especially by corporate earnings of multi nationals and companies in developed economies. The US markets are sustained by hopes for tax reform, having already discounted a rate cut by year end. This week in India the Nifty added 343 points to close 3.4% up at 10,323 after trading in a range of just 4%. Foreign portfolio investors reversed their recent abandonment of the Indian market to turn net buyers of $281mil in cash equity, joining in with domestic investors who bought a net $34mil. Volatility is still pretty subdued with the India VIX trading in a narrow range between 10 and 13 before settling unchanged at 11. Market breadth is narrow as much of the buying is of the front-line stocks. Nifty futures are trading at a premium of just over 1% to cash.

Amongst quarterly reports, HCL Tech reported USD revenues of $1,928mn, 11.9% up on an annualized basis. Net profits of $340mil were 8.6% up year on year. Full year dollar guidance has been increased to 12.1-14.1% at current exchange rates and margin guidance of 19.5-20.5% is maintained. The ever-reliable HDFC Bank reported growth of 22.6% in net interest income and 20.2% in reported profit thanks to stable margins and market share gains across most retail segments. Gross non-performing assets are still among the best in the sector: 1.26% and net NPAs were 0.43%. Kotak Mahindra Bank reported net interest income ahead by 22.3% and reported profits by 19.0%. Gross NPAs dropped slightly to 2.47% and net NPAs fell slightly to 1.25%. Shares in State owned banks jumped sharply on the recapitalization announcement (see below) but they are going to have to fight hard to recover lost market share to the best private sector banks.

This week the government has made four important announcements: First, it announced that banks will be provided with a total recapitalization amount of $32bn, equivalent to 1.3% of GDP during the remains of this fiscal year and through FY19. Of this, $21bn will be in the form of recapitalization bonds, some of which will be issued this year. $3bn will be injected using budgetary provisions and the remaining $8bn through capital raising by banks (diluting government equity). At this stage, it is expected that the government's budgetary support of $1.5bn in FY18 will remain unchanged and $1.25bn will be provided in FY19. Over the next quarter, the government has also promised to announce additional banking reforms.

Second, the government remained non-committal about whether it would meet or deviate from the FY18 fiscal deficit target of 3.2% of GDP. Its aim is to try and meet the target, but this decision will be reviewed sometime in December. However, the commitment to the fiscal glide path (to reduce the deficit to 3% of GDP) remains. Third, the government highlighted a number of public infrastructure schemes, which it expects will revive growth. In particular, its focus is on the Bharatmala project – an 83,677km road-building programme, under which it envisages an investment of $106bn (4% of GDP) over the next five years. Fourth, for micro, small and medium-sized enterprises (MSME), the government announced measures to improve their financing and market access.

Preliminary economic data shows economic activity in September accelerated, as an early festive season coincided with post-GST normalization / restocking. Auto sales continued to be good, with 2W/PV sales up 12/13% now on a 3m basis, the best pace for both over the last one year. Exports growth (29% YoY) saw multiple sectors doing well. Import growth (19% YoY) was also strong. Credit demand is showing nascent signs of recovery. Against this background the market should be sustained through year-end.