Table 1 gives the average returns of all funds. Large Cap, Mid Cap and Small Cap funds have outperformed BSE S&P Sensex index by wide margins. Lower valuations and strengthening INR and falling government bond yields helped funds outperform the broad market. However, in 2018, government bond funds outperformed equity funds as bond yields fell on falling inflation expectations, RBI bond purchases and strengthening INR.
Sensex & Nifty traded volatile for most part of the trading session in the month of December 2018. Political risk will keep markets on the edge as the current government has lost important state elections, which could impact the outcome of 2019 general elections. We expect Sensex, Nifty to stay volatile and INR is expected to stabilize as macro-economic environment for India is improving. Domestic markets remain attractive with DIIs demand, lower crude oil prices and lower interest rates, among others, being facilitators to help spur economic activity. Sensex and Nifty declined by 0.35% & 0.15% respectively in the last one month. In 2018, Senses and Nifty gained by 7.22% & 4.5% respectively.
On the global front, Dow, S&P 500 and Nasdaq all hit new lows for 2018 after the Fed hiked interest rates. The major indices rolled over after Fed Chair Powell said the central bank would continue to shrink its balance sheet, tightening financial conditions. Corporate profits in the US increased by USD 47.3 billion or 2.4% (Y-o-Y), to an all-time high of USD 2,012.6 billion during Q2Fy18, following a 8.2% jump in the previous period and missing market expectations of an 8.6% advance. Increase in corporate profits shows the increase in demand for US products (manufacturing & service) globally and uptick in expenditure patterns of US citizens.
FIIs/FPIs have sold Indian equity shares worth Rs. 59 billion & Rs. 34 billion in the month of November 2018 & December 2018 respectively, while YTD, FIIs/FPIs have sold shares worth Rs. 328 billion.
Key risks going ahead for broader market indices are:
- Global inflation rising faster than expected leading to central banks tightening policy. The Global central banks have already raised interest rates to some extent and continue to maintain a view that would increase rates further depending on the growth and inflationary trends.
- Investors have been bracing for a worldwide slowdown in economic growth, mainly driven by higher borrowing costs for dollar debtors and trade tensions between the United States and China. Trade wars are making equity markets volatile as export dependent economies would face the effect of slowdown in the corporate earnings growth due to imposed constraints.
- On the political front, current government has lost important state elections which could impact the outcome of 2019 general elections.
Consumer inflation in India declined to 2.33% in November 2018 from an upwardly revised 3.38% in October 2018 and below market expectations of 2.8%. It is the lowest inflation rate since June 2017 as food prices fell the most since the series began in 2012. The Reserve Bank of India revised down its inflation forecasts to 2.7%-3.2% for the period Oct 2018-March 2019, amid lower food and fuel prices.
India’s industrial output rose 8.1% from a year earlier in October 2018, following a 4.5% growth in the previous month and beating market expectations of 5.7% advance.
Wholesale prices in India rose by 4.64% (Y-o-Y) in November 2018, slowing from a 5.28% gain in the prior month and slightly below than market estimates of 4.7%. It was the lowest wholesale inflation since August 2018, as cost increased at a softer pace for fuel and manufactured products while prices of food declined further.
India trade deficit widened to USD 16.67 billion in November 2018 from USD 15.1 billion a year earlier and slightly higher than market expectations of USD 16.08 billion.
India’s current account deficit widened sharply to USD 19.1 billion, or 2.9% of GDP, in July-September 2018-19 from USD 6.9 billion, or 1.1% of GDP, in the same period of the previous fiscal year.
The GST Council cut tax rates on 17 goods and 6 services, ranging from cinema tickets, televisions, digital cameras and Jan-Dhan accounts to frozen vegetables, a move that will cost the Union and state governments about Rs 55 billion in one year.
Global Central Banks Monetary Policy Decisions
RBI policy stance was changed from neutral to calibrated tightening, even as it held the repo rate at 6.5% (during its December policy – meeting) after raising it by 50bps over the two previous policies prior to October policy. In December policy, RBI held rates status quo, lowered inflation projections and yet maintained a calibrated tightening policy.
The Federal Reserve raised the target range for the federal funds rate by 25bps to 2.25%-2.5% during its December policy-meeting and lowered forecasts for interest rate hikes in 2019 amid recent volatility in financial markets and slowing global growth.
Click here to read our analysis on “Fed Rate Hike Impact on Sensex, Nifty, INR & 10 Year Gsec”.
The Bank of Japan left its key short-term interest rate unchanged at -0.1% at its December policy-meeting, even after the Federal Reserve raised rates for the fourth time this year. Policymakers also kept the target for the 10-year government bond yield at around 0% and maintained their upbeat view on domestic economy despite slowing growth in China.
The People’s Bank of China left its short-term borrowing rates unchanged during its December policy-meeting. The interest rate on seven-day reverse bond repurchase agreements was kept at 2.55%, the 14-day reverse repurchase rate at 2.7% and the 28-day tenor at 2.85%.
The European Central Bank held its benchmark refinancing rate at 0% during 13th December 2018 and confirmed the end of its 2.6 trillion Euro bond purchase schemes later this month, while it will keep reinvesting cash from maturing bonds for an extended period of time. Policymakers also reiterated they expect key interest rates to remain at record low levels at least through the summer of 2019.
The Bank of England voted unanimously to hold the Bank Rate at 0.75% during its December policy-meeting, saying that Brexit uncertainty had “intensified considerably” over the last month while inflation is expected to ease below the 2% target amid falling oil prices.
The Hong Kong Monetary Authority raised its base rate by 25 basis points to 2.75% during its December policy-meeting, tracking a similar move by the US Federal Reserve as its currency is pegged to the US dollar.
The Bank of Russia raised unexpectedly its benchmark one-week repo rate by 25 bps to 7.75% during December policy-meeting, saying the decision is aimed at limiting inflation risks that remain elevated, especially over the short-term horizon on the back of the upcoming VAT rate increase. Policymakers expects annual inflation to be 5-5.5% by the end of 2019, before returning to 4% in 2020.
The US economy growth expanded at an annualized rate of 3.5% during Q3Fy18, in line with market forecasts.
Annual inflation rate in the US fell to 2.2% in November 2018 from 2.5% in October, matching market expectations. It is the lowest reading since February. On a monthly basis, consumer prices were unchanged after rising 0.3% in October and also in line with forecasts.
The US unemployment rate was unchanged at a 49-year low of 3.7% in November 2018, in line with market expectations. The number of unemployed decreased by 100,000 to 5.98 million and employment rose by 233,000 to 156.80 million.
The US trade deficit widened to USD 55.5 billion in October 2018 from an upwardly revised USD 54.6 billion in the previous month and compared with market expectations of a USD 54.9 billion gap. It is the highest deficit since October 2008 as lower soybean sales weighed down on exports and imports reached a new record high.
The Eurozone economy grew 0.2% on quarter in the three months to September 2018, unrevised from a second estimate and following a 0.4% expansion in the previous period. It was the weakest growth rate since the second quarter of 2014.
China’s consumer price inflation slowed to 4-month low of 2.2% (Y-o-Y) in November 2018 from 2.5 percent in the previous month and below market consensus of 2.5 percent.
China’s trade surplus widened to USD 44.74 billion in November 2018 from USD 38.43 billion in the same month a year earlier and easily beating market consensus of USD 34 billion. It was the largest trade surplus since December 2017, as exports rose at a faster 5.4% (Y-o-Y) while imports increased by 3% (Y-o-Y).
China’s industrial production rose 5.4% (Y-o-Y) in November 2018, easing from a 5.9% growth in October 2018 and missing market consensus of 5.9%. It was the smallest increase in industrial production since Jan-Feb 2016, as growth eased for both manufacturing and mining while utilities advanced faster.
Wall Street closed mixed on Friday, as markets wrapped a volatile week triggered by the US government shutdown, global growth headwinds, and persistent trade tensions. During the week, Dow Jones gained by 2.75%, Nasdaq surged by 3.86% and S&P 500 jumped by 1%. In 2018, Dow Jones declined 7.3%, Nasdaq plummeted by 6% and S&P 500 fell by 7.8%.
European shares closed higher on Friday, recovering from a sharp sell-off in the previous session, with tech and bank shares among the best performers, as gains in Wall Street lifted investor’s mood. During the week, FTSE gained by 0.19% and DAX declined by 0.70%. In 2018, FTSE plummeted by 12% and DAX declined by 18%.
The Nikkei 225 lost 12.1% in 2018, its first yearly decline since 2011 amid growing concerns about the global economic slowdown and the US-China trade dispute.
The Shanghai Composite lost 25% in 2018, the worst performance since 2008 amid trade tensions between China and the US and a slowdown in Chinese economy.
Airline industry is like a black hole into which mountains of cash disappear with no trace. Jet Airways seeks a cash injection, Air India requires fresh government handouts and SpiceJet’s balance sheet weakens due to surge in operating cost. Interglobe Aviation (IndiGo) reported its first ever quarterly loss but it is in the best position as it has the lowest costs & highest market share in the industry. During Q2Fy19 all listed airline companies had witnessed downgrading of their respective credit rating due to deterioration of profitability and raising concerns of debt principal repayments & renewal lease contracts.
Year 2017 was a successful year in terms for both shareholders & company’s management of airline companies. All the three listed airline companies had reported record set of bottom-line numbers with margins improvement. Rising domestic airline passenger growth, fall in crude oil prices & stability in INR had helped airline companies to post highest ever profits in 2017.
However, 2018 started on a negative sentiment for airline companies due to sharp uptick in crude oil prices (which led to rise in ATF-Aviation Turbine Fuel prices) and depreciation of INR had filliped increase in operating expenses. Along with the macro-economic factors, intense competition in this industry also played a significant role in steep fall of profitability. Airline companies couldn’t pass rise in operating expenses to consumers because of significant pricing pressure from peer groups.
It has been a turbulent journey for all airline companies in India till H1Fy19, we expect profitability to return in H2Fy19 (but lower than compared to Fy18) as prices of Brent Crude fell sharply, volatility of INR has come off and robust passenger growth will buoyant market participant sentiment for this industry.
Click here to read our complete analysis on Airline Industry in India.