ATS Monthly Newsletter

Dear Reader,

November was an eventful month on both the global and domestic front. On the global front, the most awaited one was the U.S Presidential elections, where Mr.Donald Trump got elected as the 45th President of the United States of America. It was one of the most dramatic elections in the recent past. Global markets were seen oscillating either ways due to uncertainty of the outcome. So, now the big event is out of the way investors across the world are now waiting for the US Fed rate decision in December.

Back in India, as a positive step and at an unexpected time, the Government of India has made Rs.500 and Rs.1000 notes illegal from midnight of November 8, 2016.This surprise move came as a shock to our domestic markets, BSE Sensex lost more than 1000 points at one point on Nov 09,2016, but later recovered to close down by under 340 points. November also saw some consensus being reached on the GST front, where the council has reached a consensus and recommended four tax slabs.

We saw Rupee tumbling to record lows and stock markets also witnessed selling pressure as foreign investor’s dumped Indian assets amid rising fear about a U.S. interest-rate hike and a fall in local bond yields damped the appeal of the nation’s debt.

The volatility in the global and domestic markets may stay in the short term, however, the healthy correction that we saw in our markets and any correction going forward should be used as an entry opportunity for the long term.

Earnings season so far

As the second quarter earnings season draws to a close, the earnings were in sync with the market expectations on the topline front. Technology and healthcare showed dismal performance. From a volume growth perspective, auto sector showed robust volume growth but cement and consumption sector showed subdued growth in volumes. On the margins front, barring technology and healthcare the growth was decent.

Outlook

We are expecting temporary disruptions to economic activity due to the recent currency demonetization step from the government of India. Q3FY17, economic activity will be hit because of cash crisis. We have seen long queues infront of ATM’s and Banks and public are spending too much time to either withdraw cash or deposit cash. This wastage of time is also likely to have a negative impact on productivity and the impact on GDP will increase as long as the cash crisis and long queues at ATM’s and Banks lasts. This surprise currency demonetization is coming at a time when most of the foreign and domestic fund managers and institutions were expecting a rise in GDP on the back of 7th pay commission and GST. Majority of their bets were on the consumption sector latest downgrade of India’s GDP is coming at a time when most of the fund managers were

Parliament logjam over demonetization issue continues to have a negative impact. December series expiry started of with a bang allowing the benchmark indices to snap 4-week losing streak. However, going forward, we believe that any development on the demonetization issue including parliamentary proceedings, Fed rate hike and domestic macro- economic data including Q2 GDP & manufacturing PMI will drive the markets. GDP and PMI data from other major economies like the US, China and Japan will also weigh on markets.

INDIAN MACRO-ECONOMY

GDP

At a time when developed economies struggled with lacklustre activity, India, which is Asia's third-largest economy continued to maintain a resilient pace of expansion in recent years, eclipsing China. It has performed remarkably well across all major parameters, whether its in economics or geo-politics. The economy has benefited from lower commodity prices, and inflation has declined more than expected.

As per the data released by the Central Statistics Office, India’s economy grew 7.3 percent in July to September, marginally quicker than the previous quarter’s 7.1 percent. Even though it is 30bps higher than Q1FY17,the growth is 30 basis points lower than the growth recorded in the same quarter a year-ago. Private final consumption expenditure (PFCE), which is the largest component of India’s GDP, grew by 7.6 per cent during the quarter ended September 2016. It accounted for 54.9 per cent of the GDP. Government expenditure too grew by a smart 15.2 per cent.

But, investment demand continued to be week. Gross fixed capital expenditure (GFCF) declined by 5.6 per cent during July-September 2016, this being the second consecutive quarter of a decline. Valuables too registered a steep fall of 47 per cent.

Owing to a fall in international crude oil prices, India’s import bill shrunk by nine per cent during the September 2016 quarter. This reduced the trade deficit dramatically. Trade deficit amounted to only 0.9 per cent of GDP as compared to 5.2 per cent in the year-ago quarter.

Government reports fiscal surplus for first time in FY 17

The Central Government reported a fiscal surplus of Rs.24.5 billion for October 2016. This is the first month in the current year in which the government accounts have not been in deficit.Owing to a fall in international crude oil prices, India’s import bill shrunk by nine per cent during the September 2016 quarter. This reduced the trade deficit dramatically. Trade deficit amounted to only 0.9 per cent of GDP as compared to 5.2 per cent in the year-ago quarter.

Indian government's finances - Oct 2016-17(in billion rupees)

Net tax collections rose by 38.6 per cent in October 2016, service tax and custom duty being the main growth drivers. Non- tax receipts more-than-doubled to Rs.1.7 trillion in October 2016 from Rs.0.76 trillion in October 2015. The government disinvestment receipts increased by Rs.154 billion in October 2016 which augmented the total revenue collections.

Non-plan expenditure increased by 10.7 per cent to Rs.1 trillion in October 2016 compared to the previous year. Plan expenditure rose by just 10.1 per cent to Rs.185.9 billion in October 2016 from the previous year.

Indian government's finances cumulative in Apr-Oct (in billion rupees)