Market Strategy: Monthly Outlook for August 2018 - Kotak

Market Strategy: Monthly Outlook for August 2018 - Kotak- Domestic markets were up by around 6% in July on the back of favourable GST regulation (reduction in GST rate from 28% to 18% on consumption items), strong quarterly results on a low base of Q1FY18, healthy domestic flows at ~$1.5 bn per month, expectation of normal monsoon, correction in crude prices, base metals and industrial metals and improving corporate confidence and capex. Also, the uncertainty of the central government losing support from its alliance partners is now behind us, as the trust vote was won with a high margin with the support of its alliance partners.

- Focus of market would now be on RBI policy stance, future Fed rate hike, implications of global trade war, progress of monsoon, government spending in a pre-election year, strong domestic flows and valuations. India is currently facing weaker macros with higher inflation/interest rates, higher current account deficit (CAD) and weaker INR. Under the above circumstance we recommend investors to focus on companies that are capable of delivering strong earnings growth and with good corporate governance. Nifty and Midcap index are currently trading at 18.2x and 20.8 x one year forward earnings, which is still at a premium to historical five year average on one year forward earnings.

- Global growth remains strong with US GDP growing by 4.1% in the second quarter of 2018. The trade war seems to be intensifying with US threatening China with 10% import duty on another USD 200 bn worth of goods. India looks to be better placed in the global trade war as compared to neighbouring China. Since the beginning of trade war commodity prices have corrected materially and we expect them to remain soft in the near future. This could provide relief to many hard core manufacturing sectors. After the recent spurt, inflation looks to have peaked out. We expect CPI inflation to average ~4.6% in FY19 as compared to the print of 5% in June 18. On a YoY basis corporate earnings growth is expected to be better in Q1FY19 due to low base effect caused by destocking of goods in the month of June 17 (due to GST implementation from July 17).

- Portfolio strategy - Adding companies which are exhibiting improvement in earnings (IT and banks), companies which are exhibiting strong volume growth and which would benefit from normal monsoons (FMCG and Paints), defensives with lowering regulatory risk (Pharma), companies which would benefit from government spending in a pre-election year (infrastructure companies) and export driven sectors (IT, Pharma, Textiles and Jewellery)

- Key risks to our recommendation include unfavorable outcome of forth coming state elections, further increase in Brent crude, INR depreciation, widening trade deficit, increasing inflation and interest rates and waning liquidity from FIIs and domestic mutual funds.

Source : Equity Bulls

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