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stockaxis Market Intelligence (Commentary for July 2017; Outlook for August 2017)

August 07, 2017

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We are pleased to present to you our monthly market commentary and outlook for the forthcoming month. The ‘stockaxis’ Market Intelligence’ is a quick update on the markets for the month gone by and our view for the next month. Use our sharp and crisp synopsis to continue building your wealth!

Global Trends

  • The International Monetary Fund (IMF) downgraded the 2017 US growth forecast from 2.3% to 2.1%; however, it maintained its overall global economic growth forecast of 3.5% and 3.6% in 2017 and 2018 respectively.
  • The IMF also cut the UK growth forecast from 2% to 1.7% for 2017 and retained the growth forecast at 1.5% for 2018.
  • The IMF revised its growth forecast for Japan from 1.2% to 1.3% for this year due to growth in private consumption, investments and exports. It retained its growth forecast for 2018 at 0.6%.
  • The IMF revised its growth forecast for China upwards by 0.1% to 6.7% for 2017. It also revised China’s 2018 growth forecast by 0.2% to 6.4%.
  • Businesses in the Euro zone started the second half of this year with robust growth. The European Central Bank (ECB) may initiate a debate to tighten its monetary policy.
  • Japan’s manufacturing activity recorded a slowdown with the Markit/Nikkei Manufacturing Purchasing Managers Index (PMI) falling to an 8-month low of 52.2 (seasonally adjusted) from 52.4 in June.

Domestic Trends

  • The International Monetary Fund (IMF) left unchanged its outlook of India’s growth in 2017-18 at 7.2% and for 2018-19 at 7.7%.
  • India Manufacturing Purchasing Managers' Index (PMI) slipped to 47.9 in July 2017 from 50.9 in June 2017 indicating the weakest growth in factory output due to new orders increasing at a slower pace.
  • India’s Consumer Price Index (CPI) rose to an all-time high of 132.10 in June 2017 from 131.40 in May 2017.
  • The Indian Rupee depreciated vis-à-vis the dollar over the month ending July at 66.6074 (64.63 at end-June).

Market Trends

  • First quarter of FY18 results of corporates showed a mixed picture with certain sectors such as metals, Banking, Financial Services and Insurance (BFSI) and capital goods being well-performing sectors.
  • India received net investment of Rs. 10,321.42 crores of FII investments in July due to attractive valuations and favourable liquidity conditions.
  • On the last day of trading in July 17, the Nifty traded above the psychological market of 10k mark at 10,077.10, up 556.2 points over the previous month-end.
  • The Nifty 50 P/E ratio was at 25.69 at end-July 2017.

Highlights

  • The good: Continuation of global recovery, good monsoons, attractive valuations, decline in inflation, interest rates cut by RBI
  • The bad: Rising NPAs, Goods and Services Tax (GST) caused disruptions, further fall in manufacturing

stockaxis’ Outlook for August 2017

The government has extended the period of levy of anti-dumping duties on steel imports by 4 years more (till August 2021). Levy of these duties will result in making steel imports expensive thereby benefitting Indian steel manufacturers who will see a pickup in demand and margins.

Additionally, China, which produced nearly half the world’s steel production, closed down some of its steel plants due to a glut in steel supply globally. However, Chinese demand for steel has been strong during the year due to a step-up in infrastructure spending by the Chinese government.

The result of reduction in Chinese steel output has been a significant price rise in the US and Europe to the extent of about 75% over the past year and a half. Despite the price rise, there is an expectation of higher steel demand in both these regions.

We believe these developments will have a tremendous positive impact on the Indian steel sector including related sectors such as graphite electrodes, limestone, etc. Our recommendations in this sector include fundamentally strong steel and steel-related stocks available at reasonable prices with a high margin of safety and offering an attractive potential upside.

The government’s recent hike in import duties on sugar from 40% to 50% has made imported sugar more expensive; at the same time, domestic demand for sugar is on an uptrend with the upcoming festive season. Both these factors have significantly benefitted domestic sugar companies, making this sector an attractive investment opportunity.

The government has also levied anti-dumping duties on a number of chemicals imported primarily from China. Additionally, production of chemicals in China has been significantly reduced due to stringent anti-pollution measures stipulated by the government. Domestic chemical companies are direct beneficiaries to these developments which will positively impact their profitability.

We, at stockaxis, are constantly on the lookout for great businesses run by honest promoters that are available at the right price with sufficient margin of safety. Our stringent stock selection guidelines and clearly stipulated entry and exit points make equity investing a ‘rich’ experience for our investors!

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