The Marketscope
Comment of the Day

December 09 2016

Commentary by Eoin Treacy

The Marketscope

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:

Global headwinds and domestic uncertainties prevail in Nov’16
November’16 was a perfect storm for India, as rising US bond yields, a strengthening USD, and EM risk aversion, coupled with an unprecedented demonetization drive in India, led to a significant decline in Indian assets. MSCI India was down 5.3% during the month – underperforming MSCI EM/Asia by ~300bps. While equity markets underperformed MSCI EM/Asia for a fourth month, INR performed better than many EM currencies. INR depreciated by 2.4% in the month while other EM currencies such as TRY, MXN, BRL, and IDR depreciated by 4%-10%.

Sectors relatively immune to demonetization were clear outperformers 
The sectoral performance during the month was clearly driven by the market’s assessment of the likely impact of the demonetization drive. Sectors with a global orientation or that saw significant cash inflows after demonetization were outperformers. Accordingly, BSE Metals, BSE Power, BSE IT, BSE Oil & Gas and BSE Healthcare were the outperforming sectors. On the other hand, given the disruptive ramifications of demonetization for (i) consumption sentiment, (ii) the operations of businesses with a meaningful reliance on cash transactions, (iii) the wealth effect and (iv) expectations of further follow-up action on unaccounted wealth, BSE Realty, BSE Consumer Durables and BSE Auto were the biggest underperforming sectors, with the respective indices declining by 18%/13%/9% during the month. 

Tale of two investors: 8-year-high selling by FIIs matched by record DII buying 
The flows of domestic and foreign investors touched multi-year records, albeit in different directions. Driven by hardening US bond yields and generic risk aversion towards EMs, foreign institutional investors [FIIs] were net sellers of Indian equities at US$2.6bn – the highest monthly outflows since the global financial crisis eight years ago. However, sharp FII outflows were matched by equally robust inflows from domestic institutional investors [DIIs], which net bought US$2.7bn – the highest since at least 2007 and most likely the highest ever monthly inflows. The sharp surge in DII inflows could be attributable to (i) strong inflows into mutual funds in the preceding months, (ii) a likely continuation of strong inflows into MFs in Nov’16, (iii) lower valuations for stocks hit by demonetization, (iv) a sharp surge in buying by insurance companies (at US$687mn) after eight months of net outflows/anemic inflows.

Eoin Treacy's view

Here is a link to the full report.

The Dollar surged to test its high against the Rupee following Trump’s election success and the demonetisation announced soon afterwards. It has unwound much of the It unwound much of that advance over the last 10 sessions as optimism about the success of Modi’s strategy to legitimise large parts of the economy improved. The concurrent release of 4G mobile services is an additional tailwind since it opens up whole new avenues for growth that did not exist a month ago, not least for mobile banking and payments.  

The Bombay Banks Index firmed this week from the region of the trend mean and a clear downward dynamic would be required to question potential for additional higher to lateral ranging. 

The Nifty Index firmed this week from the 8000 region and a sustained move below that level would be required to question potential for additional steadying. 

The UK listed JPMorgan Indian Investment Trust is currently trading at a discount to NAV of 12.16% and also firmed this week from the region of the its trend mean. 

The US listed Morgan Stanley India Investment trust is trading at a 13% discount and has a relatively similar pattern. 

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