Since Trump’s victory, Emerging Markets witnessed a correction…
Emerging Markets (EM) witnessed a sharp correction post Trump’s victory that caused dollar to strengthen & yields to rise
After a long time, while Indian markets underperformed EM equities, currency has been relatively less volatile w.r.t. to other EM’s
Also, Flows have witnessed a reversal.
Growth concerns emanating due to twin impact of (demonetisation and Trump’s win in U.S. presidential elections) have led to higher degree of outflow in India w.r.t. other EM’s.
India: Sectoral performance (%)
Consumer oriented companies and NBFC within financials have underperformed substantially.
While we continue to believe in the consumption theme, the non-availability of currency leading to liquidity pressures is expected to impact the consumption in the near term. Mid & Small caps have witnessed underperformance w.r.t. Large caps indices
Sentiment indicator: Market breadth for NSE 500 Index
As seen in the chart above, markets have typically bottomed when percentage of stocks above 200 DMA falls below 20
Valuations have witnessed sharp correction
Given the uncertainty, at a composite level, the valuation in frontline index has corrected to around average levels (Composite valuation adjusts market trailing P/E to reflect interest rate level)
Conclusion
• Near-term economic uncertainty has been high since the Trump victory & demonetisation announcement in early Nov. Demonetisation (currency transfusion) is an unprecedented event, having no benchmark to follow, & the complex linkages between cash usage and the real economy in a country (with a high cash-GDP ratio of 12%) makes forecasts prone to a high margin of error
Domestic Investor support has been phenomenal during this phase of market reversal (Rs.190 billion).
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