Markets bounce back strongly on strong results season.

Summary

• April saw a strong rebound in Indian equity markets. In US dollar terms the Nifty gained nearly 4% on the month with mid and small caps reversing recent underperformance to post gains of over 6%. Despite Indian Rupee weakness, Indian equities have been outperforming both emerging and developed markets since mid-March.
• High earnings expectations have driven equity market gains. We are in the midst of the final quarter of 2018 (fiscal year end) earnings and of particular note was a strong beat from India’s largest IT company TCS.Following the numbers TCS became India’s first stock to have a market cap of over US$100bn.
• Consumer price inflation (CPI) fell in March to 4.28% but India’s bond markets remain nervous about the impact of rising oil prices on India’s fiscal position. The RBI remains hawkish on the inflation trajectory but also noting the strong pickup in capital expenditure and various lead indicators showing a strengthening economy.

Fund activity

The Fund outperformed its benchmark in April following a frustrating March. Our overweight position to the consumer discretionary sector helped as a number of stocks we hold posted strong returns. In addition some of our infrastructure and materials related stocks also gained strongly in April. Motherson Sumi, a stock we have held for some time rebounded following a weak period of price returns. This is a company focused on auto ancillaries, in particular it has a globally strong position in the wire harness business (a beneficiary of increasing electronic content in autos) as well as other areas. The company has expanded globally both organically and by acquisition in other auto related areas to diversify geographically and gain exposure to various auto manufacturers. The stock price was cheered by a new acquisition that looks very attractive on price and fit. The company has a target to reach a turnover of US$18bn by 2020 and it looks well on track to achieve that milestone.

Our one stock purchase in April was also in the auto related space as we bought Sandhar Technologies, a company that has just been listed. Sandhar is a multiproduct auto component maker – the largest supplier of auto lock assemblies and second largest two wheeler rear view mirror manufacturer in India. As the largest manufacturer of construction and agricultural equipment cabins, it has a growing non-auto business as well. The stock listed at a very cheap valuation in comparison to other sector stocks for over 20% revenue growth for the next few years and higher profit growth due to significant operating leverage with no new capital expenditure needed for three to four years.

Outlook

We retain our view that the Reserve Bank of India (RBI) is being too hawkish over concerns of an inflation shock, and that macro worries are somewhat overplayed in the market currently. While we are not being complacent about the risks of further gains in the oil price, we find few signs of exuberance that would indicate an economy growing above its potential. India’s macro environment is in a far healthier state today than it was a few years back when the country was included in the infamous group of countries referred to as “the fragile 5”.

Sentiment among domestic investors in particular has deteriorated somewhat, despite more signs of a growth revival coming through and earnings pretty much on track even against high expectations. We are in the middle of the fourth quarter 2018 earnings season and what is particularly noteworthy so far is the volume recovery we are seeing among domestic companies. This to us is a good indicator of an economic recovery, even if it is yet to be fully reflected in profits. One source of unease for existing earnings expectations remains the corporate and public sector banks, where hopes of a recovery hinge on the resolution of long-running non-performing loans (NPL) issues.

What is certainly beginning to focus minds is politics, which is to be expected as we approach some important state elections in the next few months and then the final run-up to the general election in the first half of next year. It wasn’t that long ago that PM Modi and his party seemed like a shoe-in for the election. However over the past few months things have not been going all his way and the opposition Congress party seems somewhat revitalised. Nerves will no doubt increase as we move nearer the election, but a year is certainly a long time in politics.