Radiant Consulting - Economic & Financial Markets Update - January 2018
World on a growth path in 2017
Leading economies of the world have shown signs of green shoots again in 2017 when they registered modest GDP growth in annualized terms. USA registered an average annualized GDP growth rate in excess of 2% in 2017, followed by UK with a shade less than 2% growth. Surprisingly, Japan clocked approximately 1.75% average annualized GDP growth last year which is supposedly mostly under the grip of lower GDP growth in recent times. The emerging giants in the global economy, China and India continued their robust GDP growth in excess of 6% in 2017 with China piping India in a big way and registering close to 7% GDP growth in 2017. India, riled by two major events in the form of Demonetization and Goods & Services Tax (GST), clocked a modest average growth rate slightly in excess of 6%.
Benign Inflation fuelling growth
The prime reason for the green shoots seen in the GDP growth rate in 2017 for major economies of the world is benign inflation. Average annual Inflation in 2017 for major economies, e.g., US, UK, China and Japan were all sub 3% levels. Average annual Inflation for USA in 2017 was a tad over 2% while the same for China was much lower at 1.55%. Inflation levels in UK showed some sort of firming up during the second half of the year and ultimately stabilizing at 3% levels. Japan, which has traditionally seen a deflationary economy of late also registered an average close to 0.5% annual Inflation which seems to be providing the required fillip to the economy. India's average annual Inflation in 2017 though was close to 3.5%, ultimately threatened to surge up and close to over 5% levels to close the year fuelling possible rate hikes in the near future.
Stable Industrial Production Growth
Stable Industrial Production Growth was witnessed in 2017 for major economies of the world. Average Industrial Production growth for India, US, UK, Japan and China was in excess of 3.5% in 2017. However, while US Industrial Production growth increased through the year to 3.5% levels, China's average Industrial Production growth was over 6.5% during the year. Though volatility of Industrial Production growth for Japan and UK was higher than that of China and US, average growth being around 4.5% and 2.25% respectively, India's volatile Industrial Production growth in 2017 was to be reckoned with. While India's Industrial Production growth had declined to -0.3% during the middle of the year, it clocked the highest growth of 8.4% in the latest figures for Nov-17 with average growth being registered as a shade above 3% during the year.
PMI signals economic expansion
Manufacturing Purchasing Managers Index (PMI) for major economies showed an average of much above 50 during 2017, thereby signaling an expansionary economic environment rather than an economic contraction. Average Manufacturing PMI for India, USA, UK, Japan and China registered around 53, whereas the average manufacturing PMI in 2017 for the three nations of USA, UK and Japan was over 54. The similar average for India and China was slightly above 51, though. Both the countries Manufacturing PMI had dipped below the threshold level of 50 once during the middle of the year but bounced back smartly with India's end of the year Manufacturing PMI shows a rather healthy 54.70. Surprisingly, even after Brexit, UK average Manufacturing PMI registered a healthy 56 during the year 2017.
Not a Healthy Balance of Trade
India's balance of trade in 2017 slipped by 41% and dropped to a deficit of nearly USD 15 Bn, thus failing to take advantage of a depreciating USD during the year as US still remains the largest exporting country for India.
Controlled Current Account Deficit
India's Current Account Deficit in 2017 is expected to be under control and hover around 1% levels, a far cry from the nearly 5% levels 5 years ago, though it seems to have slipped a bit from the 0.6% levels it registered during the previous year.
Robust Money Supply Growth
India's Money Supply M3 growth in 2017 dropped to single digits with total Money Supply clocking INR 133 Tn. by the end of the year, due to policy measures of Demonetization and GST.
Healthy Forex Reserves
India's Forex Reserves registered a healthy growth of in excess of 12% in 2017 due to USD depreciation during the year to reach nearly USD 410 Bn by the end of the year. However, in comparison to China, it is approximately one-tenth in size.
Comfortable Govt. Debt to GDP
India Govt. Debt to GDP in 2017 is not expected to change majorly as compared to 2016 as Govt. Gross Budgeted Borrowings during the year remained under control.
External Debt Under Control
India's External Debt during the year 2017 grew in excess of 7% and register a figure of USD 496 Bn by the end of Q3 2017 which is an all time high but still seem to be under control as compared to the higher growth rate witnessed in earlier years.
Volatile Foreign Direct Investment
Volatile Foreign Direct Investment (FDI) is a cause of worry for India as the month-on-month FDI fell in excess of 26% by Q4 2017 to USD 1.57 Bn in spite of an active 'Make In India' campaign in 2017.
Slippage in Fiscal Deficit
Fiscal Deficit for 2017-18 is expected to overshoot the budgeted figure of 3.2% as the expenditures have shot up during the year as compared to the overall revenues falling short predominantly due to policy decisions like GST.
Surging Global Equity Markets
The equity markets globally continued their resurgence during 2017 with Hong Kong's Hang Seng leading the pack among leading world indices with a staggering in excess of 30% returns during the year followed by India's Nifty 50 with close to 25% returns during the year. The US' benchmark index DJIA also registered a smart in excess of 22% uptick during the year with Japan's Nikkei 225 following suit with over 15% appreciation. In comparison, UK's FTSE 100 was rather subdued with in excess of 6% appreciation on the backdrop of Brexit.
Indian Equity Follow Global Trend
India's flagship benchmark equity index Nifty 50 started the year 2017 around 8180 levels and breached the 10000 levels around the middle of the year and ending the year in excess of 10500 levels
with the euphoria of appreciation continuing with the new year 2018. Though the two major equity indices in India rallied at par with each other during the year 2017, the benchmark S&P BSE Mid Cap index and the broad-based Nifty 500 index posted stellar returns during the year with the mid cap index clocking excess of 45% appreciation with the Nifty 500 with an uptick of in excess of 35%.
However, with the Price / Earnings (P/E) ratio of both the leading India equity indices hovering in excess of 25, the market seem to have entered the overbought zone since the average historical 10 year P/E ratio of these indices are around 18. Hence, caution should be taken while investing in the Indian equity markets at these levels and a slightly risk averse investor should stick to blue-chip stocks only at these levels.
USD taking worldwide beating
The Trump administration didn't augur well for the USD in 2017 as the greenback got royally badgered globally. The negatives vibes attracted by the Trump administration since the last one year of its coming to power didn't work out too well for the US currency as the President himself has on record said that the USD is much stronger than what it should be. Coupled with the beleaguered expectation of the Fed not raising the US interest rates fast enough, on the back-drop of a reasonable US GDP growth in 2017, led to the fall in USD versus all major currencies. The USD lost nearly 13%, 9.5% and 4.25% against EUR, GBP and JPY to the levels of 1.20, 1.35 and 112.65 respectively in the year 2017 and the trend continues unabated in 2018 as well with the slump continuing to 1.2263, 1.3792 and 110.51 respectively.
Indian Exporters Take a Beating
The INR appreciating versus the USD doesn't augur well for Indian exporters since US still remains the largest exporting nation for India comprising of 16% of its exports. On the other hand, the fall in USD didn't benefit the importers too much since US is now only the distant second largest importing nation with less than 6% imports, China being the largest importing nation for India with 18% of the share of imports. CNYINR, on the other hand, remained largely stable during the year 2017. INR appreciated versus USD and JPY by 6.75% and 2.40% respectively in 2017 while it depreciated against EUR and GBP by 7.05% and 2.75% respectively.
Chindia Sovereign Yields Up
Sovereign yield of both China and India firmed up during the year 2017 whereas sovereign yield of other developed economies like US, UK and Japan eased up a bit during the same period of time. Whereas, both 10 year sovereign yields of China and India firmed up by around 100 basis points to the levels of 3.92% and 7.34% respectively, 10 year sovereign yields of Japan, US and UK fell by 2 to 14 basis points to the levels of 0.05%, 2.41% and 1.19% respectively. Interestingly, the Federal Reserve of the US had increased the Fed Rate thrice in the previous year, each by 25 basis points in order to tighten the monetary policy which surprisingly didn't have much of an impact on the sovereign rates.
India Bear Steepener formation
India bond market investors have been on the receiving end of late with some confusing signals from the Government of India. First they hinted at an increase in the Government budgeted borrowings program for the coming fiscal which sent the bond yields to dizzying heights and when they realized their folly tried to pacify the markets by backtracking their intentions but by that time damage has already been done and the investors had to undergo a rude shock. Yield for the benchmark 10 year segment increased by 70 basis points in just 3 months of the last year and still on the rise. However, for the discerning investor it does throws open a window to invest in the long term in this bear steepener formation.
Surge of Crude Oil
Crude Oil futures prices, both Brent and WTI, surged ahead during the year 2017 to register growth of 16.5% and 12.5% respectively, with further appreciation in the new year 2018. Volatility for Crude Oil futures prices were also relatively high with standard deviation of daily returns exceeding 1.5% for both Brent and WTI. Bullion, on the other hand was slightly more subdued with Gold futures prices appreciating in excess of 12% during 2017 and further consolidating the gains. Silver on the other hand rose by only 3.5% during 2017 but further appreciating. Stay away from the latest craze of Crypto-currency unless and until you risk of losing your shirt.
Suggested Asset Allocation
Conservative:
Equity - 20%
Interest Rate - 75%
Others - 5%
Moderate:
Equity - 40%
Interest Rate - 50%
Others - 10%
Aggressive:
Equity - 70%
Interest Rate - 20%
Others - 10%
|
Expected Return (%) |
|||
|
Risk Type |
1Y |
3Y |
5Y |
|
Conservative |
7.42 |
8.11 |
8.85 |
|
Moderate |
7.94 |
8.92 |
10.19 |
|
Aggressive |
8.93 |
10.33 |
12.38 |
Analyst - Sanjoy Choudhury - Reachable at +91 9821054331 or sanjoy.choudhury@radiantconsulting.co.in Report Date: 15-Jan-2018. Disclaimer: Views are personal; the contents, information and data used in the report are taken from authentic sources. However, the analyst doesn't take responsibility for any errors which might have inadvertently crept in. Users are advised to follow their own discretion in using the report for any investment decisions.
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