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MOSL: BULLS & BEARS (October 2019): India Valuations Handbook — Nifty makes a comeback-Corporate tax cut revives sentiments

BULLS & BEARS (October 2019): India Valuations Handbook — Nifty makes a comeback; Corporate tax cut revives sentiments

 

Strategy: Nifty makes a comeback; Corporate tax cut revives sentiments

• Corporate tax cuts break the fall as Nifty bounces back sharply: The Nifty made a spectacular comeback, up 4.1% in Sep’19. The markets rejoiced the corporate tax reduction announcement, which improved sentiments considerably. The Nifty recouped all its losses over the year to end the month 5% up YTD CY19. Subsequently, the markets gave up some of its gains given the volatility in Financials and global concerns around economic growth. FIIs turned net buyers to the tune of USD1b after being net sellers for the last two months. Momentum of DII inflows was maintained for the month at USD1.7b. On a 12-month basis, mid-cap returns (-6.6%) lagged that of the Nifty (5%). The Nifty Midcap100 P/E ratio corrected from 19.3x in Sep’18 to 16.3x currently. Mid-cap discount to the Nifty stood at 13% in Sep’19.
• Tax cuts – a medium-term positive catalyst for economy and markets: The corporate tax rate cut along with incentives for new manufacturing companies is a medium-term positive catalyst for the economy as well as markets. It has come at the right time just ahead of the festive season, helping to revive sentiments. While it may entail some upside risks for FY20 fiscal deficit, we believe prioritizing growth is the right policy mix in the current weak-growth environment. From a near-term perspective, it has revived sentiments and provided an earnings boost to sectors like Financials, Consumer and Auto. Growth revival appears to be the government’s most important agenda now. With the RBI also supporting (25bp repo rate cut on 4th Oct’19) with cumulative 135bp rate cuts since Feb’19, both fiscal and monetary firepower are now working in tandem. Other policy actions like up-fronting of INR700b PSU bank recapitalisation, incentives for Automobiles, Exports, Real Estate and general liquidity improvement in the last three months should collectively help growth revival gradually. However, more initiatives are still needed to revive demand, in our view.
• India outperforms most developed markets: In Sep’19, Japan (5%), Korea (5%), India (4%), Brazil (4%), the UK (3%), the US (2%), Taiwan (2%), MSCI EM (2%), Russia (2%) and China (1%) were the key global markets to close higher in local currency terms. Over the last 12 months, MSCI India is up 1% while MSCI EM is down 4%. Notably, over the last 10 years, MSCI India has outperformed MSCI EM by 80%. MSCI India’s P/E is at a premium of 94% to MSCI EM’s P/E, above its historical average premium of 51%.