The Q1FY19 GDP numbers released on Friday, 31 August 2018, cheered the entire nation. Beating all forecasts, the GDP figure came in 8.2% v/s 7.2% QoQ and 5.7% YoY. This is the highest growth seen over the last two years. These numbers indicate that the growth is broad-based and the pain caused by demonetisation and GST is behind us. The sectors that registered over 7% growth are manufacturing; electricity, gas, water supply and other utility services; construction; and public administration, defence and other services. The growth in agriculture, forestry and fishing; mining & quarrying; trade, hotels, transport, communication and services related to broadcasting; and financial, real estate and professional services is estimated to be 5.3%, 0.1%, 6.7% and 6.5% respectively. GDP at current prices in Q1FY19 is estimated at Rs.44.33 lakh crore as against Rs.38.97 lakh crore in Q1FY18 i.e. 13.8% growth rate. The $2.597 trillion Indian economy has surpassed France ($2.582 trillion) to emerge as the world’s sixth largest economy and is expected to surpass the United Kingdom by next year and be the world’s fifth largest economy. The Indian stock markets are at historic highs and are expected to cheer the GDP numbers in coming week as well with a further rise expected.
While all this data is positive, there are certain things that warrant a caution. The Rupee is at a new low against the US dollar at Rs.72, which has hit imports particularly crude oil. The Rupee has fallen nearly 10% against the dollar this year and is also the worst performing currency in Asia although it has done better than other global currencies. Although in control, the month-on-month inflation figure has been hovering above 4% for the last eight months. Crude oil prices
have remained firm above $75/barrel, which makes it harder for the government to manage the current account deficit (CAD). Growth of eight core industries viz. Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity have slowed down in July from 7.6% to 6.6% month-on-month. The coal sector in particular saw a huge decline to 9.7% from 11.5% a month ago. These eight sectors constitute 40.27% of the total industrial production. On the global front, there is a rising far of a trade war after President Trump’s new threat of pulling out the USA from the WTO (World Trade Organisation) if the latter doesn’t treat the former better. However, this is not very likely as USA would lose the ‘most favored nation’ rights in 163 countries. The US Federal’s approach to interest rate hike has also put the markets under pressure.
In short, although we are performing better than many other global economies, we must be cautious. The Nifty P/E multiple is at a historic high level of 28.4 and P/BV ratio at around 3.75. The government may face some challenges in managing the CAD and fiscal deficit on account of higher spends due to the upcoming state and general elections. Other commodity prices are falling the world over. Our market rally has been driven by select large-cap stocks, which is not sustainable. Crude oil prices are on the rise and this along with the depreciating rupee is hurting the economy significantly.
The Nifty has appreciated 14.38% in the last 5 months from 10211.8 in April to 11680.5 in August 2018 while the Sensex has gained 16.2% from 33255 to 38645 over the same period. The Nifty may rise further to touch the 12000 level buoyed by strong GDP numbers. However, caution is warranted ahead. Since the markets have gained enormously in the last six months and performed much better than other global markets, such a broad-based rally is not sustainable and profit-booking is warranted. Selecting quality stocks in mid-caps and large-caps is the only way to go forward.
Note: The writer is a SEBI registered stock research analyst (Reg. No. INH000006068).