CAU­TION AHEAD!

Money Times - - Caution Ahead! - By Laxmikant Bhole

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).

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