Indian equity market ended the first month of the year on pessimistic note with front line indices closing in negative territory. Having rallied to all time new high in Dec 2013, both Sensex and Nifty was seen trading below all time high during Jan 2014.
In India, the Reserve Bank of India (RBI) surprised the market with another round of increase in interest rate in a bid to control stubborn inflation; the benchmark repo rate was increased to 8% from 7.75%. Earlier, the RBI had proposed setting a target of 4% consumer inflation by 2016
Across the pond in the US, the Fed decided to reduce its monthly bond-buying program by another US$10bn to US$65bn per month from US$75bn. US government reported that the world’s largest economy grew by 3.2% in 4Q2013, driven by strong consumer spending and exports. Separately, the World Bank and the IMF both lifted economic growth outlook for 2014.
Emerging market (EM) remained in limelight in last week of the month as currencies turned volatile on the worries that QE (Quantitative Easing) tapering by the Federal Reserve will lead to capital outflows. Investors pulled out significant amount of money from EM stock and bond funds with equities seeing the biggest outflow.
Chart : YTD 2014 (Jan) Performance Review
On the corporate earning front, Airtel’s net profit rose for the first time in last four year, while the ICICI Bank posted slowest quarterly growth in the last four years. IT companies such as Infosys and HCL posted earnings above consensus estimates. Meanwhile, Coal India announced special dividend of INR 29 per share.
In view of these developments and other market events, frontline market indices posted negative return in January 2014 with Nifty closing down 3.37%; small cap (-7.9%) and mid cap (-7.07%) indices underperformed the market.
Chart 2: 2014 Year to Date (YTD) Return Vs P/E ratio (x)
IT and Pharma stocks continued their strong performance from 2013 with these being only two sectors closing in positive territory; CNX IT and CNX Pharma indices closed up 5.23% and 0.44%, respectively. CNX Realty (-18.29%) and CNX Bank (-10.08%) were the worst performer for Jan’14.
Going forward, announcement of further QE tapering by the Federal Reserve could adversely affect investor’s sentiment in the EM countries; FII flows will be crucial in this view. Quarterly earnings for the quarter ending December 2014 will continue to dominate news flow for another month or so. Key economic data such as inflation, industrial output and foreign trade will also be important to watch.