Although the Indian economy has gradually opened up over the last couple of months, there has been a constant rise in daily COVID cases with the number now touching 30,000/day in India. This is in contrast to the global scenario which has seen a decrease in numbers over the last month. In addition there has been steady progress in terms of medicines & vaccines by different countries. We are in different stages of trials currently. On the back of positive global sentiments the NIFTY has been quite resilient over the last month, recovering to ~10800 levels from 7610 on 23rd March. With the economy opening up gradually we should see improved activity, but increasing COVID 19 numbers daily remain a concern.
FII have been net sellers in 2020 from January to April, being net sellers by a mammoth 65,816 cr in March. They turned net buyers in May & June to the tune of Rs.13,915 cr & Rs.5493 cr respectively. They have again turned net sellers in July to the extent of Rs.3596 cr till 9th July.
The average AUM of the industry declined from Rs 27.03 lakh cr during the January-March quarter to Rs 24.62 lakh cr in the June quarter as per AMFI. Franklin Templeton was the worst hit, accounting for over 15% of this Rs 2.4 lakh cr decline. In spite of a 24% climb back in the Nifty for the June quarter, fund’s struggled to grow AUM – on account of outflow pressure both in debt and equity. While debt outflows were triggered by debt events such as the Franklin Templeton issue, profit booking on rally led to equity inflows. Net inflows into equity schemes, including into equity-linked savings schemes (ELSS), crashed 95.75% from Rs.5,666 cr in May to Rs.240 cr in June, the lowest since March 2016. Inflows through systematic investment plans (SIP) fell below Rs.8,000 cr, touching Rs.7,927 cr, in a steady decline from Rs.8,123 cr in May.
From 1st July 2020, stamp duty will be imposed on the purchase of mutual funds, including SIPs and STPs, but not on the redemption of units. The duty will apply to all mutual funds—debt as well as equity. However, its impact will be felt the most on debt funds, which are typically held for short periods. The stamp duty will be imposed at a rate of 0.005% on the purchase or switch-in amount. Apart from this, stamp duty will also be imposed on the transfer of mutual fund units such as transfers between demat accounts at 0.015%. Due to its design, the stamp duty is likely to have the most impact on short holding periods of 90 days or less.
In global markets, gold rates are inching higher as concerns over surging corona virus cases and simmering US-China tensions held up the safe-haven appeal of gold. Spot gold was around to $1,810/oz. Gold prices in India have remained range bound around Rs.49,000/10 gm. Silver futures also edged lower on MCX to ~Rs.53,000/kg. So far this year gold prices are up 19% in international markets, benefiting from lower interest rates, corona virus crisis and US-China tensions. Gold is viewed as a hedge against inflation and currency debasement.
Meanwhile, US-China tensions continued to simmer. The Hong Kong Autonomy Act, which US President Donald Trump signed, allows him to impose sanctions and visa restrictions on Chinese officials and financial institutions involved in the imposition of China’s new national security law in Hong Kong.
Consumer price index (CPI) based inflation for June stood at 6.09%, slightly above the RBI’s target band of 4% (margin of +/- 2 %). In March, CPI stood at 5.91%. A nationwide lock down imposed at the end of March had disrupted data collection, preventing a release of the headline CPI inflation number for April and May. A break-up of the inflation data showed that higher prices of food articles and of transportation contributed to the elevated inflation. Food inflation for June came in at 7.87 %, compared to 9.20% in May, after the food and agriculture supply chain opened up in June. The inflation print implies that retail inflation in June 2020 was higher than the level in March 2020, when the lock down was first imposed, challenging the view that demand destruction would cool inflation despite the supply-side hiccups.
The pace of contraction of India’s factory output (IIP) slowed in May, falling 34.7% on year from 57.6% contraction in April, calculations based on data released by the government showed. The government did not provide a number for the change in output from May 2020 but said the number of units responding has improved as compared to the earlier months of lock down. The Ministry of Statistics & Programme Implementation also revised the contraction in April from 55.5% earlier.
The wholesale price index (WPI) inflation declined 1.81% in June due to decline in prices of fuel and power, even as food articles remained expensive. The rate of deflation in May was 3.21%. Inflation in food articles during June stood at 2.04%, as against 1.13% in May. In fuel and power basket, deflation stood at 13.60% in June, against 19.83% in the previous month.
The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) stood at 47.2 in June, up from 30.8 in May. India’s manufacturing sector moved towards stabilization in June, with both output and new orders contracting at much softer rates than seen in April and May. The India Services PMI in June rose to 33.7 from 12.6 in May, indicating a pick-up from the previous month, although any reading below 50 on this survey-based index shows contraction. It stood at a record low of 5.4 in April. The Composite PMI Output Index, which measures combined services and manufacturing output, rose to 37.8 in June, up from 14.8 in May.
As per SIAM passenger vehicles once again moved to negative territory with 49.6% decline in domestic sales at 105,617 units in June 2020. Total two-wheelers saw a 38% decline at 1,013,431 units in June 2020. Three-wheeler sales for last month stood at 10,300 units, compared to 51,885 units in June 2019 marking a decline of 80%. Total commercial vehicle sales declined 84.8% at 31,636 units in Q1 FY21 as against 208,310 units in the same period last year.
IMD said Monsoon has been active in most parts of India and surplus rainfall has been recorded in the country. Monsoon covered the entire country before the scheduled date and so far 12% excess rainfall has been recorded.
Goods and service tax (GST) collections for June 2020 clocked Rs.90,917 cr at gross levels, 9% lower than the same month last year. The collections are higher than those recorded in April and May – the peak months of lock down due to the COVID 19 pandemic – where GST collection for April was Rs 32,294 cr and Rs 62,009 cr for May. Since government has allowed a relaxed time schedule for filing of GST returns, returns of the month of April, March as well as some returns of February got filed during June, 2020 and some returns of May, 2020, which would have otherwise got filed in June, will get filed during first few days of July.
Rating agency ICRA sharply revised to -9.5%, its forecast for India’s growth in the ongoing fiscal on account of the localized announced by various state governments and rising cases of COVID-19. The Indian economy had started to recover from the troughs experienced in April 2020, when the lock down was at its severest, and many sectors seemed to be adjusting to a new normal. However, the unabated rise in COVID-19 infections in the unlock phase and re-imposition of localized lock downs in several states, appear to have interrupted this recovery.
The number of people infected by the corona virus in India crossed 10 lakhs, nearly five-and-a half months after the country reported its first case. The US and Brazil are the only countries that have registered cases in excess of this figure, although the pace of spread there has been much faster. The pandemic has so far claimed more than 25,000 lives in India. Relative to population, India’s numbers are still low, but the steep rise in absolute numbers risks overwhelming the healthcare system, apart from triggering more restrictions that are already hampering economic recovery.
The front line indexes have inched up over the last month largely due to positive global cues as numbers have largely been contained across the globe. The broader markets, for a change have been participating in the recovery over the last couple of months. Some quality beaten down large cap and mid cap stocks & PSUs are back in focus. We recommend focus on business with non-discretionary products & services, food, agriculture etc currently. Businesses with discretionary products & services may still take a few months to recover.
We have been impacted by low GST & tax collections, de growth in GDP & IIP numbers over the last couple of months. Higher than expected retail inflation and negative WPI numbers aggravate concerns of a deflation. We are in the midst of a global pandemic & lock down, though I believe that we have already overcome the worst of times & expect things to only improve from here across the globe. Fund flows both on the FII and DII front remain strong providing support to the markets. We strongly advise investors to continue their SIPs in equity funds & if possible increase the amount. This is a very good buy on dips market & should be bought in a staggered manner on every 5-7% correction in markets.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’