COVID – On the recovery path

We are still in the midst of the COVID pandemic as the economy gradually opens up post COVID. The NIFTY has been quite volatile over the last few months, touching a high of ~12300 in mid January 2020 to 7610 on 23rd March.  Markets have since recovered and are currently hovering around the 10,000 mark. 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 finally turned net buyers in May to the tune of Rs.13,915  cr. They have continued to be net buyers in June till date.

The mutual fund industry saw its assets under management (AUM) jump to Rs 24.5 lakh cr in the month of May, from Rs.23.9 lakh cr AUM recorded last month. The net monthly flows in debt mutual funds rose from Rs.43,431 cr in April to Rs.94,224 cr in May 2020. Liquid funds received Rs. 61,871 in net inflows in the month of May, down from Rs 68,848 cr seen in April. In May 2020, investors’ net inflows in open-ended equity-oriented schemes were Rs.5,257 cr, the lowest since the start of 2020.

In global markets, gold rates hovered around $1725/oz amid concerns over the impact of rising corona virus cases on economies. Among other precious metals, silver is around $17.45/kg, and platinum $813.26/kg. Spiking corona virus cases has dented investor’s sentiment towards riskier assets. In India gold futures are around Rs.47,300/10 gm. Caution prevails amid growing worries over resurgence of second wave of infections along with rise in geopolitical tensions. On domestic front, commodities may seek support from weakness in INR. Gold tends to benefit from widespread stimulus measures from central banks because it is widely viewed as a hedge against inflation and currency debasement.

The CSO has been unable to compile the CPI for April and May, leaving policymakers in a quandary. However, the RBI’s Monetary Policy Committee has gone ahead and cut the repo rate to record lows to support growth, seemingly confident that retail inflation will ease over the coming months. However, the country’s Consumer Food Price Index (CFPI) for the month of May rose 9.28% yoy. In comparison to April 2020, the food inflation rose 0.13% to 151.9 in May. As per the most recent forecast of RBI, CPI inflation was seen averaging 4.8% in Apr-Jun and 4.4% in Jul-Sep. It is then seen slumping to 2.7% in Oct-Dec and 2.4% in Jan-Mar 2021.

The government also did not release the factory output data measured in terms of Index of Industrial Production (IIP), for the month of April. In the case of IIP data for April, the government said that a majority of establishments have reported NIL production.

The wholesale price index (WPI) inflation has contracted 3.21% in May, slipping into negative territory for the first time in over four years and showing signs of deflation as most components indicated a fall in prices. The biggest contributor to WPI deflation was crude, petroleum and natural gas, which showed a fall of 46.21%, fallout of the crash in global prices. By extension, fuel and power prices, too, fell from a year ago. Food, which has a high weightage in the index, showed an inflation print of 1.13%. As the lock down had also made data collection a challenge for ministries, the WPI release was suspended in April. With CPI data hard to come by, WPI data can give some early warnings for policy making.

The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) stood at 30.8 in May, up from 27.4 in April, pointing to another substantial decline in the health of the country’s manufacturing sector, albeit one that was slightly softer than recorded in April. The India Services PMI stood at 12.6 in May against 5.4 in April. A reading below 50 indicates contraction in business activity. Put together, the Composite PMI was at 14.8 from 7.2 in April. With economic output set to fall enormously in the first half of 2020, it is clear that the recovery to pre-COVID-19 levels of GDP is going to be very slow.

Retail sales of passenger vehicles plunged 87% in May from a year earlier to 30,749 units as dealerships gradually reopened but the lock down aimed at arresting the spread of the corona virus pandemic and fears of contracting the infection kept most customers away. Retail sales of trucks and buses recorded a bigger drop, falling nearly 97% from a year earlier to just 2,711 vehicles. Showroom sales of motorcycles and scooters also dropped 89% to 159,039 units during the month. The Society of Indian Automobile Manufacturers (Siam) has forecast a 35% drop in vehicle wholesales this fiscal, following an 18% decline in the previous year.  The government’s push for infrastructure spending and the recent positive measures announced for the agriculture sector will help support rural demand. It will further strengthen with the normal spread of monsoon which will help dealers in tier-II and tier-III cities arrest the decline in sales compared to their urban counterparts.

As business activities came to a virtual standstill mode, due to the pandemic lock down during the month of April, the GST collection has shown a clear reflection of the same. According to sources, the GST collections for the month of April stood at Rs 43,000 cr (approx). The GST filing period, due to pandemic hardships had been extended by 15 days. GST collections for business activities in April 2019, were at Rs 1,00,289 cr. April 2020 figures, when compared to those for March 2020, have also seen a decline. GST collections in March 2020, stood at Rs 61,543 cr.

The Indian economy is expected to contract by 4% during the current financial year, the ADB said in a supplement to its Asian Development Outlook (ADO). China, however, is expected to record a positive growth of 1.8% in 2020, sharply down from 6.1% in 2019, said the ADO. Fitch Ratings has also expected India’s economic activity to contract by 5% in the current fiscal. Fitch Ratings attributed strict lock down measures imposed since March for the fall in the economic activity. Fitch Ratings, given the low-base effect, has forecasted India’s GDP to grow by 9.5% in the next fiscal.

We are in the midst of the Q4 FY20 earnings calendar & results have mostly been lower y-o-y. But we must keep in mind that in the March quarter we had 75-80 normal days prior to lock down. In comparison we expect Q1 FY21 to be worse as we had one month of complete lock down in April and very weak economic activity in May and ongoing June. Going ahead we expect Q2 to be significantly better & near normal activities in H2 FY21. We must only keep in mind that COVID numbers are still increasing daily, something which has to reverse as soon as possible. A declining trend will provide much needed comfort.

Of late India-China cross border tensions have escalated, though I strongly believe that, India & China both being nuclear super powers & having the largest armies globally, will take action with restraint. Given the current situation, things should not escalate further & should be resolved through talks soon.

The front line indexes have been range bound over the last fortnight. 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, absent IIP numbers & GDP de growth over the last couple of months. Absent 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.

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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’

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