Economic slowdown calls for a stimulus

Stock markets have been largely range bound over the last month, though the broader markets have continued with its subdued performance largely due to consistent selling by FPIs. Ever since the budget was presented on 5th July, major indexes have corrected ~10%, while the sell-off has been sharper in the broader markets.

FII have been continuously selling the past few months, Rs. 16870 cr in July post budget followed by Rs.14828 cr in August.  FPIs have continued selling in September to the tune of Rs. 4410 cr till 12th September. Though the government reversed its decision to increase surcharge on FPI, they have continued to sell in the markets.

Mutual funds’ asset base increased to Rs.25.47 lakh cr in August, a rise of 3.8% as compared with the preceding month, on the back of robust inflows in equity and liquid schemes. Mutual fund houses witnessed an overall inflow of Rs.1.02 lakh cr last month. Of these, liquid funds alone witnessed an impressive Rs.79,428 cr in August. Inflows in mutual funds through SIPs in August stood at Rs.8,231 cr. Equity mutual funds saw the second highest level of net inflows to the tune of Rs.9,152 cr in the last 10 months. The total monthly redemption in August was the lowest in the last nine month at Rs.7,750 cr.

Improved risk sentiment has pushed down global gold prices from over $1,550 an ounce last month to below $1,500 currently. In India, prices were ~Rs.38,000/10 gram, extending their losses to Rs.1,730/10 gram after hitting a new high of Rs.39,885 beginning of September. Silver prices also continued their tumble from recent highs. Despite the recent correction in prices, gold is up about 20% so far this year in India. Gold substantially pared gains due to expectations of fiscal stimulus from various governments to tackle deceleration in global economic activity. Analysts remain bullish on the metal, as interest rate cuts from global central banks will support prices. Lower interest rates also increase the appeal of gold. Meanwhile, the government of India’s sovereign gold bonds, the last tranche for this fiscal, is currently open for subscription at Rs.3,890/gram. Those applying online get a small discount.

The FOMC will meet on 17th/18th September to decide on a FED rate cut. According to analysts a 25 bps cut is the most likely outcome, amid low inflation and trade related risks. Markets are currently pricing in a 100% probability that the FOMC will reduce the fed funds rate. It is arguably less important what the Fed does in September and more important what it will offer in terms of forward guidance. The meeting should keep the door open for additional easing over the next few months. The temporary inversion of the U.S. yield curve also troubled investors. Yield curve inversions, where short-term rates are higher than long-term rates, often preceded economic contractions. In response, investors expect more government stimulus.

Brent crude oil prices remained range bound either side of $60/bbl. While oil markets have reacted positively to the potential of an extension of current OPEC cuts, the challenges for the oil market remains on the demand side amid the slowdown in the global economy stemming from US-China trade wars. Saudi Arabia leading the OPEC is likely to cut production in order to boost oil prices to help reduce current budget constraints and to also lift the value from the partial privatization of Saudi Aramco, which plans to list 1% of Aramco this year.

Consumer Price Index (CPI) inflation was steady at 3.21% in August compared with 3.15% in July. The corresponding provisional inflation rate for rural area was 2.18% and urban area 4.49% in August as against 2.19% and 4.22% in July. The core CPI inflation eased to 4.20% in August compared with 4.25% last month. Inflation of food and beverages moved up to 2.96% in August 2019 from 2.33%. With the CPI inflation recording only a mild increase in August despite the sharp uptick in the food inflation, we continue to expect the MPC to reduce the repo rate by 15-25 basis points in the October 2019 policy review.

Wholesale Price Index (WPI) remained unchanged m-o-m at 1.08% in August. Manufactured products inflation was zero compared with 0.34% in July. Fuel and power index contracted further, by 4% against a fall of 3.64% in July. Primary articles inflation rose to 6.43% in August against 5.03% in July. Within primary articles, prices of food articles rose to 7.67% from 6.15% in July.

Index of Industrial Productions (IIP) accelerated to 4.3% in July from a downward-revised 1.2% a month ago. During July, manufacturing made a strong comeback, growing at 4.2%, while electricity surprisingly decelerated, growing at only 4.8%. Mining output grew at a robust pace of 4.9% during the month. The pick-up in growth seems to have come on the back of intermediate goods, which grew in the double digits at 13.9% even as capital goods contracted by 7.1%. Consumer durables also shrank 2.7% due to the slump in automobile sales while consumer non-durables grew at a healthy pace of 8.3%. This could lead to another round of rate cuts by the Reserve Bank of India in October, given the state of the economy.

The Nikkei Manufacturing Purchasing Managers’ Index, declined to 51.4 in August from July’s 52.5, its weakest since May 2018. August saw an undesirable combination of slowing economic growth and greater cost inflationary pressures in the Indian manufacturing industry. The Services Purchasing Managers’ Index declined to 52.4 in August from July’s year high of 53.8, still comfortably above the 50-mark separating growth from contraction. Decline in services, alongside manufacturing growth, pushed a composite index down to 52.6 in August from 53.9.

As per SIAM, domestic passenger vehicle sales fell for the tenth straight month in August, declining 31.57% yoy  to 1,96,524 units. Total two-wheeler sales in August declined 22.24% to 15,14,196 units. Sales of commercial vehicles were down 38.71% to 51,897 units in August. Most companies have cut production and lay off workers to cope with the slowdown. SIAM has been lobbying the government to reduce the GST tax rate applicable to automobiles from 28% to 18%.

In another indicator of economic slowdown, GST collection in the month of August dropped to Rs 98,202 cr. The tax collection was at Rs 1.02 lakh cr in July this year. This is the second time during this year that the revenue collection from the GST has slipped below the Rs 1 lakh cr mark. First, it happened in June when the collection was Rs.99,939 cr. CGST collections stood at Rs.17,733 cr, SGST Rs.24,239 cr, and IGST Rs.48,958 cr (including Rs.24,818 cr collected on imports) during August this year.

The monsoon season for the country will end on a positive note and be normal, with the withdrawal most likely to occur between 15th to 20th September. The weakening of El Nino during early July and the consistent shifting of the monsoon trough between south and central India regions hugely benefited the overall rainfall this season.  Overall, India has received 3% more rain than average since the start of the monsoon season on 1st June.

The Reserve Bank of India (RBI) will transfer Rs.1.76 lakh cr to the government this fiscal, the central bank announced after a board meeting last month. The transfer includes Rs.1.23 lakh cr of surplus for 2018-19 and Rs.52,637 cr of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting. The surplus transfer was finalized in line with the recommendations of the committee under former central bank governor Bimal Jalan.

India’s GDP growth rate for Q1FY20 slipped to 5% compared to 8% in the corresponding period last year, as per the latest data from the Central Statistical Office (CSO). The same was 5.8% in Q4FY19. This is the slowest in more than six years, dragged down by weak consumer demand and private investments, a sharp deceleration in the manufacturing sector and sluggish agriculture output.

Taking note of the economic downturn, the government announced a slew of measures which included removal of the surcharge on capital gains on shares for both foreign and domestic investors, an upfront Rs.70,000 cr equity infusion into public sector banks (PSBs) to boost lending, and measures to push automobile sales. While the government refrained from providing an outright fiscal stimulus given the tight fiscal deficit targets, the FM said more policy measures will be taken in the coming weeks. To boost the MSME sector & improve liquidity, the FM announced that all pending GST refunds will be paid to small businesses in 30 days, & all new refunds will be settled within 60 days.

The finance minister also announced a series of mergers of PSBs in order to revive and revitalize the banking sector. The FM announced the merger of 10 PSBs into four banks to reduce the number of PSBs to 12 currently. The FM announced the merger of PNB with Oriental Bank of Commerce & United Bank of India, Canara Bank & Syndicate Bank, Union Bank of India with Andhra Bank & Corporation Bank and Indian Bank with Allahabad Bank.  To strengthen the regional presence, Indian Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab and Sindh Bank will continue to operate on their own. The government also announced a package of Rs 55,250 cr for 10 PSBs.

The government and the Reserve of India is focusing on rate transmission as market rates have not corrected to the extent the repo rate has been cut. In a move to improve interest rate transmission, RBI has mandated that banks link their lending rates for retail, MSE & personal segment to external benchmark such as repo rate or three to six month treasury bills from 1st October 2019. It has also mandated that interest rates be reset at least once in three months.

A slowdown in the economy and weak corporate earnings growth could keep Indian markets under pressure for some time to come. Indian indices are trading around their 10-year historical averages of about 17X one-year forward earnings. The broader market, reflected by midcaps and small caps, continues to underperform and has fallen significantly from their highs in January 2018. Many of the midcap and small cap stocks offer good buying opportunity and should be accumulated gradually.

Subdued earnings growth, GST collections, low IIP/GDP growth numbers & continuous FII outflows remain a concern. On the other hand steady mutual fund inflows, reasonable valuations & inflation trajectory remaining stable augurs well for the markets. Global factors beyond India such as US- China trade war, BREXIT & global slowdown remain a concern. Markets are likely to undergo a consolidation phase with volatility increasing. We strongly advise investors to continue their SIPs in equity funds. If possible, one should increase the amount or number of SIP when negative returns are higher because when the market recovers, the return on accumulated corpus would be higher and one would end up accumulating higher corpus.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 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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