All eyes will currently be on the outcome of the election results on 23rd May 2019. Markets have been volatile for the last month as 7 phase polling continues. Last month NIFTY touched an all-time high of 11,856 while SENSEX touched a high of 39,487. Historically it has been seen that election outcome turns out to be a non-event. Thus we feel it will not matter for the markets weather BJP or Congress comes as long as we have a stable government.
FIIs continued investing in Indian markets as they were net buyers to the tune of Rs. 20,119 cr in April following up from Rs.33,116 cr in March 2019. FII have again been net buyers to the tune of Rs.1008 cr till 10th May. With election results round the corner and US China trade tensions FII sentiments need to be closely monitored.
Retail investors continue to invest in mutual funds through SIP with a tally of Rs.8,238 crore in April, an all-time high. AUM of the mutual fund industry stood at Rs. 24.8 lakh cr, up 4% m-o-m. MFs saw a total investment of Rs.1,00,460 cr in April, mainly driven by large inflows into liquid and money market funds, while flows into equity funds moderated. Liquid and money market funds saw inflows of Rs.96,000 cr in April. Corporates, which are active investors in liquid funds, tend to redeem their investments to meet advance tax payment deadline in March and return in the new financial year. As we get closer to the election outcome, investors are developing cold feet and staying on the sidelines, as is evident in subdued equity flows in April.
Gold prices are around $1280/oz in global markets as investors are closely watching the progress of US-China trade negotiations. Any disagreement between US & China in the upcoming trade talks could boost the near term appeal of gold. Gold prices domestically though remained around Rs.32,800/10 gms.
Brent crude traded lower over the last fortnight falling below $70/bbl due to heightened tensions between the world’s two biggest economies have clouded the outlook for global growth, which influences oil demand expectations. Oil prices have had some support from signs of tighter global supply on the back of production cuts by OPEC and allies including Russia. Brent and WTI have risen more than 30% so far this year. Supplies have also been tightened by US sanctions on OPEC members Venezuela and Iran.
Consumer Price Index (CPI) rose to a six-month high of 2.92% in April compared with 2.86% in March due to a spike in food prices. Inflation of food and beverages increased to 1.38% in April from 0.66% in March 2019. Fuel & light inflation was recorded at 2.56% in April 2019 vs 2.42% in March. Higher food inflation stems from the rise in crude prices; Brent was at a five-month high at $75/bbl last month. The core CPI inflation eased to 4.55% in April compared with 5.01% in March. For April-September period, the RBI has projected retail inflation at 2.9-3%, mainly due to lower food and fuel prices as well as expectation of a normal monsoon.
Wholesale Price Index (WPI) based inflation slipped to 3.07% in April vs 3.18% in March on cheaper fuel and manufactured items, even as prices of food articles remained high. Vegetables inflation was at 40.65% in April, up from 28.13% in the previous month. Inflation in food articles basket was 7.37%, up from 5.68% in the previous month. Inflation in ‘fuel and power’ category cooled to 3.84%, from 5.41% in March. Manufactured items too saw easing of prices with inflation at 1.72% in April, against 2.16% in March.
Index of Industrial Productions (IIP) entered negative territory in March after a gap of 21 months, contracting 0.1% from growing 0.1% in February 2019 mainly due to contraction in the manufacturing sector. During the entire 2018-19 fiscal, industrial output witnessed a 3.6% growth as against 4.4% in the previous fiscal. The manufacturing sector contracted 0.4% in March, while mining and electricity grew 0.8% and 2.2%, respectively. 12 out of the 23 industry groups in the manufacturing sector were in the red in March. Both consumer durables (5.1%) and non-durables (0.3%) showed lackluster performance. The only segment that continued to fare well was consumer electronics, growing at 10.6%.
The Nikkei India Manufacturing Purchasing Managers’ Index declined to 51.8 in April from 52.6 in March, reflecting weakest improvement in business conditions since August 2018. April PMI data indicated softer increase in new orders restricted growth of output, employment and business sentiment. Nikkei India Services Purchasing Managers’ Index (PMI) dropped to 51 in April from 52 the previous month. The reading came in below the average for 2018, which was 51.6, underscoring a loss of momentum in the sector. The Nikkei India Composite PMI Output Index, which combines services and manufacturing, fell to 51.7 in April from 52.7 in March. Much of the slowdown was linked to disruptions arising from elections. Companies generally foresee improvements once a government is formed.
As per SIAM, passenger vehicle (PV) sales in April fell 17.1% y-o-y to 247,541 units, the worst in eight years. This is the tenth consecutive month since July 2018 when PV sales have declined. Recovery will take time and depend on multiple factors including a good monsoon and the economic policy of the new government, to take office later this month. Two-wheelers sales registered a de-growth of 16.4% in April. Within the two wheelers segment, scooters, motorcycles and mopeds declined by 25.9%, 11.8% and 5.9% respectively. Commercial vehicles (CV) segment, which is considered as the backbone of economy, fell by 6% at 68,680 units.
Goods and Services Tax (GST) collection witnessed 10% growth from the year-ago period at ₹1.13 lakh cr in April, the highest ever since the implementation of the indirect tax system in July 2017. The rise in tax collections in April (for domestic sales in March) can also be partially attributed to the year-end phenomenon, when taxpayers pay their arrears. Total number of summary sales return GSTR-3B filed for the month of March up to 30th April stood at 72.13 lakh. April 2019 is the second consecutive month when GST collection exceeded Rs 1 lakh cr.
Monsoons are forecasted to be on time this year, onset expected in Andaman & Nicobar Islands by 24th May & Kerala by 4th June. Though due to the El Nino effect, monsoons could be marginally below average. At 96%, the India Meteorological Department (IMD) has predicted a “near-normal” monsoon in 2019. In contrast, private weather forecaster Skymet, citing an El Niño possibility, has a damp prognosis: “Below-normal” rains at 93% of the long-period average (LPA). Skymet predicts a 20% chance of deficit in rainfall in central India.
Trade talks between the United States and China nearly ground to a halt in the first week of May, and a seemingly intractable dispute over subsidies is a big part of it. Trump upped the ante by imposing a second round of punitive duties on $200 bn in Chinese goods. The talks are under close scrutiny across global financial markets. Both sides agreed to keep talking despite some temporary resistance and distractions, and to hold future meetings in Beijing. China said that in order to reach an agreement the U.S. must remove all extra tariffs, set targets for Chinese purchases of goods in line with real demand, and ensure that the text of the deal is balanced to ensure the dignity of both nations. Markets bore the brunt of escalating trade tensions between the US and China.
We are in the middle of the results season & various companies have been declaring their Q4FY19 results. Results have been a mixed set of numbers. While most automotive companies have declared lower y-o-y numbers due to a decline in volumes, slowdown in rural consumption saw FMCG companies reporting flattish numbers. However there was a visible improvement in asset quality & earnings across PSU Banks. Metals & mining & construction stocks also witnessed improved results.
Equity markets are being guided by global trends, macroeconomic data and quarterly earnings, while investors may also see volatility amid the ongoing election season. Polling for the ongoing general elections will conclude on 19th May and counting of votes will take place on 23rd May. A low base effect & turnaround in profitability of corporate India is expected to largely drive profit growth. It has been seen that quality companies outperform when markets turnaround, thus we need to be a patient with our holdings.
Positive profit growth outlook, steady mutual fund & FII flows, increasing GST collections, reasonable valuations & inflation trajectory remaining stable augurs well for the markets. Low IIP numbers though remain a concern. One eye will remain on international events like BREXIT & US-China relations, while closely monitoring election outcome in India. Short term investors should remain cautious as markets could be extremely volatile but any intermittent volatility should be used as an opportunity by patient investors with medium to long term outlook to accumulate good quality stocks.
Gold as a hedge against global uncertainty
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’