Equity markets

Equity markets in election mood

Equity markets have largely been range bound over the last month between 10,200 and 10,800. Though frontline stocks have largely been in a range, mid & small cap stocks have continued on the downward trend. This has been specially been happening in PSU stocks. With Congress doing better than expected in the just concluded state elections in five state general elections, stock markets movements may be subdued looking for the next political cue for next year assembly elections.

FIIs which have been selling heavily over the last few months till October turned net buyers in November to the tune of Rs.10563 cr. The trend has continued with FII being net buyers of Rs.1945 cr till 12th December. With crude & INR cooling off from its highs there seems to have been some respite for FII activities.

For the first time, mutual funds have managed more money in equities than insurers in the month of October 2018, according to the data released by NSDL. Equity assets managed by insurance companies came in at Rs.9.22 lakh cr as against Rs.9.32 lakh cr by mutual funds. As per AMFI, AUM of the mutual fund industry grew at 8.08% m-o-m and 5.45% y-o-y to Rs 24.03 lakh cr in November 2018. Equity AUM (incl ELSS), balanced funds and ETFs run by mutual funds stood at Rs 10.44 lakh cr in November 2018, up by 8.92% y-o-y. The industry received Rs.7,985 cr via SIP route in November. Last month, inflows into liquid schemes stood at Rs. 1.36 lakh cr in compared to Rs. 55,000 cr a month ago. During IL&FS crisis in September, almost over Rs. 2 lakh cr had flown out of liquid and money market schemes.

Gold prices are trading at near five-month highs as the dollar declined amid expectations of a slowdown in the pace of US interest rate hikes, with investors seeking refuge in the bullion from a sell-off in global stocks. Global prices are trading at round $1,240-$1250/oz. In India, gold prices are about Rs 32,100/10gm due to increase in demand from local jewelers amid firm trend in the overseas market. Gold is regarded as a safe haven against equity markets selling off, coupled with a weakness in the USD.

Brent crude declined by over 30% to around $60/bbl from a four-year high of $86.74 in the first week of October. OPEC along with Russia has agreed to cut production by 1.2 million BPD in 2019 & it is expected to stabilize the supply-demand balance. The global economy is set to cool in 2019-20, as rising interest rates and inflation begin to limit consumption in major developed economies, and market uncertainty weakens the fundamentals in emerging markets. The Indian crude basket, average price fell by 18% during the last month. The US is expected to be the world’s top oil producer, ahead of Russia and Saudi Arabia by the end of 2018.

The current account deficit (CAD) for Q2 FY19 stood at US$ 19.1 bn or 2.9% of GDP. The widening of the CAD was primarily on account of a rising import bill and unmatched export buoyancy leading to higher trade deficit. There is an improvement in services receipts and remittances transferred to India which partially offsets the worsening merchandise trade figures. Achieving fiscal deficit target of 3.3% looks difficult as: 1. GST collections are running behind the target 2. Disinvestment + Telecom also seem to be falling short of targets 3. Higher MSP for Kharif demands additional cost

After four successive quarters of improvement, Q2 FY19 GDP moderated to 7.1% vs. 8.2% in Q1 FY19. Softness in the growth came on the back of moderation in consumption growth and doubling of import growth even as the exports maintained its growth momentum. On the other hand, government spending and investment improved. GVA growth softened to 6.9% due to reduced agricultural and industrial output while the services improved. Within industries, mining output depicted a de-growth, manufacturing and construction output softened while utilities improved.

The RBI in its latest MPC meeting on 5th December left the repo rate unchanged at. 6.50% and retained its ‘calibrated tightening’ stance. The decision on keeping the rate unchanged was unanimous. The RBI has lowered its inflation projection significantly to 2.7- 3.2% in 2H FY19. However, it continues to stay guarded and sees upside risks to its inflation expectations. We expect the RBI to stay on a hold till more clarity emerges on the durability of the inflation decline.

Indian bond yields inched down over 75 bps over the last couple of months driven by softening crude prices. This led to revival of FII sentiments towards Indian debt market and hence parallel appreciation in Rupee. Further, aggressive OMO purchases by the RBI since September are also aiding the current bond rally.

WPI based inflation fell to a three month low of 4.64% in November, as prices of food articles, especially vegetables, softened. WPI inflation was 5.28% in October. Food articles witnessed softening of prices with deflation at 3.31% in November, against 1.49% in October. Vegetables became cheaper with deflation at 26.98% in November, compared to 18.65% in the previous month. Inflation in the ‘fuel and power’ basket in November continued to rule high at 16.28% but was lower than 18.44% in October. This was on account of lowering of prices of petrol and diesel.

CPI inflation declined to a 16-month low of 2.33% in November. It stood at 4.88% in November last year and was 3.31% in October. Consumer food price index recorded de-growth of 2.61% in November, from (-) 0.86% in October, mainly driven by cheaper vegetables, eggs, pulses and sugar. Fuel and light inflation for November came in at 7.39% compared to 8.55% m-o-m. Experts expect inflation to remain benign in the next few months.

The Nikkei India Manufacturing PMI increased for the third consecutive month from 53.1 in October to 54.0 in November 2018. There were healthier inflows of new orders encouraging companies to lift production and input buying. New orders expanded at the second-fastest rate in over two years, slower only than that seen in December 2017. The Nikkei India Services PMI rose to 53.7 last month from 52.2 in October, it’s highest since July. The index has been above the 50-mark for six straight months. Stronger services activity and better-than-expected growth in manufacturing pushed a composite index from October’s 53.0 to 54.5 – it’s highest since November 2016.

Index of Industrial production (IIP) grew at an 11-month high of 8.1% in October. led by mining, power and manufacturing sectors coupled with higher off take of capital as well as consumer durable goods. The growth for September remained unchanged at 4.5% compared to provisional data released last month. Manufacturing sector, which constitutes 77.63% of the index, recorded 7.9% growth. Mining sector grew 7%, the power sector output grew by 10.8% while capital goods sector saw a 16.8% output growth. Consumer durables expanded at 17.6%. In terms of industries, 21 out of 23 industry groups in the manufacturing sector have shown positive growth.

As per SIAM, domestic passenger vehicle sales declined in November down 3.43% yoy, the fourth monthly decline since July. We have been witnessing flat PV sales for last couple of months due to high interest rates and rising fuel prices. However, fuel prices have started to come down and we expect to see its positive impact going ahead. Two-wheeler sales in November were up 7.15% to 16,45,791 units. The growth was mainly driven by good motorcycle sales, which increased 9.36% last month to 10,49,659 units. Sales of commercial vehicles jumped 5.71% to 72,812 units in November.

2QFY19 reported a robust growth in sales for NIFTY 50 stocks (26% y-o-y). However, it failed to translate into concomitant EBITDA growth, underscoring the erosion in pricing power in an inflationary input cost environment. The recent softness in commodity prices, especially crude and containing of rupee depreciation should help to sustain the EBITDA growth/margin going ahead. Even though the equity market returns have fallen considerably in last two months, especially in mid & small cap stocks, the domestic investor participation in equity mutual fund continues to hold strong.

The December month so far (till 11th) has seen several important events. From the OPEC meet, India states election outcome, resignation of the RBI governor, US-China trade reconciliation. These events have translated into market shedding some of its November gains. Looking ahead, the overall global narrative is tilting in favor of emerging markets and India may receive its fair share. However, it will have to compete against some of the other beaten down markets in Latin America, China, Turkey and South Africa that are witnessing positive political/economic changes. Indian market may continue to brace the volatility as we head into the general election. The prospects of large supply of equity owing to government disinvestment plans would also have an impact.

SIP inflows remain strong but FII flows have been a bit erratic. Post correction in some quality stocks’ valuations which were looking stretched till a few months back, are currently looking quite attractive, trading close to 3-5 year average valuations. While the short term is shaky and likely to be volatile due to multiple reasons, we continue to believe medium and long term growth remain intact. The latest inflation, IIP data has been favorable & provides some comfort. One should accumulate good quality companies where there is a long term structural story in place.

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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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