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. The government has taken several measures to boost the economy, such as corporate tax rate cuts & roll back of tax surcharge, but it has failed to cheer up the stock markets.
FII have been continuously selling the past few months, Rs.16870 cr in July post budget followed by Rs.14828 cr in August & Rs.6624 cr in September. FPIs have continued selling in October to the tune of Rs. 3285 cr till 11th October. Despite all efforts, FII sentiments have remained negative.
Industry assets under management (AUM) stood at Rs.24.5 lakh cr, 4% lower than the previous month, showed data from the Association of Mutual Funds in India (AMFI). In September, net equity inflows stood at Rs.6,609 cr, compared to Rs.9,152 cr in the previous month. In the last four months, this is the lowest net inflow tally seen by the equity category. Contribution through SIPs remained intact at Rs.8,262 cr, improving marginally from last month’s tally of Rs.8,231 cr. Among equity categories, large-cap funds received net inflows of Rs.1,559 cr, which was about 40% lower than the previous month. In the fixed-income space, liquid schemes saw net outflows to the tune of Rs.1.4 lakh cr. This was largely on account of quarter-end pullouts & advance tax payments made by institutional and corporate investors.
Gold prices are now down about Rs.2,000/10 gms from record highs of about Rs.40,000/10 gms hit last month. Gold prices fell partly as the partial trade agreement reached by US and China lifted the risk appetite. International gold prices remained below $1500/oz, currently trading at about $1,485/oz. Gold traders will be watching the stance of Federal Reserve which will announce its monetary policy later this month. Also on the radar will be developments on the BREXIT front before the 31st October deadline. The coming days will be crucial with both Britain and European Union claiming a lot more work would be needed to secure an agreement.
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 climbed to a 14 month high of 3.99% in September, as opposed to 3.28% in the previous month. Consumer food price index (CFPI), spiked to 5.11% in September, in comparison to 2.99% in the previous month driven by higher vegetable prices. Fuel and light inflation contracted by 2.18% after a contraction of 1.7% in August.
Wholesale prices based inflation eased to 0.33% in September, as against 1.08% in August due to fall in prices of non-food articles. Wholesale food prices in September increased 5.98% y-o-y, compared with a 5.75% increase a month earlier. Fuel prices saw a sharper contraction of 7.05%, compared with a decline of 4% in August. The index for manufactured products with a weightage of 64.23% rose by 0.1%. Build up inflation rate in the financial year so far was 1.17% compared to 3.96% in the corresponding period of the previous year.
Index of Industrial Productions (IIP) output contracted 1.1% in August compared with 4.6% growth in the previous month. It was the worst performance since a 1.7% contraction in November 2012. The manufacturing sector, which contributes over 77% to the IIP, showed a decline of 1.2% in output during August as against a growth of 5.2% in the same month of last year. 15 out of 23 industry groups in the manufacturing sector have shown negative growth. Another rate cut in December seems likely.
The IHS Markit India Manufacturing PMI was at 51.4 in September, unchanged from August and thereby posting its joint-lowest reading since May 2018. Business confidence sank to one of the lowest levels seen in over two-and-a-half years, the survey report showed. The IHS Markit Services PMI fell to a 19-month low of 48.7 in September from 52.4 in August. It was the second month this year the index had fallen below the 50-mark separating growth from contraction – the last one being in June. The weak manufacturing and dismal services sector activity dragged down the composite PMI to just below the 50-mark for first time since February 2018.
As per SIAM, India’s passenger vehicle sales slumped 23.7% in September, the eleventh straight month of declines while passenger car sales dived 33.4%. Auto component makers have cut thousands of jobs and halted production periodically as the industry grapples with various challenges amid a broader economic slowdown. Two wheeler sales in the domestic market dropped 22.1% y-o-y to 16,56,774 units in September. Commercial vehicles sales fell 39.1% to 58,419 units.
The Goods and Services Tax (GST) collections dropped sharply to a 19-month low of Rs.91,916 cr in September, mirroring a widening slowdown in economy triggered by shrinking consumer demand. The tax collections in September was lower than Rs.98,202 cr collected in August and Rs.94,442 cr mop-up in the same month a year back. We expect a reversal in trend in October on the back of increased demand during the festival season.
The south-west monsoon withdrew from most parts of eastern India during the first fortnight of October, delayed by a couple of weeks. This will be the latest ever retreat of a monsoon. The monsoon rain this year has been the maximum in 25 years, 10% above the long term average.
S&P Global Ratings reduced India’s growth projection for 2019-20 from 7.1% to 6.3%, but said it expected a “decent, albeit unspectacular” recovery in FY20-21 to 7%. The World Bank slashed its economic growth forecast for India to 6% for the current fiscal from its April projection of 7.5%, citing a broad-based and severe cyclical slowdown. Growth is expected to gradually recover to 6.9% in FY20-21 and to 7.2% the following year. Moody’s Investors Service lowered its FY19-20 growth forecast for India to 5.8% from 6.2% earlier, saying the economy was experiencing a pronounced slowdown partly due to long-lasting factors. Last month, the Asian Development Bank (ADB) and the Organization of Economic Co-operation and Development (OECD) lowered FY19-20 growth forecasts for India by 50 basis points and 1.3 percentage points to 6.5% and 5.9%, respectively.
The September quarter results season has just started and the initial set of results of companies like TCS, Infosys, HUL amongst others have started coming out. Results till now have largely been in line with expectations. We expect markets to be driven partially by quarterly results over the next month. One observation from HUL results is that the tax rate this quarter was just 20% (Rs.460 cr tax paid on PBT of Rs.2308 cr). The prevailing tax paid even in Q1 this year was ~ 33% (Rs.83 cr/2563 cr). This is likely to be the trend for most profitable companies this quarter. (15-20% tax in Q2 to compensate for higher tax paid in Q1). So we expect Q2 numbers to be better than the trend & this should provide some support to the market. In addition the ongoing festive season could provide some impetus to a weakening economy.
We are nearing the 31st October deadline for BREXIT & expect a lot of action on that front over the next fortnight. In addition we have of late also seen heightened action on the US-China trade talks over the last fort night & any positive developments on that front could be a big relief to the global economy.
There has been a flight to safety as industry leaders and large caps have largely held on while the broader market, reflected by mid caps and small caps, continues to underperform and has fallen significantly from their highs in January 2018. Many quality mid cap and small cap stocks offer good buying opportunity and should be accumulated gradually.
Subdued GST collections, low IIP/GDP growth numbers & continuous FII outflows remain a concern. We expect the ongoing festive season to provide some boost to the flagging numbers. 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. 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.
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’