global headwinds

Global headwinds restrain equities

Markets have been trading with a negative bias around 17000 levels. Globally high interest rates, high inflation, energy crisis in Europe & fears of recession are indicating to some tough times ahead. The dollar index has gone up to a two decade high of 113. Prices of crude among other metals & mining commodities are on a downward trend due to fears of global slowdown which should help bring down inflation print.

FII have been selling heavily in Indian equities, to the tune of Rs.2.88 lakh cr in the first 7 months of this calendar year Though they turned net buyers for a month in August, they have again been net sellers to the tune of Rs. 18308 cr in September followed by Rs.7330 cr MTD till 12th October. A strong USD and increasing yields/interest rates globally, are leading to this outflow in short term.

As per AMFI data, mutual fund folios crossed all-time high of 13.81 cr in September. The mutual fund industry’s net assets under management (AUM) stood at Rs.38.42 lakh cr. The SIP AUM stood at Rs.6.35 lakh cr in September. Net inflows into equity mutual funds jumped to Rs.14,099.73 cr in September from Rs.6,120 cr in the previous month, driven by positive flows across fund categories. Systematic investment plan (SIP) contribution of Rs.12,976.34 cr was at an all-time high. However, open-ended debt mutual funds saw net outflows of Rs.65,372.40 cr in September, primarily led by liquid and money market funds.

As compared to April 2022 highs, the price of 10-gram 24k gold currently is ~Rs 51,000—down by over Rs 3,000. The drop bodes well for Indian consumers, who tend to buy the precious metal during October, when major festivals such as Diwali, Dusshera, and Karvahchauth are celebrated. Contrary to expectations, international gold prices have not rallied since April despite a sticky high-inflation environment and geopolitical political risks dogging the global economy. Globally, central banks have been raising interest rates, which has increased the appeal of interest-bearing fixed-income instruments and taken the sheen of gold. Rising interest rates in the US have also pushed the dollar index to multi-year highs—again, putting pressure on gold prices. International gold prices are hovering around $1670/oz.

Brent crude prices are hovering around $90/bbl. A larger-than-expected surge in US crude oil in storage, along with a rise in gasoline stocks, weighed on oil prices. Saudi Arabia and the United States continued to clash over a decision by the OPEC+, last week to cut its oil production target. CPI data that showed core inflation in the United States had risen to the highest level in four decades. Interest rate hike could further stymie economic growth, easing the demand for crude oil.

The U.S. dollar is experiencing a once-in-a-generation rally. The greenback briefly hit a 32-year peak against the yen of 147.665. The euro also fell against the dollar initially to a two-week low, then rebounded to trade at ~$0.9773. Inflation pressures continued to escalate, cementing expectations the Federal Reserve will deliver another 75 bps rate increase at next month’s policy meeting. The pound last changed hands at $1.1306. There is an inverted yield curve in USA as the 2 year g-sec is trading at a higher 4.4% as compared to 10 year g-sec at 3.9%. This indicates stress in the shorty term (thus risk premium) and slowdown.

Consumer Price Index (CPI) inflation accelerated to 7.41% in September, the fastest pace in five months. This is likely to pressure the RBI, which has raised its key repo rate by 190 basis points in four moves this year, to intensify its interest rates hikes. Food inflation, which accounts for nearly half the CPI basket, soared 8.60% in September 2022 as against 7.62% in August. Fuel and electricity prices rose 11.44% yoy last month, compared with a 10.78% rise the previous month. Core inflation, excluding volatile food and energy prices, was estimated at 6.07%-6.1% in September. With high inflation & FED expected to increase rates further, RBI is expected to take further rate hikes in its next meeting in December which could push up the 10 year g-sec further from ~7.4% currently.

Wholesale Price Index (WPI) eased in September to 10.70% as against 12.41% recorded in August 2022 and 11.8% in September last year. Food inflation based on WPI Food Index also decreased to 8.08% in September, from 9.93% in August. However, inflation in vegetables rose to 39.66% during the month, as against 22.29% in August. In the fuel and power basket, inflation came in lower at 32.61% in September, against 33.67% in August. We expect WPI to fall to single digits in next couple of months.

The Index of Industrial Production (IIP), contracted for the first time in 18 months by 0.8% in August as compared to 2.4% in July. The mining output contracted 3.9%, while power generation increased 1.4% during August. The primary goods segment, which accounts for nearly 34% of the index, expanded 1.7% in August compared to 16.9% growth in the year-ago period. Capital goods output, which is a barometer of investments, rose 5% in August  compared to 20%t growth in the year-ago month.

India’s manufacturing Purchasing Managers’ Index (PMI), edged down to 55.1 from 56.2 in August. The latest set of PMI data show us that the Indian manufacturing industry remains in good shape, despite considerable global headwinds and recession fears elsewhere. The S&P Global India Services Purchasing Managers’ Index (PMI) came in at 54.3 last month vs 57.2 in August. September also saw a broad stabilization of input cost inflation and the slowest upturn in prices charged for the provision of services since March. The composite PMI declined to 55.1 in September from 58.2 in August.

As per Society of Indian Automobile Manufacturers (SIAM), domestic sales of passenger cars went up to 1.42 lakh units in September this year, up from 64,235 units sold in the same period last year. Utility vehicles, on the other hand, reported domestic sales of 1.51 lakh units this month versus 87,862 in September 2021. The three-wheeler segment saw an on-year uptick in overall sales from 29,191 units sold in September last year to 50,626 units sold this year. Two-wheeler segment, on the other hand, reported an annual surge in overall sales from 15.37 lakh units in September 2021 to 17.35 lakh units in the same period in 2022. Auto sector will do well in the coming days due to festivals like Dussehra and Diwali.

The Goods and Services Tax (GST) in September this year saw a 26% year-on-year jump at Rs.1.48 lakh cr, the third highest ever collections crossing the Rs.1.40 lakh cr mark for the seventh consecutive month on robust business activities despite global economic slowdown. The collections in the next three months are expected to be even more robust due to the higher consumption expected during the festive season and the extension of the mandatory e-invoice protocol to taxpayers having turnover above Rs.10 cr from 1st October. Out of the total gross GST revenue collected in the month of September 2022, the central GST (CGST) component is Rs.25,271 cr, state GST (SGST) is Rs.31,813 cr, integrated GST (IGST) is Rs.80,464 cr (including Rs.41,215 cr collected on import of goods) and cess is Rs.10,137 cr.

The International Monetary Fund (IMF) cut its projection of India’s economic growth in 2022 to 6.8%, as it joins other global agencies that have trimmed forecasts. The IMF had in July projected a gross domestic product (GDP) growth of 7.4% for India in the fiscal year that started in April 2022. The global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: The Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China. India’s biggest strength continues to be domestic economic activity, which has shown more resilience compared to the rest of the world.

Globally high inflation, rising interest rates coupled with a slowdown is worrying as there are fears of recession.  Another round of major rate hikes are expected soon by both FED & BoE as inflation remains sticky. Crude prices are declining on slowdown fears & with expectations of sanctions being lifted on Iran, crude should decline further. GST collections have remained above Rs.1.4 lakh cr for seven months partly due to high inflation. IIP numbers, low due to a base effect of last year, need to recover while inflation which remains sticky above 7% has to come down to the 4-6% band. The dollar index is at a two decade high as major global currencies are depreciating. Though DII flows are strong, FIIs turn net sellers due to strengthening USD & increasing yields. 10 year g-sec in India is ~7.4% currently and could inch up further. This is a good time to get into long term interest rate sensitive debt products. We strongly advise investors to continue their SIPs in equity funds & if possible increase the amount.

Want to buy a house by redeeming mutual fund investments?

Universal Stagflation

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 14 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.