Indian stock market

It’s the time to choose

Frontline indexes have been inching up over the last month as the NIFTY touched an all-time high of 11,761 while SENSEX touched a high of 39,270. Broader markets have recovered marginally but insignificant given the fall over the last year. Polling for general elections is underway from 11th April & we expect markets to be volatile over the next month. Historically it has been seen that election outcome turns out to be a non-even. 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. 33,116 cr in March following up from Rs.15,328 cr bought in February 2019. FII have again been net buyers to the tune of Rs.13,308 cr till 11th April. Given the sharp correction in broader markets over the last year & crude prices inching up slowly, there has been renewed interest from FIIs over the last few months.

Retail investors continue to invest in mutual funds through SIP. Mutual funds witnessed inflows worth Rs.8,055 cr via SIP in March. SIP accounts for March stood at 2.62 cr vis-a-vis 2.11 cr for the same month last year. AUM of the mutual fund industry stood at Rs. 23.79 lakh cr as at March-end, up 11% yoy. ELSS or tax-saving funds saw inflows of Rs. 2,742 cr. Income funds received net inflows of Rs 13,856 cr in March compared to outflows of Rs 4,200 cr in February. Liquid funds saw net outflows of Rs 51,343 cr. While inflows into equity funds and equity linked saving scheme (ELSS) were very strong, the same was offset by redemptions in liquid and balanced funds.

Gold prices hovered around $1300/oz in global markets as prices firmed up with investors closely watching the progress of US-China trade negotiations. Equity markets could spike on news of an agreement, denting the near-term appeal of gold. US and Chinese negotiators are scheduled to resume discussions to try to secure a pact to end the year-long tit-for-tat tariff battle. Gold prices domestically though remained above Rs.33,000/10 gms as the rupee depreciated marginally over the last couple of weeks.

OPEC-led supply cuts have underpinned a more than 30% rally this year for Brent crude from ~$50 to ~$70/bbl. This rise has taken place despite fears of an economic slowdown. Violence in Libya has triggered concerns that the OPEC member’s production and exports could be squeezed. Russia has signaled that it wants to raise output when it meets with OPEC in June, thus a big upside looks unlikely.

The International Monetary Fund (IMF) cut India’s GDP growth forecast for 2019-20 to 7.3%. IMF revised downward India’s growth forecasts by 20 bps each in 2019-20 and 2020-21 from its outlook released in January. Both ADB and RBI last week cut their 2019-20 growth projection for India to 7.2% from 7.4% earlier, blaming rising risks to global economic growth as well as weakening domestic investment activity.

The RBI on 4th April lowered repo rate by 25 bps to 6%, but retained its stance at “neutral”. This is a second consecutive policy rate cut, taking the cumulative reduction to 50 bps in the last three months. Tight liquidity conditions are likely to keep banks’ cost of funds elevated, limiting their ability to cut lending rates. Assuming a normal monsoon in 2019, the path of consumer price index inflation was revised downwards to 2.9-3.0% in April-September 2019-20 and 3.5-3.8% in October-March 2019-20.

Consumer Price Index (CPI) moved up to 2.86% in March compared with 2.57% in February mainly due to firming food prices. The inflation rate, however, remained within the RBI’s overall target range. The food inflation rate rose to 0.30% after witnessing a contraction in the past five months. In February, the food deflation rate stood at 0.73%. The core inflation rate meanwhile, fell to 4.97% in March, from 5.36% in the previous month while fuel increased from 1.24% to 2.42%.

Wholesale Price Index (WPI) increased to 3.18% in March as compare to 2.93% in February. Inflation in food articles basket was 5.68% during March against 4.28% in the previous month. Inflation in ‘Fuel and power’ category also spiked to 5.41%, from 2.23% in February. Primary articles inflation was at 5.07% vs 4.84% last month.

Index of Industrial Productions (IIP) contracted to a 20 month low of 0.1% growth in February from 1.7% in January 2019 mainly due to contraction in the manufacturing sector. The manufacturing sector, which constitutes 77.63% of the IIP, contracted by 0.3% in February as compared to a rise of 1.3% last month. Power sector growth slowed to 1.2% while mining sector output grew 2%. Consumer durables and consumer non-durables recorded growth of 1.2% and 4.3% respectively.

The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) declined to a 6 month low 52.6 in March from 54.3 in February.  Factory orders and production expanded at the slowest pace since last September while job creation eased to an eight-month low in March. The Nikkei Services Purchasing Managers’ Index fell to 52.0 in March from 52.5 the previous month but remained above the 50 mark separating growth from contraction for a 10th consecutive month. A slowdown in the growth in services activity, alongside weaker manufacturing expansion, led the India composite index to fall to a six-month low of 52.7 in March – the lowest since September – from February’s 53.8.

As per SIAM, passenger vehicle sales in India rose just 2.7% in 2018-19, the slowest in 4 years, due to weak customer sentiment led by liquidity crunch and high vehicle prices. In March, PV sales declined 2.96%, at 2,91,806 units, a continuous decline for eight months now. Total two-wheeler sales in March declined 17.31% to 14,40,663 units as motorcycle sales last month slipped 14.27% to 9,82,385 units. Sales of commercial vehicles were up marginally by 0.28%, to 1,09,030 units. With the current fiscal lined up with many challenges, including general elections in the first quarter and transition to BS VI compliant products later during the fiscal, SIAM said it expected PV sales to grow in the range of 3-5% during the current financial year.

Goods and Services Tax (GST) collection in March rose 15.6% yoy to Rs.1,06,577 cr, the highest since the new indirect tax system took effect on 1st July 2017. Average monthly GST revenue during August-March 2017-18 was Rs.89,885 cr. This rose to Rs.98,114 cr during April-March 2018-19. GST mop-up for the whole of 2018-19 stood at Rs.11.77 lakh cr. As many as 75.95 cr GSTR 3Bs (summary returns) were filed till 31st March 2019 for February, against 73.48 cr a month ago.

Theresa May’s BREXIT deal was rejected by UK MPs by an overwhelming majority for a third time. The EU had set a deadline of 12th April for a decision, with two likely options: Britain leaves with no deal at all, or agrees a lengthy extension to allow time for a new approach. Thereafter European Union leaders have granted the UK a six-month extension to BREXIT till 31st October 2019. The UK must now hold European elections on 23rd May, or leave on 1st June without a deal. Thus they have to reach a decision by 23rd May.

Amongst other developments, Nirav Modi was arrested in London last month & his bail plea rejected. It may just be the start of a long drawn legal battle, but we are hopeful of him being brought back to India & recovery of some bad debt from PNB. In addition embattled liquor tycoon Vijay Mallya has also submitted a “renewal application” in the UK High Court, making another attempt at appealing against his extradition to India to face fraud and money laundering charges.

Despite a slowdown in consumption demand affecting earnings growth of sectors such as automobiles and the weakness expected in global cyclical sectors such as metals, we expect a healthy double-digit growth in FY20. A low base effect, turnaround in profitability of corporate lending banks and healthy growth in earnings of energy companies are expected to largely drive aggregate earnings. The Sensex trades at ~20x FY20E estimates, which we find reasonable. Markets have staged a strong pre-election rally with buying interest in broader markets also. However, in spite of the rally, India is trying to play catch-up with emerging market peers. 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, reasonable valuations & inflation trajectory remaining stable augurs well for the markets. Low IIP numbers & GST collections 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 next month during election polling but any intermittent volatility should be used as an opportunity by patient investors with medium to long term outlook to accumulate good quality stocks.

Remain cautiously optimistic in 2019

Equity markets in election mood

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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