Markets were range bound over the last month as NIFTY & SENSEX consolidated around 18,000 & 60,000 respectively. COVID numbers have also been declining gradually as vaccinations pick up. Liquidity remains strong on the domestic front though we are witnessing some foreign outflows. The markets look over heated at the moment. We have just concluded Q2 corporate earnings season. Expectations were high & marginal deviation lead to correction in the respective stocks/sectors. Crude derivative & power intensive sectors took a hit on account of higher crude/coal prices.
FIIs were net sellers to the tune of Rs.25,572 cr in October 2021, followed by net sellers to the tune of Rs.5164 cr month till date on 15th November. With markets at such elevated levels, we are witnessing some profit booking. In addition sharp movement in US bond yields & USD is leading to outflow from emerging markets.
The average assets under management (AUMs) for Indian mutual fund industry have risen to record high levels at Rs.38.21 lakh cr as on 31st October, 2021, according to data released today by AMFI. The systematic investment plans (SIPs) contribution is also a record high of Rs.10,518 cr. The SIP AUMs have breached Rs.5.5 lakh cr mark, standing at Rs.5,53,532 cr. NFOs accounted for Rs.40,000 cr of net inflows, driven by multi-cap funds and balanced advantage fund. The month of October has seen a sharp surge in inflows into floating rate funds and this trend has only got accentuated in the last few months. We also witnessed overall inflows into debt funds to the tune of Rs.12,984 cr.
Gold prices are at a five-month high on concerns over broadening inflationary risks and a stronger US dollar and elevated bond yields. Gold futures on MCX were ~Rs 49,350/10 gms up nearly Rs.2000 over the last month. Higher US dollar and bond yields amid expectations that Fed may act soon to keep a check on inflation weighed on the sentiments. Gold may remain range-bound amid mixed factors. Central banks ponder monetary tightening. Spot gold was at $1,860/oz up nearly $100 over the last month.
Global crude prices have stabilized between $81-85/ bbl with a downward bias over the last month. The Organization of the Petroleum Exporting Countries (OPEC) last week cut its world oil demand forecast for the fourth quarter by 330,000 bpd from last month’s forecast, as high energy prices hampered economic recovery from the COVID-19 pandemic. Fears of declining demand come as supplies are expected to rise. U.S. shale production in December is expected to reach pre-pandemic levels. There is additional pressure on oil prices stemming from a strong dollar, which makes the commodity expensive for buyers holding other currencies. The U.S. dollar hit a 16-month high against a basket of currencies as investors worried about the global economy. The central government slashed excise duty on petrol and diesel by Rs.5/l and Rs.10/l, respectively, offering some relief to consumers on the eve of Diwali.
Consumer Price Index inflation (CPI) rose to 4.48% in the month of October 2021 from 4.35% in September. Inflation in the food basket rose to 0.85% percent in October, compared to 0.68% in the preceding month. Fuel and light inflation stood at 14.3%, the highest level in the 2011-12 base year series. Transport and communication inflation jumped to a four-month high of 10.9% in October. In September, the Monetary Policy Committee (MPC) of the RBI had decided to keep the repo rate unchanged at four percent for the eighth time in a row.
Wholesale prices based inflation (WPI) increased to a five-month high at 12.54% in October from 10.66% in September, breaking the five-month downward trend as prices of manufactured items and fuel groups shot up. Fuel inflation accelerated to 37.2% in October from 24.8% in the preceding month, while inflation for manufactured items rose to 12% from 11.4% during the same period. Inflation for food items, however, contracted 1.7% during October as vegetable prices eased from their level a year ago.
Index of Industrial production (IIP) grew 3.1%, a seven-month low, in September as the impact of low base effect wore off. Industrial output had witnessed a growth of 11.9% in August. Output of the manufacturing sector, which accounts for over three-fourth of the total weight of the index, grew 2.7% in September, down from 9.9% in August. Electricity production increased a mere 0.9% compared to last year, likely due to the paucity of coal. Core sector data released last month had shown growth in coal production falling to 8.1% in September from 20.6% in August.
The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) rose to 55.9 in October expanding for the fourth consecutive month even as it stayed below the February reading of 57.5. While strong growth of both sales and production were noted in each of the three broad areas of the manufacturing sector, it was in intermediate goods that the sharpest rates of expansion were recorded. India Services Business Activity index rose to 58.4 in October, marking the strongest rate of growth in ten-and-a-half years. In September, the figure was at 55.2. The Composite PMI Output Index rose from 55.3 in September to 58.7 in October
According to SIAM, passenger vehicle wholesales in India declined by 27% y-o-y in October with semiconductor shortage hitting production of automobile manufacturers. Two-wheeler dispatches to dealers also witnessed a 25% decline at 15,41,621 units. Three-wheelers recorded 31,774 unit sales in October 2021, marking 19.07% growth. Manufacturers were banking on the festive season to recover from the severe drop in sales they have faced in the early part of the financial year 2021-22 which did not happen.
The gross GST collection for the month of October came in at Rs 1,30,127 cr, the second-highest collection since GST was implemented in July 2017. Revenues for the month are 24% higher y-o-y. Of the gross GST revenue collected in October, Rs 23,861 cr was towards CGST, Rs 30,421 cr was towards SGST and Rs 67,361 cr was towards IGST. Cess amounted to Rs 8,484 cr. The revenues would have still been higher if the sales of cars and other products had not been affected on account of disruption in supply of semi-conductors.
Last month, the International Monetary Fund (IMF) raised its inflation forecast for India to 5.6% for this fiscal from the 4.9% estimated in April, citing growing inflationary risks worldwide even as it kept its growth forecast for the year unchanged at 9.5% for Asia’s third-largest economy. In its latest report, Fitch maintained the FY22 growth forecast for India at 9% and 7.6% for FY23, which is slightly below consensus forecasts of 9.2% and above consensus estimates of 7.4% next year. As the frontline indexes are trading at high levels, we feel we have to be a bit selective in stock picking. Vaccinations have gradually picked up, but we still have a long way to go. Expectations are we may manage to get most of the adult population vaccinated by the first quarter of 2022. There are reports of launching vaccination for children and how that plays out needs to be seen. This could be a good buying opportunity if there is a marginal correction in markets.
We are coming to an end of the quarterly results season. There was an expectation of a strong recovery in corporate earnings and any deviation from market expectation lead to short-term correction in the respective stocks/segments. Banking sector did reasonably well as asset quality improved for all banks sequentially. With crude & power costs going up sharply companies with crude derivative raw materials & power intensive companies took a sharp hit on margins. Companies are expected to take price hikes to compensate for the increase in costs.
As we come out of the 2nd covid wave, we need to closely monitor the key economic indicators over the next few months. We are witnessing steady recovery, but an impending 3rd wave could put a spanner in the wheel. GST collections & IIP numbers are increasing. H2FY22 growth numbers will be lower on a higher base of last year. Higher than expected inflation numbers coupled with high fuel prices remain a concern. We strongly advise investors to continue their SIPs in equity funds & if possible increase the amount. The markets are elevated & look over heated & thus focus should be on stock picking.
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.