The NDA led by the BJP came back to power for the second term on 23rd May 2019, this time with a bigger mandate as the BJP on its own won in excess of 300 seats. NIFTY touched an all-time high of 12,103 while SENSEX touched a high of 40,312. Both the NIFTY & SEXSEX crossed the respective 12,000 & 40,000 mark for the first time ever on 31st May 2019. With elections done & dusted, now the focus will shift to the upcoming budget & how the new government delivers in the near future.
After four months of net inflows, FII turned net sellers in May to the tune of Rs.2136 cr, partly due to election season & partly due to various international activities like US-China trade tensions, BREXIT & decline in crude prices. FIIs have again turned net buyers in June, to the tune of Rs. 1037 cr till 11th June.
Assets under management (AUM) of the mutual fund industry stood at Rs. 25.43 lakh cr at the end of May, up 5% m-o-m, data from Association of Mutual Funds in India (AMFI) showed. Liquid and money market funds saw inflows of Rs.72,478 cr. On the other hand outflows in credit risk funds increased significantly to Rs. 4,156 cr in May as against Rs. 1,253 cr in April. Inflows into equity funds, including ELSS, improved slightly to Rs.4,969 cr in May, from Rs 4,229 cr in April. Investment in equity funds through SIPs maintained its monthly run rate with a tally of Rs. 8,183 cr almost similar to April SIP flows of Rs.8,238 cr. If the current monthly run rate of SIP at Rs 8,000 cr is maintained, the MF industry is expected to see equity inflows of nearly Rs 1,00,000 cr in 2019-20, which is sizeable by any standard.
Gold prices have rallied at a fast pace in the recent weeks. After consolidating in the $1,270-1,280 range, for the most of May, the yellow metal rallied towards $1,350/oz in the first week of June. In India as well, gold futures have rallied from Rs.31,300/10gm on 23rd May to Rs.32,735 on 12th June. Tensions between the US and China, the US and Mexico and the dovish Federal Reserve have fuelled the rally in gold.
The FOMC will meet on 18-19th June against the backdrop of rising trade tensions, slowing US growth and a sharp step-down in hiring that have led the global markets to price in at least two rate cuts by the end of 2019. President Trump is expected to meet President Xi Jingping at a G-20 summit on 28-29th June. Besides, Fed chair Jerome Powell said that the central bank would act “as appropriate” in the face of trade war risks, leaving the door open for a possible rate cut.
World oil markets have undergone a U-turn, switching from supply-side risks like OPEC’s production cuts or US sanctions against producers Iran and Venezuela, to concerns of slowing consumption amid fears of a global recession. As a result, crude oil prices have turned a 45% price rally in the first four months of the year into a slump of more than 15% since late April. Analysts participating in a Reuters oil survey in May had their most optimistic growth forecasts at around 1.4 mn bpd, as against 1.7 mn bpd in a January poll.
Consumer Price Index (CPI) accelerated marginally to 3.05% in May from 2.92% in April driven by a marginal rise in food price inflation. Inflation in the food and beverages segment accelerated to 2.03% from 1.38% last month. The fuel and light segment, however, saw inflation easing to 2.48% in May from 2.56% in the previous month.
Wholesale Price Index (WPI) based inflation slipped to 22-month low at 2.45% in May from 3.07% in April, helped by falling prices of food articles, fuel and power items. Inflation in food articles basket was 6.99%, down from 7.37%. Inflation in fuel and power category cooled to 0.98%, from 3.84% last month.
Index of Industrial Productions (IIP) rebounded in April 2019 to grow by a six-month high of 3.4%, driven by a turnaround across all the sectors measured. It returned to positive territory in April following a contraction of 0.1% in March. Growth in the manufacturing sector stood at 2.8% in April compared with a contraction of 0.4% in the previous month. Mining sector saw growth accelerating to 5.1% from 0.8%. The electricity sector saw growth accelerate to 6%. Growth in the capital goods sector recovered to 2.5% in April compared with a contraction of 8.66% in the previous month. Consumer demand also saw a turnaround, with the consumer durables sector growing 2.4% compared with a contraction of 5.1% in March.
The Nikkei India Manufacturing Purchasing Managers’ Index rose to 52.7 in May from 51.8 in April. The improvement in manufacturing activity was aided by growth in new orders. With elections out of the way, Indian goods producers expect their output to rise further. PMI for services, fell to 50.2 in May, from 51 in April. India’s dominant service economy again suffered the impacts of election disruptions, with growth of both new work and business activity softening for the third straight month. The seasonally adjusted Nikkei India Composite PMI, that maps both the manufacturing and services industry, was at 51.7 in May, unchanged from April.
As per SIAM, passenger vehicle sales fell 20.6% in May to 239,347 vehicles from a year earlier. It was the biggest fall since a 22% decline in September 2001 and the seventh consecutive drop in monthly domestic passenger vehicle sales amid weak demand and a liquidity crunch faced by non-bank vehicle financiers. Top carmakers such as Maruti, Tata Motors and M&M Ltd have announced temporary factory closures to trim mounting stocks. Total sales of two-wheelers fell 6.7% from the year earlier in May to nearly 1.73 mn units. Factory dispatches of motorcycles declined 4.9% in May to 1.16 mn units while scooter sales dropped 7.9% to 511,724 units. Commercial vehicle sales declined 10% from the year earlier in May to 68,847 units.
Goods and services tax (GST) collection crossed Rs 1 lakh cr for a third straight month in May, posting 6.7% growth y-o-y, but below the growth rate needed by the centre to avoid compensating states for revenue losses. The centre and states need to collect about Rs.1.14 lakh cr every month this fiscal. While last two months had witnessed higher growth on account of year end collections, the increase vis-a-vis May 2018 signifies good growth. A total of 72.45 lakh GSTR-3B returns were filed in May, higher than 72.13 lakh in April.
After a delay of a week, monsoon hit the Kerala coast on 8th June, marking the official commencement of the four-month rainfall season in the country. The IMD has made a forecast of 96% of the Long Period Average (LPA) which falls on the border of normal and below normal rainfall. The delay in monsoon has no co-relation to the overall quantum of the rainfall. However, monsoon will be late in other parts of the country due to its delayed commencement.
For the third time in a row, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) cut interest rates by 25 basis points to 5.75% on 6th June 2019. The MPC also decided to change the stance of monetary policy from neutral to accommodative. A change in stance to accommodative means that a rate increase is off the table. Transmissions of rate cuts by banks have been poor partly due to poor credit quality & partly due to liquidity concerns. To promote digital transactions, RBI has decided to waive off RTGS and NEFT charges.
The full budget will be presented on 5th July 2019. The Union Budget will follow an interim budget presented in February this year, and will be the first under the second NDA government. We do not expect the income tax structure to be tweaked, as it was done in the interim budget. The upcoming Budget would be an opportunity for the government to boost consumption and investments through appropriate fiscal stimulus and policies.
NIFTY witnessed sharp moderation in revenue growth (10% in Q4 FY19 vs. +20% in the previous three quarters). EBITDA growth stayed muted at 6% in Q4FY19 (vs. 5% in Q3 and 14-28% growth in the earlier five quarters). PAT growth improved to 15.8% but 62% of the PAT growth came on the back of SBI alone. For FY19 as a whole, NIFTY PAT grew by 11%
India’s corporate profit to GDP ratio has moderated from 5.7% in FY10 to 2.8% in FY19. However, now the corporate earnings cycle appears to be bottoming out. With a revival in asset quality of corporate banks and likelihood of pro-growth policies by the government, FY20 looks poised for +20% earnings growth. There is however a limited room for any re-rating for the markets, given the current valuations (NIFTY 12m fwd. PE at ~19x). As we look towards easing of interest rate conditions, the interest sensitive sectors should see gains.
Positive profit growth outlook, steady mutual fund & FII flows, increasing GST collections, reasonable valuations & inflation trajectory remaining stable augurs well for the markets. Low IIP numbers though remain a concern. One eye will remain on global growth as there are talks of a slowdown in USA and subdued crude demand. Short term investors should remain cautious as markets could be volatile leading up to the budget but any intermittent volatility should be used as an opportunity by patient investors with medium to long term outlook to accumulate good quality stocks.
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’