economic slowdown

Markets hit peak but economic slowdown persists

Stock market Index- NIFTY/SENSEX hit all-time highs over the last month, though the broader markets remain significantly lower. Sensex moved above 40,000 while NIFTY scaled above 12,000 levels partly driven by strong FII flows. September quarter results have been declared over the last month & profits have mostly been on the higher side driven by corporate tax rate cuts. Economic slowdown persists in sectors like auto, auto ancillary, capital goods and metals & mining sector amongst others.

After being net sellers for five months FII turned net buyers in October to the tune of Rs. 8595 cr. Continuing the trend FIIs are net buyers to the tune of Rs.4987 cr till 13th November. This is partly due to better September quarter earnings, stable crude prices & easing trade talks between USA & China.

Mutual funds’ assets under management (AUM) increased to Rs 26.33 lakh crore in October-end, a rise of 7.4% as compared with the preceding month, on the back of robust inflows in equity and liquid schemes.  Liquid funds alone witnessed an inflow of over Rs 93,200 cr last month. Overall, debt funds saw an inflow of Rs 1.2 lakh cr. Equity oriented schemes witnessed an infusion of Rs 6,015 cr. Mutual funds garnered Rs. 8,245 cr through SIPs in October. SIP folios have increased by 4.74 lakh in October to 288.68 lakh folios.

Gold prices in global markets fell to a three-month low of ~$1,450/oz, its lowest since beginning of August. Gold remained under pressure amid positive signals on US-China trade front. Gold also benefited from dovish monetary policies by various global central banks, but the Fed’s recent decision to hold back on further cuts until the economy takes a downturn weighed on bullion. In India, gold prices are hovering around Rs.38,000/10 gm. But as compared to early September highs of about Rs.40,000/ 10 gm, gold prices are down about Rs.2,000.

Brent crude oil prices remained range bound either side of $60/bbl. Worries about the impact on oil demand globally from the fallout of the 16-month US-China trade war, which has weighed on global economic growth continue. Positive commentary about a possible US and China interim trade deal should improve sentiments if talks fructify. After years of delay, Saudi Aramco’s much-anticipated IPO is expected to begin on 17th November 2019, the company said in a prospectus. The final share price will be determined on 5th December, a day after subscriptions close.

November could be a crucial milestone in US-China relations, as both sides appear motivated to sign a “phase one” trade deal, focusing on agriculture sales. A positive outcome at this juncture may also cancel the planned December increase in US tariffs on Chinese consumer goods exports.

In the UK, MPs in the House of Commons voted in favor of a Bill proposed by Prime Minister Boris Johnson mandating an early general election on 12th December. Parliament was dissolved on 6th November and there will be no further consideration of Johnson’s Brexit deal until after the general election. At the same time, the UK and European Union have agreed to a Brexit extension deadline of 31st January 2020.

Consumer Price Index (CPI) inflation climbed to a 16 month high of 4.62% in October, compared to 3.99% in September. It breached the Reserve Bank of India’s medium-term target of 4% for the first time since July 2018 due to higher food prices. Consumer Food price inflation, which amounts to half of the inflation basket, increased to 7.89% compared to 5.1% in the previous month. Core inflation which excludes energy and food items slowed to 94-month low of 3.47 % in comparison to 4% a month ago reflecting the slowdown in the economy. The sharp uptick in consumer inflation dampened expectations of a big cut in interest rates by RBI in December.

Wholesale prices based inflation in October dipped marginally to its lowest in more than three years at 0.16% compared to 0.33% in September. Inflation for manufactured items came at -0.84% in October compared to -0.42% in September. This is owing to demand slowdown in the economy because of which many producers are cutting back on production and also offering discounts. Food article inflation came in at 9.8% in October from 7.47% in September which prevented the index from falling into a negative territory. Inflation in fuel and power stood at -8.27% in October against -7.05% in September. The divergence in the CPI and WPI figures is due to the weightage assigned to different goods/items that make up the two baskets. In CPI, food has a much higher weightage whereas manufactured goods are assigned more weightage in the wholesale basket.

Index of Industrial Productions (IIP) output contracted for the second consecutive month to 4.3% in September after 1.1% in August. This is worst performance in this series since its inception in April 2012. It highlights the persistent structural slowdown in the economy and firming up expectations of further monetary easing next month with scant signs of a turnaround. There was a broad-based slowdown across all components. Production of capital goods, an indicator of investment activity, shrank 20.7%, mining output shrank 8.5% while electricity generation contracted 2.6% in the month. Production of consumer durables contracted 9.9% and that of consumer non-durables was down 0.4%.

The IHS Markit India Manufacturing PMI fell to a two-year low of 50.6 in October from 51.4 in September.  The cooling of manufacturing sector conditions in India continued in October, with both factory orders and production rising at the weakest rates for two years. The IHS Markit Services Purchasing Managers’ Index rose to 49.2 last month from 48.7 in September. It remained below the 50-mark threshold separating contraction from growth on a monthly basis. The last time services activity contracted for two consecutive months was in August 2017 following the implementation of GST. That, alongside a manufacturing slowdown, dragged a composite index to a more than two-year low of 49.6.

As per SIAM, domestic passenger vehicle sales increased by 0.28% to 2,85,027  units in October after 11 months of decline, thanks to festive boost. Total two-wheeler sales in October declined 14.43% y-o-y to 17,57,264 units. Sales of commercial vehicles were down 23.31%. The ailing auto sector showed slight signs of improvement during festive sales but no enough to pull the sector out of a demand crisis.

The Goods and Services Tax (GST) revenues stood at Rs.95,380 cr, up from Rs.91,916 cr in September this year but lower than Rs.1,00,710 cr in October 2018. Overall GST collections in April-October 2019 increased 3.38% y-o-y. While the domestic component grew 6.74% during April-October, GST on imports showed a decline. The government has a target of at least Rs 1 lakh cr in GST collections every month to meet its revenue estimates.

The weaker-than-expected economic data points to a deepening slowdown in the economy, where private consumption, investments and exports have all taken a hit. Economic growth rate had cooled to a six-year-low of 5% in the June quarter. The demand slowdown in the economy is still significant and would take longer time to recover. There is a distinct possibility that growth in GDP in Q2 will be lower than 5%. The government has tried to address sectoral pain points through specific measures. Most of these measures are addressing supply-side concerns and not those on the demand side, barring RBI’s rate cuts.

The September quarter results till now have largely been in line or better than expectations. Profit after tax was largely driven by lower tax rates in Q2 due to reduction in corporate tax rates and this has provided some support to the markets. Toplines for most companies have been subdued due to slack demand. NPA levels for banks remain at elevated levels though there are initial signs of them declining gradually. Among sectors, MOSL, in a report noted that autos and metals have seen a 12-13% projected earnings upgrade, while the capital goods sector has seen a 7% earnings cut going ahead.

There has been a flight to safety as industry leaders and large caps have largely held on while the broader market, reflected by midcaps 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, increasing retail inflation & falling WPI remain a concern. On the other hand steady mutual fund & FII inflows & reasonable valuations augur 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.

Corporate tax rate cut: An early Diwali

Direct Tax Code: Proposals for Implementation

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 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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