Markets remained buoyant as NIFTY & SENSEX hit new highs with NIFTY above 17,400 & SENSEX above 58,000 for the first time ever. The markets have hardly been impacted by the 2nd wave of COVID. The markets look over heated at the moment & we feel corporate earnings need to catch up over the next few quarters for markets to sustain at current levels.
FII have been sellers over the last few months but this has more than been compensated by strong buying by domestic institutions. FIIs have been net sellers to the tune of Rs.2568 cr in August 2021. Till 13th September in the current month FIIs have been net buyers to the tune of Rs.2089 cr. With markets at such elevated levels, we could see some profit booking coming.
As per AMFI, investors poured in a net Rs 8,666 cr in equity mutual fund schemes against previous month’s deposit of Rs 22,583 cr. NFOs across categories mobilized Rs 23,668 cr in August. SIP inflows in August rose to Rs 9923 cr from Rs 9608 cr in the previous month. Total number of SIP folios saw a marginal jump to 4.32 cr from 4.17 cr. The assets under management (AUM) from SIPs rose to an all-time high of Rs 5.26 lakh cr, from 5.03 lakh cr in July. Debt mutual fund schemes also saw net inflows worth Rs 1,074 cr compared to Rs 73,694 cr in July. The total mutual fund AUM as on 31st August rose to an all-time high level of Rs 36.59 lakh cr, thanks to net inflow of Rs.32,976 cr. Mark to market gains also supported the AUM rise.
Gold prices in India have been falling over the last fortnight to settle at ~Rs 46,800/10 gm in India on rising treasury yield and firm US dollar. The precious metal has been consolidating in a $50 range for the last month between $1,780-1,830 and a break on either side of the given range will give further direction. The number of Americans filing new claims for jobless benefits fell by 35,000 to a pandemic low of 310,000 for the week ended 3rd September. European Central Bank (ECB) said it will reduce the PEPP (pandemic emergency bond-purchasing program) in the coming quarter that has cushioned the impact of the coronavirus crisis and keep credit cheap in the Eurozone.
Global crude prices have been range bound over the last few months. Last week state owned Saudi Aramco cuts prices for the October shipment to Asia – excluding the U.S. and Europe. The price per barrel or Official Selling Price (OSP) was reduced by $1.30- $1.70 surprising market expectations which forecasted a much smaller markdown. The oil market also got a boost from news of a call between U.S. President Joe Biden and his Chinese Counterpart Xi Jinping. The call raised hopes for warmer relations and more global trade. The growing signs of supply tightness in the United States as a result of Hurricane Ida more than offset the bearish influences of Saudi Arabia’s price cut to Asia and China’s releasing oil from its strategic petroleum reserve.
Consumer Price Index inflation (CPI) for August 2021 came in at 5.30%, compared with 5.59% in July, as food prices cooled further. Consumer Food Price Inflation (CFPI) for August stood at 3.11% compared to 3.96% in July. However, concerns remained with high edible oil prices, which registered an increase of 33% YoY. Fuel and light inflation in August rose to 12.95% from 12.38% in the previous month.
Wholesale prices based inflation (WPI) rose marginally to 11.39% in August from 11.16% in July as prices of non-food articles such as oil seeds, fuel, minerals remained elevated. The high inflation rate in August was largely due to low base effect as inflation in August 2020 was of 0.41%. Inflation in manufactured products stood at 11.39% in August, against 11.20% in July. Fuel and power prices rose 26.09% in August yoy compared with 26.02% in July. There will always be a disconnect between WPI and CPI because of nature of the price indices and as the weightage in CPI is more towards food and WPI towards manufactured products
Index of Industrial production (IIP) grew by 11.5% in July 2021 as against 13.6% in June, registering a recovery as a result of the base effect due to the COVID-19 lockdown that affected economic activity last year. The manufacturing sector, which comprises 77.63% of the index of industrial production, grew 10.5% in July. The mining output also climbed 19.5% and power generation grew by 11.1%. The output of capital goods – a barometer of investment, grew 29.5% in July. The country’s output of the eight core sectors — also known as the infrastructural output, grew 9.4% in July 2021. It can be noted that the overall index is still 0.3% lower than the pre-pandemic levels in Jul-19.
The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) stood at 52.3 in August, down from 55.3 in July. Manufacturers were relatively less impacted by the pandemic than service providers; the bigger worry is the threat of further virus outbreaks. The IHS Markit Services Purchasing Managers’ Index (PMI) rose to 56.7 in August – its strongest pace since the pandemic hit the country in March 2020 from 45.4 in July. The Indian service sector bounced back in August, led by the reopening of several establishments and improved client confidence due to growing vaccine coverage. The Composite PMI Output Index — which measures combined services and manufacturing output — was up from 49.2 in July to 55.4 in August.
According to the Federation of Automobile Dealers Associations (FADA), retail sales of passenger vehicles (PV) in August increased by 39% yoy to 2,53,363 units. Two-wheeler sales rose 7% to 9,76,051 units last month, compared to 9,15,126 units in the year-ago period. Commercial vehicle sales surged 98% to 53,150 units last month. Three-wheeler sales saw a rise of 80% to 30,410 units last month. PV & 2-W sales have been impacted by semiconductor shortage globally & we expect sales to pick up further as it gets resolved over the next few months.
Goods and Services Tax (GST) revenues in August fell to Rs.1.12 lakh cr from Rs.1.16 lakh cr in July. Even as compared to the August revenues in 2019-20 of Rs.98,202 cr, this is a growth of 14%. Of the Rs.1,12,020 cr revenues in August, Central GST was Rs.20,522 cr, State GST Rs.26,605 cr, and Integrated GST stood at Rs.56,247 cr (including Rs.26,884 cr collected on import of goods). Compensation Cess Rs.8,646 cr was collected, of which import of goods contributed Rs.646 cr.
As the frontline indexes are hitting all-time highs, we feel we have to be a bit selective in stock picking. Currently daily COVID cases are stagnant around 30-40k cases/day and talks of a 3rd wave of COVID/delta variant are going on. Thus we must be cautiously optimistic going ahead over the next few months. 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. Vaccination for children is still in the works and how that plays out needs to be seen. This could be a good buying opportunity if there is a marginal correction in markets.
The dip in GST collections, lower-than-expected core sector growth, and moderation in the August manufacturing PMI suggest that some caution is warranted regarding the strength of the recovery that is underway in the ongoing quarter. We expect GDP growth in the ongoing second quarter of 2021-22 to range between 7.8%-8.8%, with the absolute level of GDP to continue to trail the pre-pandemic level as the services sector struggles to catch up with the rest of the economy. The markets are hitting all-time highs but the auto sector & PSU sector are laggards in the market. We remain positive on these two sectors over the next one year & feel that they will catch up with the broader markets.
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 are stagnating & IIP numbers are still marginally below pre-covid levels. Higher than expected inflation numbers remain a concern driven by high fuel prices. With high government spending to bring economy back to normal post covid, any cut in tax on fuel looks unlikely. This could also lead to a possible rate hike by RBI going ahead. 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.
Retrospective taxation- Overhang removed
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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.