Markets remained buoyant as NIFTY & SENSEX hit new highs but failed to break out remaining range bound over the last month. NIFTY has been range bound between 15500-15950 levels. Liquidity remains strong especially on the domestic front. The markets have hardly been impacted by the 2nd wave of COVID over the last 3 months. With markets at elevated levels we feel corporate earnings need to catch up going ahead.
FII have been marginal sellers over the last few months but insignificant compare to the buying which took place between December 2020 and March 2021. In fact in H2FY21, FIIs have been net buyers to the tune of Rs.1.80 lakh cr. In comparison, they have been net sellers to the tune of Rs.18000 cr in April-June 2021 quarter. This has partly been due to increasing COVID numbers & profit booking. Till 13th July this month FIIs have been net sellers to the tune of Rs.4888 cr.
As per AMFI, the total assets under management of the mutual fund industry jumped to Rs 33.66 lakh cr as on 30th June 2021 from Rs 33.05 lakh cr as on 31st May. The contribution from SIP also went up to Rs. 9,155 cr in June from Rs 8818 cr in May. SIP AUM at an all-time high and now forming almost 15% of total industry AUMs and number of SIP accounts breaching 4 cr mark for the first time ever, is reflective of continued retail investor confidence in the mutual fund asset class. The equity funds got an inflow of Rs 5,988 cr in June, down from Rs 10,082 cr in May. Bond funds saw net inflows of Rs 3,566 cr against outflows of Rs 44,512 cr last month. Money market funds and ultra-short duration funds saw net outflows of Rs 13,987 cr and Rs 2,439 cr. This is in line with the expectation that corporate investors will pull out money to make advance tax payments and to comply with quarter-end cash flow requirements.
Gold prices in India were up nearly 4% in the last one month. On MCX, gold was around Rs 48,300/10 gms. Globally, yellow metal prices were headed for the fourth consecutive weekly gain, as investors took comfort from Federal Reserve Chair Jerome Powell’s stance that the U.S. central bank would continue to support the economy and inflation will be transitory. Gold was flat at around $1,830/oz. Large stimulus measures typically tend to support gold, which is often considered a hedge against inflation and currency debasement.
Global crude prices spiked to a three year high of $77 per barrel as Opec+ failed to reach an agreement. While Opec+ members Saudi Arabia and Russia are in favor of increasing oil production by 4,00,000 bpd from August till the end of the year, UAE has not yet agreed to the proposal. If oil production and supply levels do not increase in line with rising global demand, it could lead to crude breaching $100/bbl, according to the International Energy Agency. Petrol and diesel have a combined weight of 4.69% in the wholesale price index and 2.34% in the retail price index. Any increase in the prices of the transport fuels affect the WPI more than the CPI but what is more worrisome is the pass through effect the increase in fuel prices can cause.
Consumer Price Index inflation (CPI) for the month of June stayed over the RBI’s target band for the second month in a row at 6.26% compared to 6.30% in the previous month. Food Price Index increased by 5.15% in June 2021 against 5.01% in May. Fuel and light inflation was at 12.68% in June. If inflation is not brought under control, it could lead to a possible rate hike by RBI going ahead.
Wholesale prices based inflation (WPI) eased in June to 12.07% from a record 12.94% a month ago as food and fuel prices fell while those of manufactured items accelerated. Food inflation in June decelerated to 3.1% from 4.3% a month ago while fuel inflation eased to 32.8% from 37.6%. Manufactured products saw a marginal increase in inflation to 10.9% from 10.8% in May due to rising price pressure in textiles, apparel, leather, wood, chemicals, pharmaceuticals, cement, basic metals and fabricated metal products. Core inflation excluding food and fuel items hardened further to 10.4% in June from 10% a month ago.
Index of Industrial production (IIP) witnessed a year-on-year growth of 29.3% in May 2021. The IIP had crashed (-) 33.4 % on-year to 90.2 in May 2020. This was mainly due to the nationwide lockdown which was imposed last year to curb the first wave of Covid-19 pandemic. The manufacturing sector saw a growth of 34.5 % yoy, while the mining sector saw a rise of 23.3%. The electricity sector too rose 7.5%. The growth rates over corresponding period of previous year are to be interpreted considering the unusual circumstances on account of COVID-19 pandemic since March 2020.
The IHS Markit Purchasing Managers’ Index (PMI) declined to 48.1 in June from 50.8 in May. The headline index slipped below the crucial mark of 50 for the first time since July 2020. Demand for labour is unlikely to improve anytime soon, , with backlogs of work decreasing for a second consecutive month. The only real silver lining is that price pressures appear to be coming under control. India’s services PMI fell to 41.2 in June 2021 from 46.4 in May, according to data from IHS Markit. Given the current COVID-19 situation in India, it was expected that the service sector would take a hit. Composite PMI declined to an 11 month low of 43.1 during the month, from 48.1 in May.
As per the Federation of Automobile Dealers Associations (FADA), total vehicle retail sales for the month of June 21 rose by 22.62% YoY. However, when compared to June 2019 which is a regular pre-covid month, the retail sales are still down by 28.32%. On YoY basis, all categories were in green with 2 wheeler sales up by 17%, 3 wheelers up by 22%, Passenger vehicles up by 43%, Tractors up by 14% and Commercial vehicles up by a massive 236% (on a very low base due to non-availability of BS-6 vehicles).
Goods and services tax (GST) collections for June grossed Rs 92,849 cr, dropping below Rs 1 lakh cr mark for the first time this year. During May 2021, most Indian states and Union territories were under either complete or partial lockdown due to the second wave of COVID-19. The second wave reached its peak on 7th May 2021. The Rs.92,849 cr amount includes a Central GST of Rs.16,424 cr, State GST of Rs.20,397cr, Integrated GST of Rs .49,079 cr and cess of Rs.6,949 cr.
As the frontline indexes are hitting all-time highs, have been range bound over the last month between 15,500 and 115950, we feel we have to be a bit selective in stock picking. Some sectors like PSUs, construction etc are still significantly lower than their all-time highs. The 2nd wave of COVID hit a peak of 4 lakh cases/day in May 2021. Thereafter there has been a gradual decline in COVID numbers over the last 2 months and current daily run rate is 1/10th of peak, though already talks of a 3rd wave of COVID has started. 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 and increase vaccination numbers rapidly. This could also be a good buying opportunity if there is a marginal correction in markets.
GST collections have dipped marginally due to lockdown in May/June and how it picks up will depend on an impending 3rd wave and unlocking of the economy. IIP numbers are still far away from full recovery and could be a dampener due to partial lockdown. We have to keep in mind that we had complete lockdown last year from end March. Thus yoy economic numbers will look extremely good on a low base, over next few months. Higher than expected inflation numbers coupled with a sharply depreciating INR remain a concern. 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. This is a very good buy on dips market & focus should be on stock picking. I think we are at the beginning of another bull run & could see positive movements over the next couple of years.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 13 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.