Omicron variant

New Omicron variant unsettles markets

Markets have corrected ~8-9% from all-time highs due to fears of the new Omicron variant. Liquidity remains strong on the domestic front though we are witnessing strong foreign outflows. The markets look over heated at the moment and a marginal correction cannot be ruled out. How new cases relating to the new variant plays out in Europe & Africa and fresh lockdowns will dictate the direction of markets in the short term.

FIIs were net sellers to the tune of Rs.25,572 cr in October 2021, followed by Rs.39,902 cr in November. Till 13th December this month FIIs have sold to the tune of Rs.18,978 cr.  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) inched up to an all-time high in November 2021 to Rs38.45 lakh cr against Rs.38.21 lakh cr as last month, according to data released by AMFI. Mutual Fund SIP contribution for November 2021 hit an all-time high of Rs.11,005 cr. The cumulative inflows from systematic investment plans (SIPs) have crossed Rs.1 lakh cr in a year for the first time. Buoyed by the continued support from retail investors, the domestic flows have partially offset the selling pressure from foreign portfolio investors (FPIs). Boosted by the SIP inflow, the domestic funds deployed Rs.63,439 cr in the equity market while the FPIs invested close to Rs.43,193 cr in the first eleven months of 2021. As a result, the share of the local funds in the total institutional equity AUM rose to 16.8% in November, the highest since February 2020, according to NSDL data. Within the pure debt / income schemes category, liquid schemes, medium to long duration schemes, short duration schemes and credit risk schemes all reported positive flows.

Gold prices which hit a five-month high last month around Rs.49,500/10 gm, have cooled down marginally to ~Rs 48,000-48,500/10 gms. Spot gold was which it $1,860/oz last month is current hovering between $1770-$1800/oz . Central banks are ponder monetary tightening. Investors are focused on key central bank meetings this week, with the US Federal Reserve likely to accelerate its plans for the roll-back of its pandemic-era economic support measures. The ECB was largely expected to reduce asset purchases by half, but Omicron variant concerns may compel the central bank to delay it, which may give further strength to prices of precious metals

Global crude prices were volatile over the last month as it fell from a high of $86/bbl to $69/bbl on concerns over the new Omicron variant. Thereafter prices are settling around $75/bbl.  The OPEC raised its world oil demand forecast for the first quarter of 2022 and stuck to its timeline for a return to pre-pandemic levels of oil use, saying the Omicron coronavirus variant would have a mild and brief impact. Supply meanwhile is expected to increase with the largest U.S. shale basin’s output expected to surge to a record in January. The Asian Development Bank trimmed its growth forecasts for developing Asia for this year and next to reflects risks and uncertainty brought on by the Omicron coronavirus variant, which could also hamper oil demand.

Consumer Price Index inflation (CPI) firmed up to 4.91% year-on-year in November on the back of a rise in vegetable prices from 4.48% in October 2021. Core inflation, which is the non-food non-fuel component of the CPI basket, stood at 6.1% against 5.8% seen in the month before. Inflation in the food basket in November rose to 1.87% from 0.85% a month ago. Fuel & light inflation came in at 13.35% against a rise of 14.35% seen in October.

Wholesale prices based inflation (WPI) increased to a 12 year high of 14.23% in November from 12.54% in October. The high rate of inflation is primarily due to rise in prices of mineral oils, basic metals, crude petroleum & natural gas, chemicals and chemical products, food products etc. as compared to the corresponding month of the previous year. The food articles segment witnessed a 4.88% spike in November, the data showed. In the month prior to that, this was (-)1.69%. The fuel and power segment inched up to 39.81% in November from 37.18% a month ago.

Index of Industrial production (IIP) grew 3.2%, the lowest in eight months, in October, with an uptick in mining and electricity output. Supply-side bottlenecks, especially related to coal and chips in the automobile sector, along with subdued investment and consumption weighed on the Index of Industrial Production (IIP) despite festive demand. Data showed two key pockets of weakness — capital goods (-1.1% y-o-y) and consumer durables (-6.1%). The output of the manufacturing sector, which accounts for over three-fourth of the total weight of the index, grew 2% in October as against 3% in September and 4.5% a year ago.

The RBI Monetary Policy Committee (MPC) on 8th December retained the key lending rate, repo, at 4%, and maintained its stance as “accommodative”. An accommodative stance means the MPC is willing to either lower rates or keep them unchanged. The committee expects the spike in vegetable prices to reverse with the winter arrivals. RBI expects CPI at 5.1% for Q3 and 5.7% for Q4 of this financial year. The RBI has retained its GDP growth projection at 9.5% for FY22, but revised Q3FY22 growth estimate to 6.6% from 6.8% earlier.

The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) rose to a 10 month high of 57.6 in November from 55.9 in October. The second devastating wave of coronavirus pandemic had hit the country in March, affecting manufacturing activity.  India Services Business Activity index eased to 58.1 in November from 58.4 in October. PMI data for November indicated the Indian service sector continued to strengthen, with a substantial upturn in new orders underpinning output growth. The combined improvement in both these sectors has resulted in the Composite PMI Output Index rising to 59.2 in November from 58.7 in October.

According to SIAM, passenger vehicle sales last month fell 18.6% to 215,626 units. Including the sales of Tata Motors, which has stopped reporting monthly data to the SIAM, the industry volume fell about 14%. Two-wheeler sales dropped a steeper 34% last month. While sales of scooters fell 39% to 306,899 units, those of motorcycles slid 32% to 699,949 units in November. Industry continues to face headwinds due to a global semiconductor shortage. However, the commercial vehicle (CV) retail sales rose by 13.32% to 57,389 units last month on a low base.

The gross GST revenue collected in November 2021 was Rs.1,31,526 cr, the second highest since introduction of GST, only to that in April 2021. For the second straight month, gross GST collection crossed Rs.1.30 lakh cr. The revenues for the month of November 2021 are 25% higher than the GST revenues in the same month last year and 27% over 2019-20. Of the total GST collections in November, CGST was Rs.23,978 cr, SGST Rs.31,127 cr, IGST is Rs.66,815 cr (including Rs.32,165 cr collected on import of goods) and cess is Rs.9,606 cr (including Rs.653 cr collected on import of goods).

GDP in the second quarter of the fiscal year 2021-22 grew at 8.4%.The numbers mark a significant increase as compared to the COVID-19-hit second quarter of last fiscal year, when the GDP had declined by 7.4%. The GDP numbers for the second quarter were mostly in line with the projections by leading brokerages and financial institutions. Growth remains well on track for a full year growth of around 9.5%. The growth numbers will unlikely play a differentiating factor for the RBI’s policy with its own estimate being at 7.9%.

We are witnessing a marginal correction in markets, but long term prospects remain intact & this is giving a good opportunity to re-enter your favorite stocks at lower prices. With a decline in crude prices we expect margins to improve for Companies having crude derivative raw materials. OMCs, Paints, FMCGs, Specialty Chemicals, Plastics among other segments should witness better margins. With the semi-conductor chip shortage easing out gradually, automotive volumes should also improve in the next 6 months. We are seeing some banks & NBFCs increasing interest rates, indicating towards a reversal in the interest rate cycle & increased credit off take. We have a spate of IPOs lined up & as seen over the last couple of months, we need to be selective on which ones to invest, not only depending on prospects but also on valuations at which the issue happens.

We had abnormal economic numbers in H1FY21 due to the lockdown & thus this year H1 numbers looked exceedingly good yoy. We need to closely monitor the key economic indicators over the next few months as yoy numbers normalize to an extent. H2FY22 growth numbers will be lower on a higher base of last year. We are witnessing steady recovery, but an impending 3rd wave led by the Omicron variant could put a spanner in the wheel. GST collections & IIP numbers are increasing. 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 current market correction is giving an opportunity to re-enter some quality stocks at lower levels.

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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.

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