oil on the boil

Oil on the boil – March 2021

Markets remained buoyant as both NIFTY & SENSEX hit new highs, SENSEX above the 50,000 mark while NIFTY is above 15,000. This move has largely been driven by liquidity due to strong FII inflows over last few months. Sentiments have further been boosted by declining COVID numbers & increased vaccination.

FII have been buying heavily in Indian equities over the last year. In the last four months (November 2020-February 2021, FIIs have been net buyers to the tune of Rs.1.64 lakh cr) They have continued to be net buyers to the tune of Rs.3,327 cr till 12th March 2021. At a time when DIIs have been continuously been selling, FIIs have driven up liquidity in the markets.

Equity mutual funds continue to witness net outflow for 8th month in a row as the segment saw a withdrawal of Rs.4,534 cr in February on profit-booking by investors amid sharp market rally. However, investors put in Rs.1,735 cr from debt mutual funds last month, thanks to the net inflows in liquid, low duration and money market funds.  Despite the outflow from equities, asset under management (AUM) of the mutual fund industry rose to Rs.31.64 lakh cr in February-end from Rs.30.5 lakh cr in January-end. The AUMs of SIPs as well as retail equity folios are at an all-time high of Rs.4.21 lakh cr and Rs.8.07 lakh cr, respectively, reflective of continued disciplined approach adopted by the retail mutual fund investors.

Gold and silver prices have been declining in Indian markets as a rally in risk assets takes some shine off precious metals. On MCX, gold futures were ~Rs.44,750/10 gm while silver is trading around Rs.67,200/kg. Gold rates in India are down ~Rs.11,500/10 gm from August 2020 highs. In global markets, gold rates also kept falling as US benchmark bond yields have been going up. Spot gold is at about $1,720/oz. Higher bond yields increase the opportunity cost of holding non-interest paying gold. Weighing on gold is increased vaccination globally which has improved global growth outlook.

Brent crude oil prices are flirting with $70/bbl and have so far in 2021 increased by about 33% in two and a half months. Higher crude oil prices affect many sectors. For instance, strong oil prices bode well for producers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd. As far as state-run oil marketing companies (OMCs) are concerned, as long as they keep passing on higher oil prices in the form of higher retail prices, there shouldn’t be an issue. For aviation companies, higher crude oil prices are always detrimental, as they form a big chunk of their operating costs. Consumer companies & paints, too, are adversely impacted owing to higher oil prices.

Consumer Price Index inflation (CPI) increased to 5.03% in February 2021 from 4.06% in January mostly on the back of rise in food inflation and fuel. The rising global crude prices will continue to add inflationary risks going ahead.  Food inflation rose steeply to 3.87% in February, compared to 1.89% in the previous month. The core inflation, which measures growth in the consumer price index after removing the food and fuel components stood at 5.8% as against 5.7% in the previous month. Inflation in ‘fuel and light’ category remained elevated at 3.53% during February compared to 3.87% in January. Higher fuel prices have been passed through, reflecting an 11.36% increase in transport and communications inflation.

Wholesale prices based inflation rose to a 27-month high of 4.17% in February compared to 2.26% for the corresponding period in January 2021. WPI Food Index stood at 3.31%, an increase against (-) 0.26% in the previous month. Primary articles inflation is at 1.82% compared to (-) 2.24% in the previous month. Prices of minerals (9.40%), crude petroleum & natural gas (6.50%) and food articles (0.51%) increased in February, 2021 as compared to January, 2021.

The Index of Industrial Production (IIP) contracted 1.6% in January against a 1.5% rise in December and 2.2% expansion in January last year. The manufacturing sector continues to contract at 2%. While mining shrank 3.7%, electricity generation was up 5.5%. Eighteen of the 23 sub-sectors of manufacturing contracted in January. Capital goods production, an indicator of investment, shrank 9.6%, indicating that the anticipated investment revival is yet to manifest itself.

The IHS Markit Purchasing Managers’ Index (PMI) for manufacturing sector declined marginally to 57.5 in February from 57.7 in January 2021. The headline figure remained above the long-run average of 53.6. This was driven by sharp rise in new business orders amid a rebound in demand conditions that led to rise in production and hiring activity. The seasonally adjusted India Services Business Activity Index rose from 52.8 in January to 55.3 in February, pointing to the sharpest rate of expansion in output in a year amid improved demand and more favorable market conditions. The Composite PMI Output Index, which measures combined services and manufacturing output, increased from 55.8 in January to 57.3 in February.

On the domestic macro-economic front, after contracting for two quarters in a row, the Indian economy recorded a 0.4% GDP growth in the October-December quarter, mainly due to a good show by farm, manufacturing, services and construction sectors.

As per Federation of Automobile Dealers Association (FADA) passenger vehicle sales in February increased by 10.6% yoy to 2,54,058 units on a low base of last year as India started transitioning from BS4 to BS6 emission norms. This coupled with the global semiconductor outrage has kept the waiting period of PVs as high as 8 months. Tractors maintained their outperformance compared to the broader market, up 18.9% yoy at 61,351 units. In contrast two-wheeler sales were down 16.1% at 10.91 lakh units while three-wheeler sales were down 49% at 33,319 units. CV sales were down 29.5% yoy at 59,020 units. CV segment continued to falter despite seeing a good pent-up demand during the months after unlocking. Negligible sales of passenger buses due to closure of educational institutes and supply side constraints have kept the registrations in deep red though tippers and heavy commercial vehicles are witnessing initial signs of revival due to the government’s infrastructure push creating demand.

Goods and service tax (GST) collections for February crossed Rs.1.1 lakh cr for the third consecutive month on the back of improve compliance and recovery in economic activities at Rs.1.13 lakh cr. GST collections in January touched an all-time high of Rs.1.19 lakh cr since introduction of tax regime. Out of total GST revenue, CGST is Rs.21,092 cr, SGST is Rs.27,273 cr, IGST is Rs.55,253 cr (including Rs.24,382 cr collected on import of goods) and cess is Rs.9,525 cr (including Rs.660 cr collected on import of goods). GST collection in March 2021 is expected to touch a record high of around Rs.1.30 lakh cr on the backdrop of a rapid economic recovery.

The Indian economy may revive and retake its place as the fastest growing one in 2021-22, as per forecast released by the Organization for Economic Cooperation and Development (OECD). India’s gross domestic product (GDP) is projected to jump by 12.6% during FY 21-22. This is especially significant as India experienced recession for the first time in 25 years during FY 20-21, largely due to the COVID-19 pandemic. Globally the OECD expects 5.6% growth in 2021, compared to its December 2020 estimate of 4.6% growth. It also expects the United States to grow by 6.5% this year compared to the earlier projected 3.5%. In countries using Euro currency, the OECD expected output to expand by 3.9%, the United Kingdom it expects growth of 5.1%.

Over the next 2 months assembly elections will be held in four states (West Bengal, Tamil Nadu, Assam and Kerala) and one union territory (Pondicherry). Elections will begin on 27th March till 29th April, with polling in eight phases in West Bengal. Counting for all seats will be done on 2nd May. While BJP is already in power in Assam, they would be looking to make significant inroads in the rest of the states. Markets will keep a close watch on results in West Bengal, among all the states.

As the frontline Indexes hit all-time highs, we feel we have to be a bit selective in stock picking. Some sectors like PSUs, metals & mining construction etc are still significantly lower than their all-time highs. NIFTY 50 profit growth is estimated at 18-20% over the next couple of years on a low base of FY21 and interest rates are low. The gap between 10Y G-sec yield and 1Y-forward NIFTY 50 earning yield [i.e. 100/ (one year forward P/E)] has reduced significantly and is now below 10 year average indicating that equities are attractively valued relative to current bond yields.

GST collections are consistently clocking above the 1.1 lakh cr/month & GDP & IIP numbers have consistently improved over the last couple of quarters though low tax collections could be a dampener this year. Higher than expected inflation numbers coupled with increasing crude prices remain a concern. I believe that we have already overcome the worst of COVID times & expect things to improve from here across the globe. 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.

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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.

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