There has been a major sell-off in the Indian markets over the last month largely due to consistent selling by FPIs due to higher tax implication post budget. Thereafter the major topic of discussion has been how the government revoked article 370, which grants special status to Jammu & Kashmir on 5th August 2019. Ever since the budget was presented on 5th July, major indexes have corrected ~10%, while the sell-off has been sharper in the broader markets.
FII have been continuously selling the past few months, Rs.2,136 cr in May, Rs.688 cr in June followed up by Rs. 16,870 cr in July post budget. FPIs have continued selling in August to the tune of Rs. 7,710 cr till 14th August as tax burden above Rs.2 cr income has been increased in the budget.
Assets under management (AUM) of the mutual fund industry stood at Rs 24.5 lakh crore at July-end, up 1% m-o-m, data from AMFI showed. Liquid and money market funds had inflows of around Rs.56,000 cr in July after an outflow of over Rs 150,000 cr in June. This was largely due to advance tax payments by corporates. Total equity inflows stood at Rs.8,092 cr in July. Investment in equity funds through systematic investment plans (SIPs) comes as a silver lining, with a tally of Rs.8,324 cr in July, an all-time high. Thanks to strong equity MF inflows in FY19 and year to date, domestic mutual funds are playing a balancing role and smoothening out the volatility to a large extent caused by the exit of FPI money.
Gold prices this year have seen a spectacular rally this year, rising to record highs. Gold futures prices are up from around Rs.31,500/10 gms at the start of the year to the current levels of around Rs.38,000 in India, a gain of around 20% in eight months. In spot markets, gold prices have hit a new high of Rs.38,470/10 gms. Domestic prices are driven by global rates, rupee-dollar exchange rate and import duty. In global markets, gold prices have also seen a massive gain and are hovering around a six-year high of $1,500/oz. Investors piled into safe-haven assets amid a global slowdown, dovish stance from global central banks and a US-China trade war.
The Federal Reserve in its meeting on 31st July-1st August cut its interest rate by 25 basis points, the first reduction since the financial crisis, but disappointed investors by calling the move a “mid-cycle adjustment to policy” rather than the start of a more aggressive cycle of monetary easing. Before the Fed meeting, markets were betting on three more interest rate cuts by the end of 2019. The FOMC cut the target range for the federal funds rate to 2-2.25% and its accompanying statement suggested that a bias towards further easing remained.
Saudi Arabia, the de-facto leader of the OPEC, has said, it plans to keep its crude oil exports below 7 mn bpd in August and September to help drain global oil inventories. Analysts expect the country to support prices ahead of its plans to float Saudi Aramco, in what could be the world’s largest IPO. OPEC and its allies ( OPEC+), had agreed to cut 1.2 mn bpd since January, but booming U.S. shale oil production continues to chip away at efforts to limit the global supply overhang, weighing on prices. U.S. oil output from seven major shale formations is expected to rise by 85,000 bpd in September, to a record 8.77 mn bpd, the U.S. Energy Information Administration forecast in a report. Gloomy forecasts for the global economy and oil demand growth have also dragged on oil prices as the trade dispute between the United States and China escalates.
Consumer Price Index (CPI) inflation was steady at 3.15% in July 2019, compared with 3.18% in June 2019. Inflation of food and beverages eased to 2.33% in July 2019 from 2.37% in June. Fuel and light dipped to (0.36%) in July 2019. The core CPI inflation rose to 4.24% in July compared with 4.13% last month. The cumulative CPI inflation has declined to 3.09% in April-July FY20 compared with 4.63% in April-July FY19.
Wholesale Price Index (WPI) declined to a 25 months low of 1.08% in July, against 2.02%, mom mainly on account of cheaper fuel and food items. Inflation in food articles was 6.15% in July as against 6.98% in the previous month. Similarly, wholesale inflation in fuel and power segment contracted further to – 3.64% as against -2.2% in June. Inflation in manufactured products, with a weight of 64.23%, eased to 0.34% from 0.94%, suggesting lack of pricing power for manufacturers in the face of weak consumer demand.
Index of Industrial Productions (IIP) growth slipped to a 3 month low of 2% in June as against 4.6% in May. Manufacturing output, which accounts for more than three-fourths of the entire index, grew 1.2% in June, against a growth of 2.5% last month. Capital goods saw a contraction of 6.5% in June. The expansion in power generation sector stood at 8.2%. Contraction in 15 of the 23 sub-sectors of manufacturing, reinforce the evidence of a slowdown emerging from various sectors.
The Nikkei Manufacturing Purchasing Managers’ Index (PMI) rose to 52.5 in July from June’s 52.1. It has remained above the 50-mark separating contraction from growth for two years. New orders, a measure of overall demand, came in at a faster pace last month and helped boost factory output. Services sector activities in July not only returned to growth territory from contraction in the previous month but expanded to a 12-month high on new business orders, showed the widely-tracked Nikkei purchasing managers’ index (PMI). Services PMI rose to 53.8 in July from 49.6 in June. Composite PMI Output Index, which maps both manufacturing and services industry, touched an eight-month high of 53.9 in July from 50.8 in June, as aggregate new orders rose to the greatest extent since last November.
Sales of passenger vehicles to car dealers fell 30.9% to 200,790 units in July, data released by the Society of Indian Automobile Manufacturers (SIAM) showed. Sales fell for the ninth straight month. Motorcycle and scooters sales fell 16.8% to about 1.51 mn units. Commercial vehicles sales fell 25.7% to 56,866 units. The data shows urgent need for a revival package from the government. The industry is doing everything possible to increase sales but it needs government support to prevent the crisis from worsening.
Collections from the Goods & Services Tax (GST) reached over Rs.1.02 lakh cr in July. So far, in three out of four months during the current fiscal year, the collection has been more than Rs.1 lakh cr. During the April-July 2019 period, the domestic component has grown 9.2% over the year-ago period while the GST on imports has come down by 0.2%. The total collection for the period rose 6.83%. Interestingly, collections grew despite industrial activity slowing down.
Overall, India has received 5% less rain than average since the start of the monsoon season on 1st June. India received 28% more rainfall than the 50-year average in the 1st week of August, data from the IMD showed. The southwest monsoon’s trail of destruction continued with floods in several states including Assam, West Bengal, Uttarakhand, Gujarat, Andhra Pradesh, Karnataka and Kerala.
For the fourth time in a row, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) cut interest rates, this time by 35 basis points to 5.40% on 7th August 2019. It also decided to retain the monetary policy’s current accommodative stance. This is the second-biggest rate cut in recent times after RBI reduced the repo rate by 50bps twice: once in April 2012 and next in September 2015. With inflation expected to remain benign amid slowing consumption and investment growth, which threatens to further slowdown economic growth. Up until the recent policy review, banks had lowered their benchmark lending rate (MCLR) by just 10-20 bps, even though the RBI had cut the repo rate by 75 bps.
After hitting a fresh life-high of 12,103 in July, Nifty recorded the worst monthly performance this year and closed with losses of around 6%. The market fall has been due to a combination of global as well as domestic factors. There is a want for higher required rate of returns due to expectations of rise in risk premium. If risk premiums rise, the markets have to be cheap enough to deliver the higher expected pre-tax returns. Equity markets are not cheap enough at the current level of risk-returns equation.
India’s economic activity weakened further in 1QFY20, with very weak growth in fiscal spending contributing to it (partly due to elections). We believe that real GDP growth could decelerate slightly from 5.8% yoy in 4QFY19 to ~5.6% in 1QFY20. We expect 1QFY20 to be the bottom for GDP growth; hereon it is expected to start reviving and cross 7% in 4QFY20.
The Indian stock market has been the worst performing market so far in 2019. A slowdown in the economy and weak corporate earnings growth could keep Indian markets under pressure for some time to come. Indian indices are trading just near around their 10-year historical averages of about 17X one-year forward earnings. Earnings growth continues to be weak for India Inc in the quarter ended June 2019 — with profit (excluding banks and finance companies) dropping by ~6%.
Subdued earnings growth, low IIP/GDP growth numbers & continuous FII outflows remain a concern. On the other hand steady mutual fund inflows, increasing GST collections, reasonable valuations & inflation trajectory remaining stable augurs well for the markets. One eye will remain on global the global scenario as slowdown talks linger in addition to US- China trade war, BREXIT & subdued crude demand. Short term investors should remain cautious as markets remain volatile but any intermittent decline in markets should be used as an opportunity by patient investors with medium to long term outlook to accumulate good quality stocks at reasonable valuations.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 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’