Equity markets have corrected over 10% the last month with USD-INR hitting new highs and crude prices scaling multi year highs. Rupee depreciated to above Rs.74/$ for the first time on 5th October 2018. Departing from the trend of the last few months, both large & mid-caps have declined last month driven by a sharp fall in NBFC & OMC stocks. With less than a year to go for general elections, markets movements may be subdued looking for the next political cue.
FIIs have been selling heavily over the last few months, Rs.2029 cr in August, Rs.9623 cr in September followed by Rs.12399 cr till 9th October. With crude & INR-USD moving up there seems to be no respite in the short term.
The total AUM of the mutual fund industry fell to Rs 22.04 lakh cr in September compared to Rs.25.2 lakh cr in August. The fall in overall assets was due to the outflows of Rs.2.11 lakh cr from liquid funds. Short-term debt schemes witnessed sharp outflows triggered by the ratings downgrade of IL&FS and withdrawals by companies to pay their quarterly advance taxes. Net inflows into domestic equity mutual funds rose to Rs.11,172 cr, up 33.39% from August even though the markets have corrected sharply. It clearly indicates that investors are not looking at markets with a short-term horizon but believe that the Indian market structurally is intact. The total amount collected through SIPs in September was Rs.7,727 cr as against Rs.7,658 cr in August. According to AMFI total number of SIP accounts as on 30th September stood at Rs.2.44 cr.
Time and again, gold has proven its worth as a hedge against volatility and inflation. So at a time when the rupee is falling, people tend to hold on to money in the form of gold. The fear of a full-blown trade war between the US and China in the near future has partly been negated by a strengthening USD and international prices have remained steady. Though, in 2018, the price of gold is almost at the same level in the international market as it was in September 2014, but due to a depreciation in the value of the rupee against the dollar from 61.5/$ to 72.24/$, the price of gold in the domestic market has surged from Rs.26550/10 gm to Rs.31700/10 gm. Globally gold has been hovering around $1200/oz for the last couple of months & is currently trading at $1,207/oz.
Brent hit a four-year high of $86.74 in the first week of October. The oil market mood is exceptionally bullish, with fears growing that the U.S. demands for an Iran oil embargo could cause a significant supply shortfall. Iran’s crude exports fell further in the first week of October, according to tanker data, as buyers sought alternatives ahead of US sanctions that take effect on 4th November. Iran exported 1.1 mn bpd of crude last week, down from 2.5 mn bpd in April before the sanctions. Crude prices have already risen 24.21% this year.
The trade war between USA and China, soaring crude oil prices and India’s dilemma over crude oil imports from Iran are the primary reasons for the rupee weakening against the dollar. Indian rupee has fallen 13.22% so far this year, touching all-time lows of Rs.74.35/$ on 9th October 2018. Investors remained concerned over sustained foreign capital outflows other than the rise in crude oil price.
After two successive rate hikes, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) kept key policy rates unchanged in its fourth bi-monthly policy review on 5th October 2018, citing a benign inflation trajectory and downward revision to inflation projections, though the stance changed from neutral to “calibrated tightening”. The RBI retained GDP forecast for 2018-19 at 7.4%. The IMF has retained India’s GDP growth forecast for fiscal year 2018-19 at 7.3%.
WPI inflation came in at 5.13% in September as against 4.53% in August driven by a rise in fuel & food prices. Prices of food articles rose 0.14% in September, as against a fall of 2.25% a month ago. Prices of fuel and power, continued to rise at 16.65% in September, as against a rise of 17.73% in August. Primary articles, which account for more than a fifth of the entire wholesale price index, rose 2.97%, as against a fall of 0.15% in August.
India’s consumer price index (CPI) inflation increased marginally to 3.77% in September from 3.69% in August due to higher fuel cost. Retail inflation was lower than economists’ estimates. Food inflation accelerated to 0.51%, against 0.29% in August. CPI was within the Reserve Bank of India’s (RBI) medium-term target of 4%. Fuel & light inflation remains unchanged m-o-m at 8.47%. Core inflation was at 5.8% vs 5.9% m-o-m.
The Nikkei India Manufacturing Purchasing Managers’ Index strengthened in September to 52.2 from 51.7 in August. The seasonally-adjusted Nikkei India Services Business Activity Index touched a four month low of 50.9 in September, down from 51.5 recorded in August. Services sector expanded at a slower pace in September as higher fuel costs and stronger US dollar made imported goods expensive. The composite PMI fell to a four month low of 51.6 in September against 51.9 in August.
The core sector index, which measures output across eight infrastructure sectors, rose 4.2% in August compared with an upwardly revised 7.3% in July. The core sector index has a 40% weight in the index of industrial production (IIP), which along with muted auto sales, indicates that industrial growth could moderate in August. GST collections rose to Rs.94,442 cr in September compared with Rs.93,690 cr in August.
Index of industrial production (IIP) grew at 4.3% in August lower than 6.6% clocked in July due to a higher base effect. This was significantly higher than expected. The manufacturing sector grew at 4.6% in August against 7% growth in July. Capital goods production grew by 5% in August as against 3% in July. Consumer durables output grew at 5.2% in August, compared to 14.4% in July, while consumer non-durables output grew at 6.3% in August, compared with 5.6% a month ago.
According to SIAM, passenger vehicle sales in September declined 5.61% yoy to 2,92,658 units. Total two-wheeler sales in September increased 4.12% yoy to 21,26,484 units driven by motorcycle sales which rose 7.04% to 13,60,415 units. Commercial vehicles sales remained strong up 24.14% yoy at 95,867 units in September.
The monsoon this year has left 21.38% area of the country moderately to extremely dry, IMD data at the end of the four month season shows. India received 9% less rainfall this year during the southwest monsoon between June and September. The northeastern states had the maximum deficit. IMD has said the onset of the northeast monsoon is likely on 8th October in view of the favorable conditions. Normally, the onset of the monsoon takes place over coastal Tamil Nadu by 20th October after the withdrawal of south-west monsoon.
We have assembly elections in five states – Chhattisgarh, Madhya Pradesh, Mizoram, Rajasthan and Telangana coming up between end October & beginning December. These will be the last elections before the general elections next year & thus the outcome will be very closely watched. These results will act as a precursor to predicting the polls next year & will have a hugh bearing on market sentiments over the next two months.
There has been a sharp correction in markets by over 10% in the last month from recent highs. This has largely been driven by a sharp correction in NBFC & OMC stocks in addition to correction in some frontline stocks which, till now had held up the major indices. The sell-off in the broader mid & small cap stocks have continued over the last month. Although we remain positive on long-term structural story as the reforms implemented (GST, IBC, RERA) in the last couple of years should start paying off, near-term movement could be subdued. As crude prices have risen 24.21% and INR has fallen 13.22% so far this year, analysts fear that the fiscal burden will weigh on markets. The Indian market may face turbulence over the next 2-3 quarters with stock prices being dictated by unfavorable global macro, weak domestic macro, government actions and uncertain politics rather than the underlying fundamentals and fair values of stocks.
SIP inflows remain strong but FII outflows along with a depreciating rupee remain a concern. Increasing crude prices along with that is likely to affect the fiscal math as 10-year g-sec surges above 8% on expectations of higher fiscal deficit. There has been a sharp correction in some quality stocks which have started looking like compelling BUYs at current levels with a 2-3 year investment horizon but stock selection will be critical. Valuations which were looking stretched till a couple of months back are currently looking quite attractive as there have not been any significant earnings downgrades. One should accumulate good quality companies where there is a long term structural story in place.
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’