Markets corrected over the last month due to the Ukraine Russia conflict which has been going on for over a fortnight now. We expect markets to remain volatile till we have a resolution in place. Going ahead inflation remains the primary concern as crude is above $100/bbl. Corporate earnings need to improve in subsequent quarters to support markets at current levels.
FII have been selling heavily in Indian equities over the ten months of FY22 barring September 2021. After being net buyers to the tune of Rs.913 cr in September 2021, they have been net sellers to the tune of Rs.1.88 lakh cr in the last five months. They have continued to be net sellers to the tune of Rs.43,303 cr till 11th march 2022. At a time when FIIs have continuously been selling, DIIs have provided some support to the markets.
As per AMFI, equity mutual funds saw a net inflow of Rs 19,645 cr in February, whereas debt mutual funds saw net outflows of Rs 8,274 cr. The SIP contribution rose to Rs 11,438 cr, marginally lower from Rs 11,517 cr in January. On the debt mutual fund side, liquid fund inflows shot up from outflows in January to a net inflow of Rs 40,273 cr in February. All the debt mutual fund categories, except liquid funds and overnight funds, saw net outflows this month, on the back of uncertainty in the rate movement. Average assets under management stood at Rs 38.56 lakh cr, in February compared with Rs 37.9 lakh cr in January.
Gold prices in India have gone up 11% in 2022 to ~Rs 53,000/10 gms. In the international markets it has corrected marginally to ~$1980/oz after crossing $2000 levels last week due to the Ukraine Russia conflict. Strong US dollar index and rising bond yields have capped the gains of precious metals. On the geopolitical issue, Russia-Ukraine talks have made little progress amid prevailing uncertainty. The trend in precious metals may remain range-bound as rising inflation supports gold prices. On the other hand, high expectations of a rate hike from the US fed and unexpected hawkish decision of the European Central Bank to wind down monetary stimulus may put pressure on precious metals at higher levels.
Brent crude prices rose to a 13 year high above $130/bbl last week, has since cooled to ~$110/bbl. Oil prices might continue moderating this week as investors have been digesting the impact of sanctions on Russia, along with parties showing signs of negotiation towards ceasing fire. The Russia-Ukraine situation is very fluid and the market is going to be sensitive to developments on this front. Suggestions that parties may be willing to negotiate is likely weighing on prices somewhat.
The U.S. Federal Open Market Committee meets on March 15-16 to decide whether or not to raise interest rates. U.S. consumer prices had surged to 7.9% in February, its largest annual increase in inflation in 40 years, and is set to accelerate further as Russia’s war against Ukraine drives up the costs of crude oil and other commodities. The Federal Reserve is expected to start raising rates this week, which would put downward pressure on oil prices.
In addition, growing COVID cases in China will raise concerns over demand. China is seeing its worst COVID outbreak in more than two years. The city of Shenzhen has gone into lockdown, whilst other cities are also seeing tougher restrictions. Its daily new case load figures have hit two-year highs, with 3507 new confirmed coronavirus cases reported on 14th March.
Consumer Price Index inflation (CPI) in February rate rose marginally to 6.07% from 6.01% in the previous month. The retail inflation reading has once again breached the upper limit of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) target of 4-6%. Food inflation came in at 5.85%. The higher-than-expected number for February means inflation will exceed the RBI’s forecast of 5.7% for January-March 2022 unless the March reading falls to at least 5.1%. The inflation trajectory is weighed heavily on the upside, with elevated commodity prices, fuel price and higher raw material costs.
Wholesale prices based inflation stayed in double digits for the eleventh consecutive month at 13.11%. It had moderated to 12.96% in January 2022 after rising to 13.56% in December 2021. The high rate of inflation in February 2022 is primarily due to rise in prices of mineral oils, basic metals, chemicals and chemical products, crude petroleum & natural gas, food articles and non-food articles etc. as compared to the corresponding month of the previous year. Inflation in food articles basket in February came in at 8.19%, tad lower from the 10.33% growth witnessed in the month before. With geopolitical tensions far from providing any respite, the resultant disruptions in global supply chains, rising freight costs and an increase in international commodity prices are expected to keep wholesale price pressures elevated at double-digit levels for the remaining fiscal. However, a favorable base could pull down the overall WPI inflation to some extent in the coming months.
The Index of Industrial Production (IIP) rose marginally to 1.3% in January 2022 yoy compared with 0.7% in the month before. Manufacturing output increased 1.1%, the fastest growth in three months. Mining grew 2.8% on-year while electricity output was up 0.9%.with high crude and commodities prices emerging as a new drag, IIP growth is likely to remain in low single digits going ahead. The output of capital goods production, an indicator of investment activity, shrank 1.4% from a year ago while production of consumer durable goods contracted 3.3%. The production of consumer non-durables rose 2.1% in the month.
The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers Index (PMI) rose to 54.9 in February from 54 in January as Indian manufacturers raised their buying activity. Manufacturing firms increased production, input buying and stocks in response to strong increase in new work intakes. India’s services sector activity rose marginally in February, with the Purchasing Managers’ Index (PMI) at 51.8 after decelerating to a six-month low of 51.5 in January. Growth in the service sector failed to rebound as meaningfully as many would have hoped given that the covid-19 cases receded considerably from January’s new wave and restrictions were lifted. The composite PMI output rose to 53.5 in February from 53.0 in January, signaling a solid rate of expansion.
As per Society of Indian Automobile Manufacturers (SIAM) Passenger vehicle sales last month stood at 262,984 units, down 6.5% yoy. Two-wheeler domestic sales in February 2022 were at 10,37,994 units compared with 14,26,865 units sold in February 2021, registering a decline of 27.2% yoy. Meanwhile, three-wheeler sales in February 2022 stood at 27,039 as against 27,656, declining 2.2% yoy. Continuing supply side challenges like semiconductor shortages, increase in cost due to new regulations, higher commodity prices, higher logistics cost etc. have impacted overall sales in the auto industry.
The gross GST revenue collected in the month of February 2022 was Rs.1,33,026 cr, up 18% yoy, of which CGST is Rs.24,435 cr, SGST is Rs.30,779 cr, IGST is Rs.67,471cr (including Rs.33,837 cr collected on import of goods) and cess is Rs.10,340 cr (including Rs.638 cr collected on import of goods). This is for the fifth time GST collection has crossed Rs.1.30 lakh cr mark.
The Indian economy grew by 5.4% year-on-year in the third quarter of the current fiscal year. The growth albeit, is slower than previous two quarters, amid rising risks from higher prices of crude oil and commodities after Russia’s invasion of Ukraine. India’s gross domestic product (GDP) had grown by 8.4% in the quarter ended July-September. The dip in growth momentum may be attributed to the fading base effect. As higher oil prices torpedo economic recovery worldwide, Morgan Stanley has cut India’s GDP forecast for the fiscal year beginning 1st April 2022 by 50 basis points to 7.9%, raised retail inflation projection to 6% and expects current account deficit to widen to 3% of GDP. February 2022 exports increased 25.1% to $34.6 bn vs $27.6 bn YoY; imports increased 36.1% at $55.4 bn vs $40.7 bn YoY. This has led to a widening trade deficit.
Now all eyes will be on the Ukraine- Russia conflict as it is leading to strong FII outflows & decline in markets. The frontline indexes are volatile between 15800-16800, we feel proper stock picking will be critical. The proposed LIC IPO has been postponed & could possibly come in May 2022. GST collections have been steady above Rs.1.3 lakh cr/month. GDP & IIP numbers have been low on a high base of H2FY21 and need to pick up. High inflation along with high fuel prices remain a concern. With crude above $100/bbl further rise in inflation is possible. With the FED expected to raise rates by 50 bps in March, what reaction RBI takes will be keenly watched. 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 & should be bought in a staggered manner.
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.