stock markets

Stock markets hit new highs

As the economy gradually opens up we are witnessing better economic data, stock markets are hitting all-time highs. There has been a gradual decline in daily COVID cases over the last few months. We have also seen steady progress in terms of vaccines by different countries as vaccines have already been launched in the UK, Canada & USA on an emergency basis. We are also expecting a launch in India in the next 1-2 months.

FII have continuously been net buyers since May 2020 other than in September to the tune of Rs.11410 cr. FII have been net buyers to the tune of Rs.65317 cr in November and Rs.26927 cr MTD till 11th December. Declining COVID numbers & vaccine launches globally have provided an impetus to investor sentiments as they have been investing heavily.

As per Association of Mutual Funds in India (AMFI), total assets under management for the industry stood at Rs.30 lakh cr as on 30th November, compared to Rs.28.22 lakh cr in October. Investors continued to redeem from their equity mutual fund holdings. Equity funds witnessed net redemptions worth Rs.12,917 cr in November, compared to Rs. 2,724 cr in October. Hybrid schemes also saw net exit of Rs 5,249 cr. Monthly SIP contribution in November fell to Rs.7,302 cr compared to Rs.7,800 cr in October. Bond funds continue to see robust investor interest in the current low interest rate environment. All debt fund categories put together saw net inflows of Rs.44,983 cr in November. Low duration, short term and corporate bond funds saw net inflows of Rs.27,107 cr, Rs 13,093 cr and Rs 11,093 cr, respectively. Investor interest appears to be on the higher side with respect to short-term debt funds.

International gold prices are trading at around $1850/oz down over 10% from recent highs. In India, gold prices are trading between Rs.49,000-49,500/10 gms. The market will now look at the Fed meeting next week, any fresh trigger from the US stimulus talks, US-China trade tensions and Brexit uncertainty for further cues. Fundamentally for the coming month, we expect international gold prices to continue to trade mixed to bearish as there is a report of a further revival of global economic activities especially after the reports of third quarter GDP growth rate of various countries confirming that the global economy is heading towards the pre-COVID-19 situation.

Brent crude hit $50 a barrel last week for the first time since oil prices crashed in early March, as hopes of swifter-than-thought vaccine rollout fueled bullish expectations of strengthening oil demand early next year. Oil prices were boosted by Canada approving the Pfizer-BioNTech vaccine, joining the UK. Indian Oil Corp, the biggest refinery in India, said its refineries operated at 100% capacity in November, for the first time since the pandemic started, in order to meet growing domestic fuel demand.

The Reserve Bank of India (RBI) on 5th December kept its policy rates unchanged and promised to continue its accommodative stance this fiscal year and into the next, while sharply revising its inflation forecast upward. The repo rate was unchanged at 4% and the stance “accommodative”. The rate pause was on expected lines, and all the six members on the Monetary Policy Committee were unanimous on the matter.  It raised its inflation expectations for the second half of 2020-21 from 5% to 6.3%. The RBI expects third-quarter inflation to be 6.8% and fourth-quarter 5.8%. The MPC is currently mandated to keep retail inflation within the 2%-6% range while targeting medium-term inflation at 4%.

India’s wholesale inflation (WPI) rose to a 9-month high of 1.55% in November as manufactured products turned costlier, while food prices eased. The WPI inflation was 1.48% in October 2020 and 0.58% in November last year. Food inflation in November stood at 3.94%, against 6.37% in the previous month. Inflation in non-food articles was higher at 8.43% in November. Fuel and power basket softened to (-) 9.87% in November.

Index of Industrial Production (IIP) grew at the fastest pace in eight months in October 2020 at 3.6%, with consumer durables production surpassing levels last seen prior to the COVID-19 pandemic. This was the second month in a row that industrial output recorded positive growth. Electricity generation grew 11.2% in October compared to a 12.2% decline a year ago, while manufacturing activity grew 3.5% in contrast to a 5.7% contraction October 2019. Mining shrank 1.5%.

The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) dropped to 56.3 in November from an over 12-year high of 58.9 in October. There were slower increases in factory orders, exports, buying levels and output while pandemic related restrictions caused a further drop in payroll numbers. The purchasing managers’ index (PMI) for services expanded at 53.7 in November even as it fell from 54.1 in October. New business inflows likewise rose for the second straight month and solidly, despite growth easing from October. The composite purchasing managers’ index (PMI) output index was down from 58 to 56.3, a reading that was still consistent with a marked rate of expansion.

According to the Federation of Automobile Dealers Associations (FADA), for the month of November, tractors and PV grew by 8.47% and 4.17% YoY. 2W, CV and 3W continued to fall by -21.4%, -31.22% and -64.98% YoY respectively.  The fear of the pandemic saw the search for safer means of travel for the entire family, leading to good sales in the passenger vehicles segment. While inventory level for PVs (25-30 days) is now closer to FADA recommended range of 21 days, 2W inventory continues to be in high range of 45-50 days.

GST collections for the month of November have come in nearly unchanged m-o-m and rose 1.4% on an annual basis at Rs.1,04,963 lakh cr.  The collections came at Rs.1,03,491 lakh cr in November 2019 and Rs.1,05,155 lakh cr in October 2020. CGST is Rs.19,189 cr, SGST is Rs. 25,540 cr, IGST is Rs.51,992 cr (including Rs.22,078 cr collected on import of goods) and cess is Rs. 8,242 cr (including Rs. 809 cr collected on import of goods).

The Asian Development Bank (ADB) upgraded its forecast for the Indian economy, projecting 8% contraction in 2020-21 as compared to 9% estimated earlier. Fitch Ratings raised India’s GDP forecast to -9.4% in the current fiscal year from a previously projected contraction of 10.5% due to a sharp economic rebound in the July-September quarter. Nomura expects India GDP to grow at the fastest pace globally at 9.9% in 2021, eclipsing China (2021 GDP growth pegged at 9%) and Singapore (at 7.5%) during this period.

Joe Biden will become the 46th US President after a bitterly-fought election that Donald Trump is yet to concede. Indian-origin Kamala Harris will become his Vice President. Trump, who will become the first President since George HW Bush to serve a single term, has mounted a legal challenge, claiming without proof that mail-in ballots, which helped Biden win were prone to fraud. The Constitution gives the electors the power to choose the president, and when all the votes are counted this week, President-elect Joe Biden is expected to have 306 electoral votes, more than the 270 needed to elect a president, to 232 votes for President Donald Trump.

As evident from latest quarterly results, there has been a marked improvement in operating matrix for most companies due to cost cutting measures taken due to the COVID pandemic. Also the way business is being done & automation, transformation towards contactless, online transactions, shift of business from China to India & lower dependence on imports augurs well for domestic businesses. In addition, the sharp fall in cost of capital/interest costs should directly benefit the bottom line and also boost demand.

Although the NIFTY/SENSEX has scaled new all-time highs of 13,500/46,200, the rally has been narrow & still a lot of quality mid & small cap stocks are available at decent valuations. This has partly been driven by strong FII flows over the last few months offsetting DIIs what have continued to sell due to profit booking. Indexes have remained positive, largely due to positive global cues as COVID numbers have largely been contained and vaccines are being rolled out gradually in different countries. In terms of capital allocation, with a decline in interest rates & returns from debt instruments, we should see renewed interest in equities.  Some quality beaten down large cap and mid cap stocks & PSUs are back in focus.  We recommend focus on quality business with quality management which should recover sharply as sentiments improve.

GST collections are consistently clocking above the 1 lakh cr/month & GDP & IIP numbers have consistently improved over the last quarter though low tax collections could be a dampener this year. Higher than expected retail inflation and the gap with WPI numbers aggravate concerns of a deflation. We are gradually unlocking & I believe that we have already overcome the worst of times & expect things to only 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 & should be bought in a staggered manner. 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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Additional Tier 1 Capital in Indian Banks

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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