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Stock markets on a COVID booster dose

Even as the Indian economy gradually opens up, there has been a constant rise in daily COVID cases with the number now touching 1 lakh/day in India from ~60,000/day last month. This is in contrast to the global scenario which has seen a decrease in numbers over the last month. Thus India currently lies in 2nd place after USA & with the highest number of daily cases globally. We have also seen a steady progress in terms of medicines & vaccines by different countries & expect the launch of a vaccine in the next couple of months. On the back of positive global sentiments the NIFTY has been quite resilient over the last month, sustaining above the 11,000 mark.  With the economy opening up gradually we should see improved activity, but increasing COVID 19 numbers daily remain a concern.

Since April 2020 till when FIIs had been net sellers, FII have been net buyers every month with a high of Rs.15750 cr in August 2020. Increasing crude oil prices and declining covid numbers globally have provided an impetus to investor sentiments. FIIs have been net sellers to the tune of Rs.418 cr till 11th September in the current month. We expect flows to remain positive as the economy gradually opens up.

As per Association of Mutual Funds in India (AMFI), the industry registered outflow of Rs 14,000 cr. However, AUM increased marginally last month. Total assets under management (AUM) stood at Rs 27.7 lakh cr in August, as against Rs 27.2 lakh cr in July. The total outflow from the equity scheme category increased to Rs 4,000 cr in August compared with Rs 2,480 cr registered a month ago. Over the last two or three months, investors have continued to book profits from equity mutual funds. Inflows through SIP also saw a marginal dip from Rs.7,831 cr in July to Rs.7,791 cr in August. Total outflows in debt funds stood at almost Rs 9,000 cr in August. Liquid funds which are used by corporates to park surplus cash registered outflows of Rs 15,814 cr in August.

Global gold prices hovered around $1950/oz down over 5% from its highs. Gold prices in India are around Rs.51,300/10gm. The precious metal is down about Rs.5,000/10 gm from record highs of Rs.56200, hit last month. But from the start of this year, gold is up about 30% this year, tracking a global rally. COVID vaccine developments and improving economic data present near-term headwinds to gold but low and negative interest rates, weaker US dollar and expectations of further stimulus will keep gold supported.

Consumer price index (CPI) in August came in at 6.69% marginally lower than the 6.73% registered in July. Food inflation increased by 9.05% yoy in August, while core inflation remained flat at 5.44% yoy. WPI inflation rose to 0.16% in August compared with a contraction of 0.58% in July, according to data released by the Ministry of Commerce and Industry. Core WPI, too, is now back in inflationary territory after 13 straight months of deflation. Prices of food articles rose 3.84% in August after growing 4.08% last month.

Food has a large weightage in the inflation indices, be it wholesale or retail index. What should worry policymakers is the wide gap between food inflation at the wholesale level and that at the retail level. The difference between WPI food and CPI food shows us the supply side issues. The gap between the two should narrow, which would mean supply side logistics are getting smoothened out.

Index of Industrial Production (IIP) contracted for the fifth month in a row in July, declining 10.4% from a year ago. In the first four months of FY21, India’s factory output shrank 29.2% compared with 3.5% growth in the year-ago period. High-frequency indicators suggest the economy picked up pace toward the end of August even though Covid-19 cases have continued to rise. We may expect growth to be negative albeit to a lesser extent in August while September may come closer to zero given the pick-up in human movement, which will boost pre-festival sales.

The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) rose to 52 in August from 46 in July, signaling an improvement in operating conditions across the manufacturing sector following four consecutive months of contraction. The Services Purchasing Managers’ Index (PMI) jumped to 41.8 in August from July’s 34.2, though it continued to remain in the contraction zone. The services activity last month remained under sub-50 for the sixth straight month amid continued restrictions due to corona virus that took toll on the business operations and demand, causing the longest streak of job losses on record. The composite index, which measures both services and factory activity, improved to 46.0 in August from July’s 37.2, cushioned by a better manufacturing performance.

As per SIAM, passenger vehicle sales in India increased by 14.16% in August to 2,15,916 units. Two-wheeler sales also rose 3% at 15,59,665 units. Motorcycle sales were at 10,32,476 units, up 10.13%. Scooter sales were, however, down 12.3% at 4,56,848 units. India’s automobile industry needs government support through a cut in vehicle taxes to make them more affordable and an incentive-linked scrappage policy to help revive consumer sentiment and sales in a corona virus-hit market.

As per the IMD, this year’s monsoon could end in the range of normal to above normal. This is expected to benefit agriculture and the overall economy. Of the four-month rainfall season, June and August have recorded 17 and 24% more rainfall that normal respectively while July saw 10% deficient precipitation. The overall rainfall is likely to be 102% of the Long Period Average (LPA) with an error margin of +/-4%.

Gross GST collection in August 2020 was at Rs.86,449 cr, down from Rs.87,422 cr collected in July 2020. In August 2019, Rs.98,202 cr was mopped up. CGST is Rs.15,906 cr, SGST is Rs.21,064 cr, IGST is Rs.42,264 cr (including Rs.19,179 cr collected on import of goods) and cess is Rs.7,215 cr. The goods and services tax (GST) revenue during the April-August period this year saw an overall decline of 30.4% as compared to the corresponding period last year. Five states and union territories (UTs) witnessed a yoy decline of over 40% in their GST revenue during the period.

The election to decide whether Donald Trump will serve a second term as president is already in full flow. We have just 50 days until election day, 3rd November, when voters will take varying degrees of health risks – and face hurdles to voting of varying heights – to cast their ballots in person for Trump or his potential Democratic successor, Joe Biden.

Tensions between China and India flared again in recent days as the two sides exchanged claims the other’s troops crossed into their territory. The two sides traded accusations that the other fired warning shots in violation of agreements to avoid using weapons in disputed areas. India faces trade imbalance heavily in favor of China. The two countries failed to resolve their border dispute and Indian media outlets have repeatedly reported Chinese military incursions into Indian territory. Both countries have steadily established military infrastructure along border areas.

In August, benchmark indices Nifty and Sensex rose 2.84% and 2.72%, respectively, largely due to positive global cues as numbers have largely been contained across the globe. 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.

We have been impacted by low GST & tax collections, de growth in GDP & IIP numbers over the last quarter. Higher than expected retail inflation and the gap with WPI numbers aggravate concerns of a deflation. We are in the midst of a global pandemic & lock down, though I believe that we have already overcome the worst of times & expect things to only improve from here across the globe. Fund flows on the FII remain strong though we are seeing some profit booking for DIIs. 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.

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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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