Stock markets in 2020 started off on a volatile note as the frontline indexes hit new highs punctured by sharp decline in markets due to US-Iran tensions. For CY19 the NIFTY was up by 11.5% while SEXSEX was up by 13.8% for the full year. But the rally in NIFTY50 was a narrow rally. Top 5 stocks contributed to 152% & 81% of NIFTY 50 returns in CY18 & CY19 respectively. During the same period the NIFTY Midcap 100 index was down 4.3% while the NIFTY Small cap 100 index was down 9.9%. In our judgment, such conditions will be short lived and we expect markets to become broader based.
FII have been net buyers for the last quarter being net buyers to the tune of Rs. 8595 cr in October, Rs.12925 cr in November & Rs.694 cr in December. They have continued to be net buyers to the tune of Rs.803 cr till 13th January 2020. FPI inflows of US$14.4bn into India in 2019 were highest since 2014. DII flows continue to be healthy and were positive for 5th consecutive year.
Mutual funds’ assets under management (AUM) of the 43-player mutual fund industry stood at Rs 26.54 lakh cr, registering a growth of ~14% yoy. MF industry registered total SIP inflows of Rs 8,518.5 cr in December, a growth of 3% m-o-m. AMFI data shows that the MF industry added, on average, 9.55 lakh SIP accounts each month during the FY 2019-20, with an average SIP size of about Rs.2,850 per SIP account. Equity-oriented schemes witnessed an inflow of Rs.4,499.39 cr in December 2019. The net outflow from income and debt-oriented schemes stood at Rs.78,426.82 cr for December as compared to Rs.51,427.58 cr in November. Most of the outflows were seen in liquid funds, overnight funds and ultra-short duration fund. Stable domestic SIP flows have reduced the impact of periodic FPI selling on markets and on market volatility.
Gold prices went above Rs.40,000/10 gms in India on 7th January after traders flocked to the safe-haven commodity following an escalation of geopolitical tensions between USA & Iran. In the international markets, gold soared as much as 2% to vault over the $1,600/oz mark for the first time in nearly seven years. Since then gold prices have corrected marginally after US President Donald Trump’s comments eased fears of further hostilities between America and Iran. Trump said Iranian missile strikes on bases in Iraq had not harmed any US troops, and that Tehran appeared to be standing down. Iran later said it had “concluded” the attacks for now, while Foreign Minister Mohammad Javad Zarif tweeted that the country does “not seek escalation or war”. Gold may witness some profit booking as a softening of the rhetoric by the US and Iran allayed concerns of a larger military conflict.
The US will sign the first phase of a pending trade deal with China probably on 15th January. As part of the “Phase One” deal, China has committed to a minimum of US$200 billion in increased purchases over the next two years from the United States, including US$50 billion in additional farm exports, according to US Trade Representative Robert Lighthizer.
CPI inflation hit a 40-month high of 7.35% in December 2019 as against 5.54% in November; in July 2014, the CPI was 7.39%. This will likely prompt the RBI rethink future rate cuts. Food inflation rose to 14.12% in December as against 10.01% in November 2019. Core Inflation came in marginally higher at 3.7%. This is for the first time since July, 2016, the Consumer Price Index (CPI) inflation is breaching the 2% -6% inflation band set for the RBI by the government.
Wholesale prices based inflation rose to a 7-month high of 2.59% in December 2019 compared to 0.58% for the previous month. Data released by commerce and industry department showed that wholesale food inflation accelerated to 13.24% in December from 11.08% in a month ago, led by a 456% jump in onion prices. Both fuel inflation and inflation of manufactured items contracted 1.46% and 0.25% respectively, signaling lack of pricing power of Indian producers. The food items have around 15% weight in WPI whereas they weigh more than 45% in the CPI.
Index of Industrial Productions (IIP) rebounded in November after three consecutive months of contraction. IIP grew 1.8% in November against a contraction of 3.8% in October. Manufacturing output, which accounts for more than three-fourths of the entire index, grew 2.7%, against a contraction of 2.1% in October. Mining production grew 1.7% against a fall of 8% a month ago. The growth of primary products fell 0.3% against a fall of 6% last month. Production of capital goods in November saw contraction of 8.6% against a fall of 21.9% in October.
The IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) increased to 52.7 in December from 51.2 in November. With improvements in a number of leading indicators, including goods and services tax (GST) collection, core sector industries, auto sales and non-oil merchandise exports we expect some recovery in the economy. The IHS Markit India Services Business Activity Index (PMI) improved from 52.7 in November to 53.3 in December, highlighting the second-strongest rate of increase in output in over a year, after July. The Composite PMI Output Index that maps both the manufacturing and services sector, rose from 52.7 in November to 53.7, reflecting stronger rates of expansion in both the manufacturing and service sectors.
As per SIAM, sale of passenger vehicles – including passenger cars, utility vehicles and vans – declined 1.2% to 2,35,786 units in December. Among passenger vehicles, sales of utility vehicles, however, jumped 30%. Two-wheeler sales dropped 16.6% to 1,050,038 units. Motorcycle sales declined 12% to 6,97,819 units . Sales of commercial vehicles, which include medium and heavy commercial vehicles, dropped 31.7% to 21,388 units. From 1st April, BS-VI norms would be implemented leading to an increase in cost of vehicles. This may lead to some additional demand in February/March.
Goods and Services Tax (GST) revenue collected in the month of December, 2019 rose to Rs.1,03,184 cr, the second month in a row when collections were above Rs.1 lakh cr. This is a 9% y-o-y jump in collections. As compared to the previous month of November, December collections remained flat. Out of the December 2019 collections, CGST comprised Rs.19,962 cr, SGST Rs.26,792 cr, IGST Rs.48,099 cr (including Rs.21,295 cr collected on imports) and cess is Rs.8,331 cr (including Rs.847 cr collected on imports).
The World Bank has projected a 5% growth rate for India in the 2019-20, but said it was likely to recover to 5.8% in the following financial year. The World Bank’s latest update is also in line with the RBI’s October policy estimate in which it slashed the economy’s expected growth to 5% this fiscal year. The CSO said that the country’s GDP would grow at 5% (at 2011-12 prices) and at 7.5% at current prices. India’s GDP slumped to over 6-year low of 5% in the April -June quarter and 4.5% in the July – September quarter of 2019. The government estimated that gross value added (GVA), which is GDP minus net taxes, will grow at 4.9% in 2019-20.
Finance Minister Nirmala Sitharaman will present the Union Budget 2020 on 1st February 2020, at a time when India’s economy is going through one of the worst periods of slowdown in decades. A cut in personal income tax rates is one of the most popular demands floated by salaried individuals. While there is no guarantee on whether the government will announce any deduction in personal income tax, economists say the government should focus on sector-specific measures to address challenges. While the government has already unveiled plans to boost growth in manufacturing, infrastructure and construction sectors, industry watchers expect the government to ramp up its efforts in the upcoming budget.
The UK MPs finally approved the BREXIT deal on 9th January 2020, paving the way for Britain’s smooth exit from the European Union on 31st January. The move is historic, as the deal was stuck in the British Parliament for over a year. The bill is expected to become a law in time for Britain’s scheduled departure from the European Union. With this, Britain will become the first-ever country to leave the European Union.
As the frontline Indexes hit all-time highs, we feel it is a good time to invest. The broader markets, beyond the top 10 stocks have mostly not participated in the rally. Market cap to GDP at 61% and FY21 expected P/E of ~15x is attractive, especially at time when NIFTY 50 profit growth is estimated at 18-20% over the next couple of years and interest rates are low. The gap between 10Y G-sec yield and 1Y-forward NIFTY 50 earning yield [i.e. 100/ (one year forward P/E)] has reduced significantly and is now below 10 year average indicating that equities are attractively valued relative to current bond yields.
Low IIP/GDP growth numbers, GST collections & increasing retail inflation & low wholesale inflation remain a concern. Resolution of global factors beyond India such as US- China trade war & BREXIT could provide impetus globally. We should watch out for announcements from the upcoming budget. We strongly advise investors to continue their SIPs in equity funds. If possible, one should increase the amount or number of SIP when negative returns are higher because when the market recovers, the return on accumulated corpus would be higher and one would end up accumulating higher corpus.
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. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’