News flows over the last month have been dominated by terrorist attacks & counter attacks by India. On 14th February 2019, a convoy of vehicles carrying security personnel on the Jammu-Srinagar National Highway was attacked by a vehicle-borne suicide bomber. The responsibility for the attack was claimed by the Pakistan-based Islamist militant group Jaish-e-Mohammed. Following the incident on 26th February 2019, the Indian Air Force crossed the LOC in Kashmir to perform an airstrike at Balakot, on what India says was a terrorist training camp inside Pakistan. Pakistan retaliated days later. This created tension between the two countries & called for de-escalation & dialogue.
Frontline indexes have inched up over the last fortnight as election dates have been announced & some clarity emerges on elections. We believe once the elections overhang is over, broader markets beyond the index will move up further. So maybe we need to wait for a couple of more months for the pain to subside. These are market cycles that we have to play out and we have seen historically that good quality stocks give handsome returns from such subdued levels when things turn around. Based on empirical evidence, it has been observed that elections do not impact market returns in the long run. Thus we feel it will not matter for the markets weather BJP or Congress comes as long as we have a stable government.
Tax compliance, especially GST collections have been lower than projections. Thus fiscal deficit continue to remain a concern. GST collections which had jumped to Rs.1.02 lakh cr in January 2019 again declined to Rs.97,247 cr in February. GST collections in the current fiscal till February totaled Rs 10.70 lakh cr. The government has lowered the GST collection target for current fiscal to Rs 11.47 lakh cr in the revised estimates, from Rs 13.71 lakh cr budgeted initially. For the next fiscal 2019-20, the GST collection target has been budgeted at Rs 13.71 lakh cr.
FIIs which were net sellers in January 2019 to the tune of Rs.504 cr again turned net buyers to the tune of Rs.15328 cr in February 2019. FII have again been net buyers to the tune of Rs.9336 cr till 11th March. Given the sharp correction in broader markets over the last year, crude prices inching up slowly, there has been renewed interest from FIIs over the last month.
Overall assets under management (AUM) of the mutual fund industry stood at Rs.23.16 lakh cr in February, marginally down compared to the previous month as per data released by AMFI. Equity funds continued their downward journey for the fourth straight month, with the quantum of inflows declining 16.9% m-o-m to Rs.5,122 cr. While the overall equity flows have been weakening, investment in equity funds through systematic investment plans (SIPs), which is a relatively sticky, continued to remain strong at Rs.8,095 cr. If the current monthly SIP run-rate of Rs 8,000 cr is sustained, the industry will receive equity inflows of at least Rs 1,00,000 cr in the next fiscal, which is sizeable. Net fund outflows in February were at Rs 20,083 cr, as liquid schemes registered outflows of Rs. 24,509 cr.
Gold prices which corrected marginally below $1300/oz over the last one month due to increased bond yields & increase in equities have again moved up. Investors opted for the safe-haven metal after British lawmakers rejected an amended exit deal. Bond yields have started to weaken gently, and while the dollar is going up, equities are seeing headwinds. Gold prices domestically though remained above Rs.33,000/10 gms and the fall in international prices is not completely reflected in the domestic prices given that the Indian rupee has depreciated against the US dollar and also due to import duties that distort the local prices as compared to international prices.
India’s GDP growth has slowed down to 6.6% in the December quarter. The growth rate is below expectations. India’s GDP growth was revised down to 7% from 7.1% in the second quarter ended 30th September,2018. However, India pips China to retain the tag of the world’s fastest growing large economy. The Chinese economy grew at 6.4% in the third quarter.
Wholesale Price Index (WPI) increased to 2.93% in February, as compared to 2.6% in January. Prices of fuel and power, which together have a weightage of 13.15% in WPI, grew to 2.23% in February, as against 1.85% in January. Prices of primary articles, which include food articles, which account for more than a fifth of the entire wholesale price index, came in at 4.84% in February as against 3.54% in January. WPI food index increased from 1.84% in January to 3.29% in February.
Consumer Price Index (CPI) rose for the first time in five months in February to 2.57% from 1.97% in January, mainly due to firming food prices. Inflation in food and beverages sector stood at (0.07%) in February compared with (1.29%) in January. Core inflation moderated to 5.3% in February from January level of 5.36%. In fuel and light category, the rate of price rise slowed to 1.24% from 2.20% in January.
Index of Industrial Productions (IIP) slowed in January 2019 growing by just 1.7% from 2.4% in the previous month due in large part to a deceleration in the manufacturing, electricity, and capital goods sectors. The manufacturing sector saw growth slowing to 1.3% in January from 2.65% in December. The electricity sector saw growth slowing to 0.8% from 4.45% over the same period. The capital goods sector contracted 3.2% in January, down from a growth of 5.9% in the previous month.
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rose to a 14-month high of 54.3 in February, from 53.9 a month ago. There was a solid rise in input buying and a modest accumulation in pre-production inventories, but stocks of finished goods decreased as firms utilized them to fulfill orders. Nikkei’s India Services Purchasing Managers’ Index rose to 52.5 in February from January’s 52.2, staying above the 50-mark that separates growth from contraction for a ninth straight month. The PMI survey showed faster increases in new work and business activity supporting one of the best upturns in jobs for eight years. The seasonally adjusted Nikkei India Composite PMI Output Index, which includes both manufacturing and services, increased to a three-month high of 53.8 from January’s 53.6.
As per SIAM, domestic passenger vehicle (PV) sales saw fourth consecutive month of decline of 1.11% at 2,72,284 units in February 2019. Sales of two-wheelers also decreased by 4.22% at 16,15,071 units due to low urban demand and impact of the revised insurance premiums. Within two-wheelers, motorcycle sales last month declined by 0.58% to 10,47,486 units. Three-wheeler sales, showing a similar trend, were down by 4.14% at 59,875 units last month. Revised axle norms, prevailing liquidity crunch, slow performance of core sector dragged the demand of commercial vehicles down by 0.43% to 87,436 units.
Theresa May’s BREXIT deal has been rejected by UK MPs by an overwhelming majority for a second time. MPs will now get a vote on whether the UK should leave the EU without a deal and, if that fails, on whether BREXIT should be delayed. With only days left to the deadline of 29th March, this has significantly increased the likelihood of a no-deal BREXIT or a no BREXIT at all.
Dates have been announced for the 17th Lok Sabha elections on 10th March. The elections will start on 11th April and continue till 19th May. The counting will be held on 23rd May. The polls will be held in 7-phases. With the announcement of election dates, the Model Code of Conduct has come into effect.
It has been seen that quality companies outperform when markets turnaround, thus we need to be a bit patient with our holdings. In fact some quality stocks have rebounded smartly over the last fortnight. Still valuations are quite attractive given the decline in stock prices. So far, while fresh investments into equity MFs have come-off, the industry is not witnessing significant cancellation of SIPs. Thus support from DII continues to be there. Lower GST collections remain a concern & it will definitely impact fiscal deficit targets. With inflation remaining below RBI’s target, inflationary expectations declining and growth profile weakening, there is a strong case for another rate cut by RBI in April.
Positive profit growth outlook, steady mutual fund flows, reasonable valuations & inflation trajectory remaining stable augurs well for the markets. Low IIP numbers & GST collections though remain a concern. Short term investors should remain cautious as markets could be extremely volatile in the next couple of months leading up to the election outcome but any intermittent volatility should be used as an opportunity by patient investors with medium to long term outlook to accumulate good quality stocks.
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’