Trade tariffs & counter tariffs

As the US nears mid-term elections vital for Trump’s legislative agenda, the White House will be ready to impose 10% tariffs on $200 bn of Chinese-made products, ranging from clothing to television parts to refrigerators by 30th August. The levies together with some $50 bn already in the works stand to raise import prices on almost half of everything the US buys from the Asian nation. China has time till end August to make a deal or dig in and try to outlast the US leader. President Xi Jinping, facing his own political pressures to look tough, has vowed to respond blow-for-blow. He’s already imposed retaliatory tariffs targeting Trump’s base including Iowa soybeans and Kentucky bourbon.

NIFTY reclaimed 11k on 12th July for the 1st time since 1st February 2018 largely supported by a few high weightage stocks like TCS, Infosys, Reliance, HUL, Asian Paints & HDFC Bank with the broader markets having taken a beating with many smaller companies falling by 25-30% from their peak.The current correction in some quality mid-cap stocks is providing some good opportunities to enter at reasonable valuations.

FIIs have been net sellers for the last three months. They were sellers to the tune of Rs. 6468 cr in April, followed by Rs.4977 cr in May  & Rs.1899 cr in June largely due to global factors like FED rate hike, crude price rise & INR depreciation. The trend has continued in July with net outflows Rs.1377 cr till 12th July. FII selling has been more pronounced over the last few months in the debt markets.

The domestic MF industry’s AUM in June 2018 has increased by mere 1.2% m-o-m to Rs. 22.86 lakh cr. The increase in AUM has been primarily led by inflows in liquid/money market segment, which saw an inflow of Rs. 52,104 cr. It was followed by inflows in equity schemes, which witnessed a total inflow of Rs. 8,794 cr. ETF segment saw huge inflows to the tune of Rs. 8,313 crore. In terms of outflows, ‘income funds’ and ‘arbitrage funds’ saw a huge redemption of Rs. 23,119 cr and Rs. 1,426 cr respectively.

Several factors such as US sanction on Iran, trade war and outages from Libya and Venezuela fueled fears of a global supply crunch, and crude prices were nearing $80/bbl. While the OPEC agreed on an increase in oil production by about 1 mn bpd, or 1% of global supply from July, the additional barrels may not be enough to meet growing demand. Oil prices fell sharply last week on news that Libya was suddenly set to restore higher production and the US struck a softer line on Iran sanctions. Saudi Arabia told OPEC it raised oil output by almost 500,000 bpd last month to 10.5 mn bpd as they tried to cap rallying prices by ramping up output.

As per IMD, the western and central parts of the country have seen strong rainfall but the north India plains, including in big agrarian states of Uttar Pradesh, Bihar, Jharkhand, Odisha and Gujarat, have been left out, despite a strong start to the monsoon in June. The southwest monsoon is expected to make a strong comeback in the next few days over north and east India, along with Gujarat, which might bring down the cumulative seasonal deficit to 2-3% from the current 8%.

Midcap stocks which had taken a hammering over the last few months are currently consolidating at lower levels. Some quality midcaps & some large caps are at a quotational loss with no apparent problem in the companies. This euphoria could be a good opportunity to make some money in midcaps stocks which have fallen sharply & we expect to bounce back partially due to a feel good factor of NIFTY being at 11k.

As evident from auto sales volumes we expect FY19 numbers to show good growth due to low base effect of last year. Q1FY19 results have just stared coming out with TCS, Infosys among the big companies declaring good results. Results for other Companies are expected to be declared over the next month. Given current market valuations, a substantial growth in profits will be critical for stocks to sustain at current prices. In addition how the NPA recovery unfolds for PSU banks over the next year will be critical for the overall economy.

SIP inflows remain strong & DII flows have over the last few months supported FII outflows to an extent. Government borrowing/fiscal deficit is a concern & with inflation inching up g-sec yields could also be under pressure. Crude prices have been range bound but declining & a lower crude price would auger well for India. With inflation rates inching up further rate hikes cannot be ruled out completely. Though the broader indices are touching all-time highs, it has largely been due to a few stocks only & broader markets, especially mid-cap stocks have continued to correct sharply. This is providing a good opportunity to enter quality midcaps at reasonable valuations. One should still avoid cyclical stocks & accumulate good quality companies where there is a long term structural story in place.

Will the US China trade war last?

Midcap stocks on a free fall

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 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’

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