Stock market Index- NIFTY/SENSEX sustained at significantly high levels, though the broader markets remain subdued. Markets have largely remained range bound over the last month but the euphoria seen in the index levels do not reflect in stocks beyond the top 10-15 stocks. Liquidity remains strong as seen from the oversubscription in IPOs over the last month.
FII turned net buyers in October to the tune of Rs. 8595 cr & continued the trend to the tune of Rs.12925 cr in November. They have again turned net sellers to the tune of Rs.3728 cr till 13th December. FII flows going ahead will depend on how crude moves from here along with US-China trade deal & BREXIT execution.
Mutual funds’ assets under management (AUM) rose to a new high of Rs.27.014 lakh cr in October from Rs.26.32 lakh cr last month. The biggest driver to the growth was a massive inflow to overnight and liquid funds at Rs.20,649 cr and Rs 6,938 cr, respectively. Equity mutual fund redemptions that stood at Rs.11,025 cr in October leapt to a 20-month high of Rs.16,216 cr in November. Thus net inflows into equity mutual fund schemes declined to Rs.1,690 cr in November. The total amount collected through SIPs in November was at a record high of Rs.8,273 cr, as against Rs.8,246 cr in October. Investors booked profits as markets touched record highs in November, leading to a sharp fall in net inflows.
Concluding a year that saw the central bank take down its benchmark rate three times, the FOMC on 11th December met widely held expectations and kept the funds rate unchanged in a target range of 1.5%-1.75%. Fed Chairman Jerome Powell said that unless economic conditions “materially” change, an adjustment in rates is not required. The USD may get a boost from optimistic Fed officials who may see the prevailing economic conditions as not warranting additional stimulus.
Gold prices continued their downward movement at ~Rs.37500/10 gms, prices are down about Rs.2,450/10 gms in three months, from their record highs of about Rs.40,000/10 gms. In global markets, gold prices were steady at ~$1,460/oz. Prices have moved up marginally with the FED holding rates & initial signs of trade negotiations between USA & China.
Saudi Aramco shares surged the maximum permitted 10% above their initial public offering (IPO) price on their Riyadh stock market debut on 11th December, later crossing the $2 trillion valuation long sought by Saudi Crown Prince Mohammed bin Salman. Brent crude oil prices remained range bound around $60-64/bbl. Worries about the impact on oil demand globally from the fallout of the 16-month US-China trade war, which has weighed on global economic growth continue. With the market expected to be over-supplied next year on growing shale oil output and new projects coming on stream, any additional tariffs will dent demand and, in turn, prices.
The United States has offered to cut existing tariffs on Chinese goods by as much as 50% and suspend new tariffs scheduled to go into effect on 15th December in an attempt to secure a “Phase One” trade deal. US negotiators have offered to reduce tariffs on about $375 bn in Chinese goods by 50% across the board and suspend tariffs on $160 bn in goods scheduled for 15th December. Both sides focus on de-escalating tensions by cutting import taxes currently in place rather than removing specific products from the target list.
The UK elections were held on 12th December & Prime Minister Boris Johnson’s Conservatives has won 364 seats — 47 more than they won in the last election, in 2017. The victory is the party’s biggest since Margaret Thatcher captured a third term in 1987. This has also given a strong & clear mandate to finalize BREXIT deal by end of January.
The Reserve Bank of India (RBI) on 5th December, released its fifth bi-monthly monetary policy statement for 2019-20 in which the MPC, decided to keep the policy repo rate unchanged at 5.15%. In 2019, the RBI has cut repo rate by 135 bps so far to a nine-year low of 5.15%. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture. RBI has lowered its real GDP growth forecast for 2019-20 from 6.1% in the October policy to 5%.
CPI inflation jumped to over three year high of 5.54% in November 2019, compared with 4.62% in October. Inflation of food and beverages jumped to 8.66% in November 2019 from 6.93% in October. Within the food items, the inflation increased for vegetables to 35.99%. The core CPI inflation rose marginally to 3.50% in November compared with 3.44% in October. The sharp uptick in consumer inflation justified the decision of the RBI to hold rates in its last meeting in December.
Index of Industrial Productions (IIP) contracted 3.8% in October after shrinking 4.3% in September, in sharp contrast with an 8.4% expansion in October last year. Pointing to a demand slump in the economy, manufacturing output, which accounts for three-fourth of factory output, contracted 2.1% in October. Production of items such as cars and household appliances contracted 18% in October, after shrinking 9.9% in the month before. The broad-based industrial weakness continues. The fiscal and monetary policy measures taken are expected to have a lagged impact on the economy.
The IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) rose to 51.2 in November from 50.6 in October when it had fallen to a two-year low. It remained above the 50-mark threshold that separates contraction from expansion. Amid all the gloom and doom, the rebound in the Services PMI in November to 52.7 is encouraging. In October, the measure was 49.2. The latest PMI results continue to sound a note of caution regarding demand and the underlying state of the sector. The sharp expansion in both services and manufacturing activity pushed a composite index to a four-month high of 52.7 in November, from 49.6 in the previous month.
As per SIAM, Sales of passenger vehicles including passenger cars, utility vehicles and vans declined 0.84% to 263,773 units in November. Among passenger vehicles, sales of utility vehicles however jumped 32.70%. Two-wheelers recorded a decline of 14.27% in sales to 14.1 lakh units in November this year. Sales of commercial vehicles declined 14.98% to 61,907 units.
Goods and Services Tax (GST) revenue collection crossed Rs.1 lakh cr after a gap of three months in November with the revenue growing by 6% to Rs.1.03 lakh cr in the month. CGST is Rs.19,592 cr, SGST Rs.27,144 cr, IGST Rs.49,028 cr (including Rs.20,948 cr collected on imports) and cess Rs.7,727 cr (including Rs.869 cr collected on imports). GST collections still remain significantly below estimates.
The Citizenship (Amendment) Bill, which provides for Indian citizenship to non-Muslims who left Afghanistan, Bangladesh and Pakistan and entered India before 2015, has been passed to become a bill. With the passing of the Bill, lakhs of immigrants from religious minorities – Hindus, Sikhs, Buddhists, Jains, Parsis and Christians – will get Indian citizenship, even if they do not have any document to prove their residency.
The weaker-than-expected economic data points to a possible recession in the economy, where private consumption, investments and exports have all taken a hit. Economic growth rate had cooled to 4.5% in the September quarter from 5% in the June quarter. The demand slowdown in the economy is still significant and would take longer time to recover. The government has tried to address sectoral pain points through specific measures. Most of these measures are addressing supply-side concerns and not those on the demand side, barring RBI’s rate cuts.
There has been a flight to safety as industry leaders and large caps have largely held on while the broader market, reflected by midcaps and small caps, continues to underperform and has fallen significantly from their highs in January 2018. Many quality mid cap and small cap stocks offer good buying opportunity and should be accumulated gradually.
Subdued GST collections, low IIP/GDP growth numbers, increasing retail inflation & falling WPI remain a concern. Resolution of global factors beyond India such as US- China trade war & BREXIT could provide impetus globally. 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’