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The Outlier Effect
May 24, 2019
6mins | Views 8248
The new financial year began on the positive note with the continued rally in equity markets and the indices creating new highs. With larger expectations getting built around a decisive government at the Centre the mood at the equity markets turned bullish as markets achieved new highs with foreign investors regaining their confidence in the Indian economy and markets. This has been a positive event ahead of the ongoing General Elections. The rising crude oil prices turned out to be a dampener, though, as we speak the prices seem to be settling down at lower levels ($70/bbl from $75/bbl). Having said this there is a fair bit of uncertainty that prevails in the market and its direction in the short term based on the outcome of General Elections.
Hence, as mentioned above, the S&P BSE 50 and the Nifty 50 hit a new all-time high during the month but finished the month with a total return of 1% and 1.1% respectively. Although large-caps gained during the month, mid-and Small Caps struggled. The S&P BSE Mid Cap and S&P BSE Small Cap declined 3.8% and 2.7%, respectively. FII/FPIs continued to invest heavily in the Indian market with US$1.7 bn inflows in April (US$9.9 bn in CYTD19) while DIIs sold US$601 mn worth of equities. India’s benchmark 10-year sovereign bond yields stayed firm this month, despite a 25bps rate reduction by the RBI.
On the global front, the US announced an end to waivers on Iranian oil imports as the 2nd May deadline drew closer with crude cruising higher in the month amid supply concerns despite high US inventory levels. Global growth concerns were marginally moderated after some mixed macro numbers from China. Global equities continued to move higher, witnessing a sharp V-shaped recovery in 2019 and paring all the losses recorded in the second half of 2018. MSCI India underperformed EM in April after being the best performing market in March.
The slowdown in the consumption story seemed more pronounced this month as high-frequency domestic growth indicators & the corporate earnings results of certain sectors continue to suggest weakness in the consumption sector. Data continues to be soft in consumer durables and non-durables production, auto sales, Non-Oil and Non-Gold imports, and industry commentary remained weak. PMI also weakened with companies citing election-related uncertainty as a drag. However, for certain sectors like cement and steel (demand and order books), banks (credit growth), and industrial capacity utilization remained decent. Traffic indicators were mixed with railway traffic growth increasing and airport traffic weakening.
On the macro front, February IIP showed signification slowdown, coming in at a 20-month low of 0.1% vs 1.7% in January 2019. The CPI inflation increased marginally in March to 2.9%. For the last quarter of the financial year, CPI inflation averaged at 2.5%, marginally higher than RBI’s quarterly forecast of 2.4%. March WPI also rose to 3.2% vs 2.9% in February on the back of a spurt in food and fuel prices. For the second time in a row, RBI cut the repo rate by 25bps to 6% while revising down FY20 GDP growth forecast to 7.2%. This is positive for both bond markets and economy from a short to medium term perspective.
Equity flows (including ETFs) in the Mutual Fund Industry remained positive for the 59th consecutive month, with inflows of INR 20,700 crores (highest since November 2017) in March. Of these, retail inflows stood at INR 10,200 crores (highest in five months), and ETFs at INR 10,500 crore. Non-SIP flows reported inflows of INR 2100 crores and SIP flows were positive at INR 8100 crores. Fixed income funds reported outflows of INR 43,000bn (driven by liquid flows).
In my view, while the rest of the world is seeing a synchronized slowdown, India is an outlier and is on a trajectory to potentially grow into a $5 tn economy by 2025. Key reforms like GST, IBC, RERA, Affordable Housing, Electricity for All, PSU Bank Recapitalization implemented by the government have laid a strong foundation. A young population with rising aspirations coupled with increasing income means that domestic consumption will continue to drive the economy in medium to long term. Going forward earnings growth should also pick up as businesses have adjusted to policy changes. Election related uncertainty will also be over soon. With the ongoing financialisation of savings, the domestic liquidity cycle can be expected to continue over the next decade.
$/bbl – dollars per barrel, FII – Foreign Institutional Investors, FPI – Foreign Portfolio Investors, Bn – billion, Mn – million, Tn – trillion, IIP – Index of Industrial Production, CPI – Consumer Price Index, WPI – Wholesale Price Index, GDP – Gross Domestic Production, ETF – Exchange-Traded Fund, GST – Goods and Service Tax IBC – Insolvency and Bankruptcy Code, RERA – Real Estate (Regulation and Development) Act, PSU – Public Sector undertaking
Sources – Bloomberg, AMFI
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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