Q1. What has been the key macroeconomic concern impacting market sentiment?
The main worry has been the deceleration in growth. GDP growth for 1QFY14 has been much lower at 4.4%. While Agriculture grew at 2.7% and Services at 6.6%, there has been a significant slowdown in the Industrial sector, which grew at just 0.2%.
The key events in the month were –
- Domestic factors -
- Gradual unlock in India - The Ministry of Home Affairs has issued no changes in the guidelines issued for November’20. It has extended the guidelines for re-opening issues for October’20 to be extended till November end.
- GST - GST collection rose by 10.2% yoy in October’20 to Rs1,052 bn compared to Rs955 bn last month. Gross GST collections up to 7MFY21 were at Rs5.6 tn, contraction of 20% over 7MFY20.
- Trade Deficit -Trade deficit widened in October’20 to $8.8 bn in October’20 against $2.7 bn in September’20. Exports fell 5.4% yoy to $24.8 bn and imports contracted by 11.5% yoy to $33.6 bn.
- Manufacturing and Service PMI - India’s manufacturing PMI rose to a 13 year high at 58.9 for October’20, while the services PMI also rose above 50 level to 54.1 showing the tailwinds of removing the restrictions gradually.
- RBI Bi-monthly Policy - The MPC kept the repo rate unchanged at 4% and retained the ‘accommodative’ stance. It also announced measures to boost liquidity in the banking sector.
- Global factors -
- COVID-19 - Total number of COVID-19 cases crossed 46mn worldwide as on 1st November’20 with a fatality rate of less than 3.0%, while there are about 8.2mn confirmed cases in India with a recovery rate of over 80%. Second wave of COVID-19 in Europe led to imposition of fresh restrictions in many parts of the continent.
- US GDP - The US economy expanded by an annualized 33.1% in Q3CY20, beating forecasts of a 31% surge, following a record 31.4% plunge in Q2CY20, as the economy rebounds from the COVID-19 pandemic.
- US Manufacturing PMI - US manufacturing PMI rose to a 2 years at 59.3 in Oct’20 from 55.4 in Sep’20. This was led by a sharp uptick in new orders.
- ECB - The ECB kept its interest rates and wider monetary policy unchanged but suggested that additional policy action could come in the Euro Zone as early as December as fresh curbs to contain the second wave of COVID-19 has fueled fears of a new recession.
- China Manufacturing PMI - The Manufacturing PMI of China rose to 53.6 in October’20. This was the sixth straight month of expansion in factory activity and the strongest since January’11, as the economy recovered further from the COVID-19 shocks.
Domestic macro economic data
Inflation - CPI inflation rose to 7.3% in September’20 Vs 6.7% in August’20, led by rise in food inflation. The WPI rose to a seven month high of 1.3% in September’20 Vs 0.2% in August’20.
Outlook for Equities
Nifty gained 3.5% in the month of October’20 as high frequency economic indicators improved in India on the back of pent up demand plus the festive season. The MPC kept the repo rate unchanged at 4% and retained the ‘accommodative’ stance. MSCI announced that it is going to consider changes in the foreign ownership limits in the MSCI global indices for Indian stocks. On the global front, COVID-19 cases surged in US and Europe due to the second wave of the pandemic, raising concerns on slower recovery. The ECB decided to keep its rates and wider monetary policy unchanged, but suggested that additional policy action in the euro zone could come as soon as December’20. FPIs bought $2.7 bn worth of equities in the month of October’20 while DII sold $2.4 bn worth of equities.
Nifty is currently trading at around 19x FY22e earnings. We expect 15% CAGR growth in earnings for next 2 years given that FY21 will see decline due to lockdown impact but FY22 will see strong growth in earnings over a low base. Earnings traction expected from Large Private Banks, FMCG, IT, Telecom and Pharma in FY22. Currently we are seeing a smart recovery in both manufacturing and services PMI due to a combination of pent up and festive demand. We will require to monitor the H2FY21 on whether this demand momentum sustains or not. US election results will create some volatility in global equity markets depending upon the result. While Equity markets have run up sharply in the last 5 months supported by global liquidity and looking fairly valued but Investors can continue to invest from a long term perspective as gradual economic recovery and corporate earnings are expected to bounce back from the current subdued levels.
Outlook for Debt
October MPC was rescheduled as new members joined but it did not disappoint markets in its key message of managing the Government borrowing program smoothly. MPC members expressed inflationary pressures as transitory and likely to ebb while placing accommodative stance as important for revival of economic activity. FY21 real GDP growth was guided towards (-)9.5% with risks on downside. State development loans OMO was announced for this fiscal year in Governor’s address as also floating rate on tap targeted long-term repo operations (TLTRO). MPC minutes had a dovish bias as members reiterated transient inflation and need to maintain accommodative stance as growth risks remain. However low rates and higher term spreads were highlighted by few members.
During the month much awaited decision of GST council was announced to compensate states for lower GST compensation. Central Government added Rs1.10 tn to the dated securities borrowing calendar in 3 and 5 year segments towards this end. Proceeds from additional borrowing will be passed on to state governments to compensate for GST shortfall. RBI also increased OMO amount to Rs200 bn and SDL OMO was conducted for Rs100 bn. These measures assuaged yields and spread on SDL’s.
GST collections for September month came at Rs1.05 tn, up 10.2% yoy. Infrastructure output contracted by 0.8% in September’20 against 7.3% fall in August’20 as steel, coal and electricity production rose. September’20 CPI inflation rose to 7.34% due to food prices remaining on a higher clip. IIP in August’20 fell by 8% as mining and manufacturing were weaker while electricity production was nearly at previous year’s level. Trade data showed green shoots as exports grew 6.0% yoy while imports fell by 19.6% yoy taking trade deficit to $2.7 bn for September’20.
Globally stimulus talks amid rising COVID-19 cases is guiding yields. US 10-year inched upwards towards 0.86% as dollar index strengthened in this backdrop. Gold prices however hovered near $1900/oz mark. Upcoming FED meeting will be watched, ECB meeting committed to action in the December’20 meeting based on economic data at that point of time.
Markets domestically will watch demand and supply dynamics as RBI OMO’s soften the supply pressures. Inflation readings will be watched as despite expectation food prices have not shown signs of easing yet. Further announcements on the fiscal front will be anticipated as tax collections are yet to recover. 10-year G-sec yield closed at 5.88% on 29th October’20 lower by 13 bps from previous month. In the near term we expect 10-year yield to be in a range of 5.75% - 6.00%. Corporate bond spread over G-sec is 50 bps and likely to be between 45-60 bps.