On the onset, we are shocked at the devastating April 25th earthquake measuring 7.9 on the Richter scale. The toll from the earthquake that was followed by several aftershocks, including a powerful one on May 12, has reached 8,567 in Nepal apart from which, loss of life and property in other parts of the neighboring areas including India is quite saddening to say the least.
Tremors were felt on the Stock Market, as FII’s resorted to unabashed selling following the confusion over the issue of Minimum Alternative Tax (MAT), along with uncertainties over Greece, Crude Price etc. Nifty the benchmark index at NSE saw a correction of almost 10% and Midcaps reported deep cuts.
BSE and National Stock Exchange of India Ltd (NSE), saw a combined average daily turnover of nearly Rs.21,600 crore in April, which is nearly 20% higher than the Rs.17,912 crore registered in April 2014. Retail trading in equity derivatives in the March quarter rose to the highest level since at least 2012. Average daily turnover for the retail category of investors in futures and options (F&O) amounted to Rs.1.04 trillion in the quarter ended 31 March on NSE.
There has been a 56 per cent year-on-year jump in the value of NSE-listed stocks owned by FIIs at ₹19.32 lakh crore as at March-end this year. FIIs now own 6.44 per cent of the 1,094 companies listed on the NSE, according to data by Prime Database. The report noted that 465 FIIs are invested in Indian equities across all NSE-listed companies. In terms of companies, HDFC has the highest FII holding of 79.65 per cent, followed by Tata Motors DVR (56.18 per cent), Zee Entertainment Enterprises (49.98 per cent), HDIL (49.03 per cent) and IDFC (47.38 per cent).
On the macro front, a sharp drop in the production of steel, cement and refinery products resulted in a 0.1 per cent fall in the growth of the eight core industries in March, to its lowest rate in 17 months. Production growth in the eight sectors in fiscal year 2014-15 was at 3.5 per cent, which was lower than the 4.2 per cent growth posted in the previous fiscal year. Industry representatives are concerned that the fall in production in the core sectors indicates a slowdown in economic activity. “It is worrisome as growth has been witnessing a subsiding trend since November 2014. The lead indicators for the construction sector, such as cement and steel, are decelerating significantly, indicating a slowdown,” said Alok B Shriram, President, PHD Chamber, in a press statement.
Exports earned $22 bn, down 14% year-on-year, and imports fell 7.5% to $33 bn, leaving a trade deficit of $11 bn. India’s merchandise exports shrank for the fifth consecutive month in April, largely on account of a slump in earnings from shipments of petroleum products because of lower crude oil prices. Gold imports by India, the world’s second-largest consumer of the precious metal, exceeded 100 tonnes for a second month in April and, in value terms, rose 71% to $3.1 billion as easing of state curbs boosted demand for jewelry.
India’s wholesale price index (WPI) based inflation contracted for the sixth month in a row in April, falling 2.65% after shrinking 2.33% in the previous month, boosting hopes of an interest rate cut by the central bank. Factory output growth touched a five-month low in March at 2.1% and retail inflation eased to a four-month low in April at 4.87%. The United Nations Economic and Social Commission for Asia and the Pacific in a report said declining inflation has provided space to central banks in the Asia-Pacific region, including India, to lower their policy rates. The report projected that the Indian economy would clock 8.1% growth in 2015-16, spurred by strong consumer spending amid low inflation, infrastructure projects and the government’s reform measures.
The HSBC Purchasing Managers’ Index (PMI) dropped to 52.4 in April, against 53 in March, which means that growth in activity and new orders softened for the second consecutive month. The sector contributes over 57 per cent to the gross domestic product.
Direct tax collections touched Rs 6, 96,200 crore during 2014-15 despite difficulties on the economic front, marginally falling short of the target. . The collections fell short by 1.26 percent. In 2013-14, the mop-up was Rs 5, 83,000 crore. The government had revised the direct tax collection target to Rs 7,05,000 crore for the fiscal 2014-15 against the initial projection of Rs 7,36,000 crore in view of the sluggish economic growth.
Crude oil soared above $67 a barrel, rising 40% since January to the highest in 2015 amid expectation that the market would be tighter in the second half of the year. Global prices have soared from six-year low of $45.19 in January.
After suffering from significant and widespread abnormal rainfall during the Rabiseason that resulted in severe crop damageIndia is expected to receive below normal monsoon rainfall of 93 per cent, according to Met department forecast which predicted a reduction of two per cent from the one made initially. The less rainfall is being attributed to El-Nino condition, whose chances of occurrence are as high as 70 per cent. Monsoon is crucial for the economy, especially for the agriculture sector which is largely rain-fed.
Globally, China’s factories suffered their fastest drop in activity in a year in April as new orders shrank, the HSBC/Markit Purchasing Managers’ Index (PMI) fell to 48.9 in April—the lowest level since April 2014—from 49.6 in March, as demand faltered and deflationary pressures persisted. Aside from weakness in the manufacturing sector, China’s economy is struggling with a downturn in its property market and high levels of domestic debt. China’s exports, too, declined in April by 6.4%, as a rising Yuan hurt demand for Chinese goods and services abroad.
In an attempt to provide support to the floundering economy China reduced the amount of cash lenders must set aside as reserves by the most since the global financial crisis. The reserve-requirement ratio (RRR) was lowered by 1 percentage, the second reduction this year and the largest since November 2008. “This RRR cut is much bigger than the market anticipated and banks will be flooded with liquidity,” said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd in Hong Kong. “It will also add fuel to the already red hot stock market.”
The U.S. trade deficit in March swelled to the highest level in more than six years, propelled by a flood of imports that may have sapped the U.S. economy of any growth in the first quarter. The deficit rose to $51.4 billion, the largest trade gap since October 2008 and more than 43 percent higher than in February.
Sectorally, in a bid to revive the Sugar Industry, The Union food ministry has decided to take up seven proposals — including creating a buffer stock of sugar by the government and raising an import duty on the sweetener to 40% from the current 15%. The proposals also include incentives for white sugar exports, restructuring of interest-free loans, direct central assistance to farmers and extending credit from the Sugar Development Fund for ethanol production, modernization of mills and co-generation and permission to produce ethanol directly from molasses. Cane dues owed to farmers across the country hit a record Rs 19,244 crore as of March 31. Indian Sugar Mills Association (ISMA) said the output will cross 27 million tonnes in the full 2014-15 marketing year (October-September) against 24.3 million tonnes in the previous year. The annual domestic demand is pegged at 24.8 million tonnes. ISMA feared that prices might fall further and cane price arrears would continue to remain at a high level if the government does not purchase the surplus sugar.
Mining is another sector which is saddled with never ending problems, as if the various issues of mining ban etc. where not enough, the output prices have fallen considerably and demand has spiraled down. Public sector mining giant NMDC Limited has reduced prices of iron ore fines by 20 per cent and lumps by 6.1 per cent for 62 per cent Fe grade. The move comes after the recent fall in international prices, which are currently ruling at $49-51 per tonne CFR China basis. Also, the sluggish demand for iron ore by the domestic steel mills has led to the price reduction by NMDC.
Aviation as a sector has been showing good growth. Domestic air traffic grew 18.8 per cent in March on a year-on-year basis, with IndiGo leading all airlines with a 36.4 per cent market share. This is the third consecutive month which saw a strong growth in air travel. Domestic airlines flew 6.2 million passengers last month as against 5.2 million passengers in March 2014.
Automobile is another sector which has witnessed good traction. Improving macro and micro economic sentiment along with softening of interest rates have renewed the demand for cars in the urban markets. Domestic passenger car sales clocked 18.14% growth in April, the fastest in 30 months. Industry body Society of Indian Automobile Manufacturers (Siam) said car sales stood at 159,548 units during the month, against 135,054 units in April 2014. It was the seventh straight month of growth for the industry, and the fastest year-on-year since October 2012, when it grew 21.19%. However, Siam cautioned that a complete turnaround would take some more time. Sales of three-wheelers, motorcycles and light commercial vehicles dipped. Sale of SUVs and multipurpose vehicles grew 7%, while vans logged a nearly 20% growth. Sale of commercial vehicles grew by 6.5% largely on the back of a 24% jump in sales of heavy trucks and buses.
Telecom as a space is witnessing consolidation. Smartphone shipments in India dipped 7% in the first quarter this year to 19.5 million units, impacted by change in duty structure and restricted supplies from China. The overall mobile handsets market in the country, including feature phones, declined 15% to 53 million units in the January-March period, compared to the previous three months (October-December 2014).
The banking sector’s asset quality woes further worsened in the last one year, with gross non-performing asset (GNPA) ratio inching to 4.45 per cent as on March 15 this year, as compared to 4.1 per cent in March 2014, according to the latest data released by the Reserve Bank of India (RBI). The central bank also warned that poorly managed banks’ capital adequacy ratio could slip below the minimum regulatory requirement if they are unable to improve their performance.
Retail continues to remain in the limelight. With a host of corporate actions this can be a sector to keep a watch on. First it was the consolidation of The Aditya Birla Group’s garment business into a single entity and its merger with Pantaloons Fashion and Retail India Ltd to create India’s largest branded clothing company with annual sales of Rs.5,290 crore. Second was the announcement of the merger of Kishore Biyani’s Future Retail with Rajan Bharti Mittal’s Bharti Retail in a ₹750-crore all-stock transaction. Post merger, the combined retail entity is expected to have a total turnover of ₹15,000 crore. This was followed with Aditya Birla Retail Ltd (ABRL) agreeing to acquire the Total Super Store business from Jubilant Agri and Consumer Products Ltd (JACL) for an undisclosed sum in an all-cash deal.
On the online retail front, Lifestyle online retailer Jabong more than doubled its revenue to Rs 811 crore during calendar year 2014 but deep discounting led to a five-fold increase in losses to Rs 160 crore. With an EBIDTA loss of Rs 454 crore, Jabong burns about 55 paise to get one rupee of sales. On the other hand, Flipkart plans to focus on building a mobile app that delivers a shopping experience closer to real life shopping, and will align its infrastructure and engineering resources to do that, this will mark a change from its existing mobile app and technology infrastructure that is largely geared to serve desktop applications. With the kind of losses online retailers are announcing, one really wonders about their survival.
The government signed a Rs.1 trillion urbanization plan, with the Union cabinet approving the proposal to create 100 smart cities and the rolling out of a new five-year urban development mission for 500 cities. Key focus areas of the mission, which allows states greater flexibility in spending the money, include provision of clean water supply, sanitation and solid waste management, efficient mobility and public transport, affordable housing and governance.
Japan plans to double its investments in India in five years to over $35 billion, develop exclusive Japanese townships in the country and intensify cooperation in information technology. Japan is the fourth largest investor in India with about $17.9 billion worth of investments currently. Doubling this in five years, as targeted, would increase Japanese investments to more than $35 billion and probably push the country up to the second or third place, after Mauritius and Singapore. Infrastructure along with Cement & Steel would be a space to watch out for in the long term.
In a major boost to India’s capital markets, the Union labour ministry has allowed investing 5-15 per cent of Employees’ Provident Fund Organisation (EPFO)’s incremental corpus in equity-related instruments, in the form of exchange-traded funds (investment funds traded on stock exchanges). The EPFO’s incremental corpus is estimated to be around Rs 80,000 crore for 2014-15. Currently, the EPFO doesn’t invest in equity and equity-related instruments.
Going forward, macro economic data, corporate earnings, crude oil prices and how the rupee shapes up against the dollar are some of the issues that would set the trend of the market in the short term. Apart from this, global events and strength of FII inflows would be the major pointers towards which market would be watching keenly. With inflation on a downward trajectory, it’s just a matter of time when interest rates start softening, followed by increased government investment towards capital formation to revive the investment cycle, which is currently plagued by high NPA in banks. This apart global data which has been poor till date would be something interesting to watch out for – with both US & China reporting poor macro numbers, Japan also reporting weak industrial output numbers. Last but not the least the outcome of Greece would be a major trigger in the short term.
When markets turn bearish, it’s time for long-term investors to look for opportunities to buy. One should look for good quality, undervalued stocks to add to one’s long-term portfolio. One can have a look at company’s that have strong balance sheet, low or zero debt, quality management and earnings visibility. Some of the sectors that are likely to do well in the near future are technology, private sector banks, healthcare and NBFC. For longer term though Steel & Cement followed by capital goods would be something to watch out for.
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(Working as Head-Research at Eastern Financiers Ltd, am a post graduate in commerce from Calcutta University, and have gained wide experience in the last 18 years. Prior to joining Eastern Financiers, I have gained in depth knowledge of the Financial Markets while working with Capital Market Publishers, Lohia Securities & CD Equisearch. As head of the Equity Research Wing, I appear regularly as Guest Analyst at CNBC, Awaaz, CNN-IBN, NDTV Profit , Zee Business,Bloomberg UTV, ET Now & R Plus.)