Large Cap, Mid Cap and Small Cap funds underperformed the BSE S&P Sensex index by wide margins last month. Multiple worries of corporate earnings, pledged shares, NBFC crisis, political uncertainty and global economic growth hit stocks and turned investors risk averse. Going forward, the market is likely to retain its uncertain outlook on elections though there will be respite given Fed’s dovish stance on rates this year.
Sensex and Nifty gained by 1.30% & 0.30% respectively in the last one month. Indices were mainly driven by index heavy weights IT stocks while Auto sector stocks were the top losers in the month of January 2019.
On the global front, Wall Street closed mixed on Friday the last day of the month, as jobs report for January 2019 showed the economy added a better-than-expected 304K jobs, contrasting with some of index heavy weight stocks falling sharply following their quarterly earnings announcement.
European stocks closed mixed on Friday, the last day of the month, with household goods shares among the best performers amid new round of corporate earnings and after a no deal on trade talks between the US and China but setting up more meetings later this month.
FIIs/FPIs have sold Indian equity shares worth Rs. 42 billion in January 2019 and bought shares worth Rs. 27 billion in February 2019 (on 01st February).
Global and Indian equity markets will have to contend with several events in H1CY19. Following factors can derail potential gains and increase market volatility:
- The US Fed’s rate actions linked to the strength of the US economy will be a key variable. US economy continues to display strong momentum and better than expected economic data could surprise the market negatively in terms of the extent of rate increases by the Fed.
- The progress on China-US trade issues will be another variable with the US holding the threat of further increases in tariffs on Chinese imports from 1st March 2019.
- The level of oil prices linked to further US actions against Iran’s oil exports (current exemption to eight oil importing countries from Iran ends on 4th May 2019) will matter particularly for India’s macro.
- India will hold national elections in April-May 2019 and the outcome is quite uncertain post the strong performance of the main opposition party in recent state elections, these states contributed handsomely to BJP’s victory in 2014.
Annual consumer inflation in India declined to 2.19% in December 2018 from 2.33% in November 2018, marginally below market expectations of 2.2%. It is the lowest inflation rate since June 2017 as food prices continued to decline and inflation eased for clothing, housing and fuel.
Wholesale prices in India rose by 3.8% in December 2018, slowing from a 4.64% gain in the prior month and below than market estimates of 4.42%. It was the lowest wholesale inflation since April 2018, as cost increased at a softer pace for fuel and manufactured products while prices of food declined further.
India’s industrial production growth slowed sharply to 0.5% (Y-o-Y) in November 2018 from an upwardly revised 11-month high of 8.4% in the previous month and missing market expectations of a 4.1%. Growth slowed primarily due to a high base effect along with a moderation in growth in capital goods, consumer durables and a contraction in manufacturing growth.
The Nikkei India Services PMI dropped to 53.2 levels in December 2018 from November’s 4-month high of 53.7 levels while markets had estimated 52.5 levels.
The Nikkei India Manufacturing PMI dropped to 53.2 levels in December 2018 from an 11-month high of 54 levels in the previous month. Still, the latest figure was the second-highest in 2018 and contributed to highest quarterly average since Q3 Fy12.
The Nikkei India Manufacturing PMI increased to 53.9 levels in January 2019 from 53.2 levels in a month earlier and beating market expectations of 52.5 levels. Output rose the most since December 2017 and surpassed its long-run average, new orders expanded at the fastest rate in 13 months and new export orders grew for 15th straight month.
Global Central Banks Monetary Policy Decisions
The Federal Reserve held the target range for the federal funds rate at 2.25% – 2.5% during its first policy meeting of 2019 and reaffirmed its position to be patient about further policy firming considering recent global economic and financial developments and muted inflation pressures.
The European Central Bank held its benchmark refinancing rate at 0% during its January policy-meeting and reiterated it expects key interest rates to remain at record low levels at least through the summer of 2019. The central bank brought to an end its Euros 2.6 trillion bond purchase scheme last month, but policy makers mentioned they will keep reinvesting cash from maturing bonds for an extended period of time.
The Bank of Korea held its base rate steady at 1.75% during its January policy-meeting, after hiking 25 bps in the previous meeting, as widely expected. Policymakers said that they will maintain its accommodative monetary policy stance as inflationary pressures on the demand side will not be high for the time being and that the domestic economy will sustain a rate of growth that does not diverge significantly from its potential level.
The Bank of Japan left its key short-term interest rate unchanged at -0.1% during its January policy-meeting and kept the target for the 10-year government bond yield at around 0%. At the same time, the central bank revised down inflation forecast for fiscal 2019 to average 1.1% from an earlier projection of 1.6%, mainly due to a decline in crude oil prices and worries over global economic outlook.
Bank of Indonesia left its benchmark 7-day reverse repo rate unchanged at 6% during January policy-meeting, as widely expected. Policymakers said the decision was consistent with efforts to reduce the current account gap towards a range of 2.5% of GDP in 2019.
Industrial capacity utilization rate in China decreased to 76% during Q4Fy18 from 76.5% in the previous period and reached the lowest figure since Q1Fy17. The utilization rate of manufacturing industry declined by 2% (Y-o-Y) to 76.5% and for mining industry was down 2.2% to 70.2%.
Industrial output in the US rose 0.3% in December, following a downwardly revised 0.4% growth in November 2018 and beating expectations of a 0.2% gain.
The US unemployment rate rose to 4% in January 2019 from 3.9% in the previous month and slightly above market expectations of 3.9%. The number of unemployed increased by 241,000 to 6.54 million while employment fell by 251,000 to 156.69 million, following the 35-day partial government shutdown.
Annual inflation rate in the United States fell to 1.9% in December 2018 from 2.2% in November 2018, matching market expectations. It is the lowest inflation rate since August 2017, mainly due to a decline in gasoline cost. It is the first monthly decrease in consumer prices in nine months, due to a 7.5% slump in gasoline prices.
The annual inflation rate in the Euro Area came in at 1.6% in December 2018, unchanged from the preliminary estimate and below November’s final reading of 1.9%. It was the lowest rate since April as prices of energy and processed food, alcohol & tobacco rose at a softer pace.
Industrial production in the Euro Area went down 3.3% (Y-o-Y) in November 2018, following a 1.2% rise in October 2018 and worse than market expectations of a 2.3% drop. It is the first annual fall in industrial output since January of 2017 and the biggest since November of 2012.
Japan’s consumer price inflation eased to 0.3% (Y-o-Y) in December 2018 from 0.8% in the previous month and in line with market expectations. It was the lowest inflation rate since October 2017, amid declines in cost of food, transport and housing. On a monthly basis, consumer prices declined 0.2% in December, the same as a month earlier.
Last week, India’s top cement companies by market value, Shree Cement and UltraTech reported strong volume growth, led by revenues for the Q3Fy19 quarter. As robust demand remains supportive, Shree Cement reported total volume growth of 11% & 5% (Q-o-Q) which was driven by strong sales in eastern India. On the revenue front, revenue from cement business witnessed a growth of 16.32% (Y-o-Y) & revenue from power segment surged by 44% (Y-o-Y). Another key player from Eastern India, Dalmia Bharat is expected to report Q3Fy18 earnings in this week.
UltraTech, too, saw volumes surge by 14% (Y-o-Y) & 15% (Q-o-Q) led by buoyant demand, and high capacity utilisation of the cement plants acquired from JP group. However, due to higher expenses, EBITDA margins for Ultratech fell in Q3Fy18.
In the Budget Fy19-20, Government announced increased allocation to Pradhan Mantri Gram Sadak Yojana (PMGSY) by 22%, which augurs well for cement manufacturers amid weak demand for more than 2 years. The government raised the allocation to PMGSY to Rs 190 billion from Rs 155 billion.
Rising disposable incomes and a larger share of households in higher income brackets is driving up consumers overall spending power. These trends have, in turn, altered consumption patterns, thereby driving the retail real estate segment’s growth. India’s construction industry spending is expected to be in the range of Rs. 23-24 trillion, translating into a CAGR of 10-12%, way faster than a 2-4% rate observed between 2012-13 and 2014-15. Over the next five years, rural cement demand is expected to grow better than the urban demand.