The market continued to beat down mid and small cap stocks on election uncertainties, global macro issues and domestic earnings worries. Mid and small cap funds underperformed large cap and diversified funds in February 2019. While negatives of election, economic slowdown, Indo-Pak tensions, global trade worries, credit issues and earnings growth slowdown are still present, there are bright spots emerging in the form of Fed holding back rate hikes, RBI rate cut, progress in US-China trade talks, low inflation, oil prices down from highs and stabilizing INR.
In February 2019, Sensex & Nifty declined in value by 1.42% and 0.70% respectively.
On the global front, US equities extended losses on 28th February 2019 after US trade representative Robert Lighthizer said before a Congressional committee that much work still needs to be done in US-China trade negotiations. During the month, Dow Jones gained by 3.67%, Nasdaq gained by 4% and S&P 500 rose by 0.50%.
Stock markets across the Asia-Pacific region closed mostly in the red on 28th February 2019 amid persistent concerns about US-China trade talks and after the White House announced that the US-North Korea summit came to an end with no agreement reached. In addition, weaker-than-expected Chinese data showed factory activity contracted the most since February 2016. The Nikkei 225 fell by 0.8%, Shanghai Composite fell by 0.4%, Hang Seng declined by 0.4% and Kospi declined by 1.8%.
FIIs/FPIs have sold Indian equity shares worth Rs. 42 billion in January 2019 and bought shares worth Rs. 176 billion in February 2019.
Following factors can derail potential gains and increase market volatility:
- The level of oil prices linked to further US action 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 2.05% in January 2019 from a downwardly revised 2.11% in December 2018, below market expectations of 2.48%. It is the lowest inflation rate since June 2017 as food prices continued to decline.
The Indian economy advanced 6.6% (Y-o-Y) in the last three months of 2018, below a downwardly revised 7% expansion in the previous period and market expectations of 6.9%. It is the lowest growth rate in five quarters as weak consumer demand and government spending held back expansion.
The Nikkei India Manufacturing PMI increased unexpectedly to 54.3 levels in February 2019 from 53.9 levels in a month earlier and beating market expectations of 53.5.
Wholesale prices in India rose by 2.76% (Y-o-Y) in January 2019, slowing from a 3.80% rise in the prior month and well below market estimates of 3.65%. It was the lowest wholesale inflation since March 2018, mainly due to a noticeable slowdown in cost of fuel and manufactured products.
India’s industrial production growth accelerated to 2.4% (Y-o-Y) in December 2018 from a 17-month low of 0.3% in the previous month and above market expectations of 2.4%, boosted by a rebound in manufacturing output.
India trade deficit fell to USD 14.73 billion in January 2019 from a downwardly revised USD 15.67 billion a year earlier. From April to January, the country’s trade gap increased to USD 155.93 billion from USD 136.25 billion a year earlier.
The Reserve Bank of India lowered its benchmark interest rate by 25bps to 6.25% during its February policy meeting and shifted its stance to “neutral” in an attempt to boost a slowing economy as inflation rate remains well below its mid-point target of 4%. The central bank also released its bi-monthly review of the economy, where it forecast India’s economy will expand 7.4% in 2019-20, up from 7.2% in this fiscal year.
India’s fiscal deficit widened to Rs. 7 trillion in April-December 2018 from Rs. 6.21 trillion in the same period of the previous fiscal year. Total expenditures went up 7.8% to Rs. 18.32 trillion and revenues rose at a slower 5% to Rs. 11.31 trillion. The budget gap is equivalent to 112% of the government’s target for the whole financial year, compared with 114% a year ago.
Auto firms had reported disappointing Q3Fy19 earnings on the back of liquidity squeeze in the economy, higher fuel costs and rising insurance costs. Outlook given by OEMs & Auto-ancillary companies for Q4Fy19 is low as they expect tepid demand in the coming quarters. Contraction in profitability & margins are mainly due to rising commodity prices (Palladium prices touched all time highs) and adverse forex exchange rate. The interim union budget, which was released on 01st February 2019, had no good news specific for Auto Industries. However, some of the announcements such as tax exemption for individual income upto Rs 0.5 million will help in spurring demand for two-wheelers & small cars going ahead.
On the earnings front, Tata motors reported a huge loss of Rs. 270 billion for Q3Fy19 due to one-time asset impairment at its struggling JLR factory. This is the third consecutive quarterly loss reported by Tata Motors. Recently as per the Bloomberg reports, CDS (credit default swaps) spreads for JLR have risen by 680 bps. Tata Motors share price declined by 52% in the last one year.
Cumulative sales gowth during Apr-Dec 18 of Auto industry show positive sign across the segments. However, in the month of December 2018 sales declined across the segments due to low consumer sentiments.
The industry produced a total 23,861,485 vehicles including passenger vehicles, commercial vehicles, three wheelers, two wheelers and quadricycle in April-December 2018 as against 21,432,030 in April-December 2017, registering a growth of 11.34% over the same period last year. Total vehicles sales in the domestic market during the month of February grew by 1% to 17,352 units from 17,213 units in February 2018.
A weak demand for Auto industry products is leading to slower sales growth which indicates a bumpy ride for Auto industry stocks in near term.
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 minutes reaffirmed its position to be patient about further policy firming considering recent global economic and financial developments and muted inflation pressures.
Annual inflation rate in the US slowed for the third straight month to 1.6% (Y-o-Y) in January 2019 from 1.9% in December 2018. It is the lowest rate since June 2017, compared to market expectations of 1.5%, mainly due to a sharp fall in energy prices.
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.
The Japanese economy advanced by 0.3% in the December quarter 2018, reversing from a 0.7% contraction in the previous period and compared to market expectations of a 0.4% growth.
Japan’s consumer price inflation inched lower to 0.2% (Y-o-Y) in January 2019 from 0.3% in the previous month and in line with market expectations. It was the lowest inflation rate since October 2017, amid further decreases in prices of food, transport and housing. On a monthly basis, consumer prices rose by 0.3% in January, following a 0.2% drop in December 2018.
The Eurozone economy grew 1.2% during Q4Fy18, easing from a 1.6% expansion in the previous three-month period and matching market expectations. Meanwhile, the European Commission cut its Eurozone growth forecast for this year to 1.3% on 7th February 2019 from 1.9% in its earlier forecast, citing large uncertainty from Brexit negotiations, slowing growth in China and weakening global trade.