Small Cap Funds outperformed Large Cap, Multi cap and Mid Cap funds in the month of March. Improved market sentiments on expectations of easing political risk and high FII flows, pushed up small cap stocks that had fallen sharply over the last one year. The markets are entering a speculative phase over the next two months and caution should be the key word for investors.
Table 1 gives the average returns of all funds and outperformance with respect to Sensex.
Calendar year 2019 has started off well for markets with equity markets across the globe showing sustained gains and global bond yields trading at lower levels of yields. Domestic markets too have seen the Sensex & Nifty trading at higher levels, INR showing strength and bond yields sharply down from one-year highs.
The markets have risen despite weaker incoming economic data both on the global and domestic front. On the global front, China and Eurozone PMI has weakened while in the US, retail sales have fallen. In India, GDP growth and IIP growth have fallen. Inflation is looking down globally.
On an overall basis, economies are on a much stronger footing than what they were post the 2008 financial crisis, which spurred an unprecedented central bank accommodation. Unemployment rate is down sharply from highs, economies are growing, and inflation has stayed down. To some extent, trade wars, China slowdown and geo political issues have weighed on economies.
In the wake of weaker incoming economic data, central banks that were turning neutral are now rethinking their stance. Fed is guiding to no rate cuts this year and no sharp reduction in balance sheet size while ECB is staying accommodative. China PBOC has turned accommodative while Bank of Japan is still ultra-loose.
Market participants, however, need to tread with caution. Macro-economic data hasn’t improved substantially, Q4Fy19 earnings are expected to be less than expectations and Brent Crude oil prices have been rising which is negative news for deficit figures. However, longer term outlook for markets is more promising given that both global and domestic economy is nowhere close to the bubble levels seen pre – 2008 financial crisis. In India, there has been a long-drawn resolution to the banks bad loan crisis and new leaders have emerged on the strength of their businesses. This trend will continue and will generate long term wealth for patient and disciplined investors, investing in the right stocks
Following factors can derail potential gains and increase market volatility:
- The level of oil prices linked to further US supply cuts action against Iran’s oil exports and Venezuela (current exemption to eight oil importing countries from Iran ends on 4th May 2019 will matter particularly for India’s macro). Oil prices have been supported for much of 2019 by the efforts of the OPEC & Non-OPEC countries who have pledged to withhold around 1.2 million barrels per day (bpd) of supply this year to prop up markets. OPEC & Non-OPEC countries are meeting in June 2019 to discuss whether to continue withholding supply or not.
- Volatility in Q4Fy19 earnings could drag broad market indices.
- India general elections begin on the 11th of April and goes on till 19th of May and results will be declared on 23rd of May. The long period of elections will cause a lot of market volatility with political parties making a lot of noises that will get caught up on media and social media.
Q4Fy19 Earnings Outlook:
Q4Fy19 results are expected to be tepid, as commodity prices across the globe during the quarter have slumped. However, fall in input costs will help the end-user industries. INR appreciation will have an impact on revenues for IT & Pharma companies. Airline companies are expected to post strong earnings as the airfares were higher and utilisation levels have gone up for other airlines as the Jet Airways has grounded more than 60% of its fleet size. Consumer and Retail companies have witnessed strong demand which would translate in to stronger revenues.
FIIs/FPIs have sold Indian equity shares worth Rs. 42 billion in January 2019 and bought shares worth Rs. 176 billion in February 2019.
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 levels. The latest reading pointed to the strongest pace of expansion in the manufacturing sector since December 2017, boosted by a sharp and accelerated increase in both output and employment.
Consumer prices in India rose 2.57% (Y-o-Y) in February 2019, following a downwardly revised 1.97% rise in January 2019 and above market expectations of 2.43%. It is the highest inflation rate in four months as food prices fell less. In its February 2019 policy-meeting, the Reserve Bank of India lowered its inflation forecasts to 2.8% for January-March 2019, mentioning a deflation in food items and a sharp fall in fuel inflation.
Industrial production in India increased 1.7% (Y-o-Y) in January 2019, following an upwardly revised 2.6% rise in the previous month and below market expectations of 2%.
India trade gap narrowed to USD 9.6 billion in February of 2019 from USD 12.3 billion a year earlier and below market expectations of USD 14.3 billion. It is the lowest trade deficit since September 2017. Exports increased 2.4% (Y-o-Y) to USD 26.7 billion. In contrast, imports declined 5.4% (Y-o-Y) to USD 36.3 billion.
Wholesale prices in India rose by 2.93% (Y-o-Y) in February 2019, accelerating from a 2.76% rise in the prior month. The latest reading was above market estimates of 2.88%, mainly driven by a faster rise in cost of food and fuel.
The US economy advanced at an annualized rate of 2.6% on quarter in the fourth quarter of 2018, beating market expectations of a 2.4% growth, the initial estimate showed. It follows a 3.4% expansion in the previous period. The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), non-residential fixed investment, exports, private inventory investment, and federal government spending.
Consumer prices in the United States increased 1.5% (Y-o-Y) in February 2019, following a 1.6% rise in January 2019 and below market expectations of 1.6%. It is the lowest inflation rate since September 2016, mainly due to a fall in cost of gasoline and clothing while prices of electricity stalled.
Non-farm payrolls in the US increased by 20,000 in February 2019, following an upwardly revised 311,000 rise in January 2019 and well below market expectations of 180,000. It is the lowest reading since February 2017, mainly due to fall in construction employment while jobs were added in professional and business services, health care, and wholesale trade.
The US unemployment rate fell to 3.8% in February 2019 from 4% in the previous month and below market expectations of 3.9%. The number of unemployed persons decreased by 300,000 to 6.2 million.
The US government budget deficit increased to USD 234 billion in February 2019 from a USD 215 billion gap a year earlier and above market expectations of a USD 227 billion shortfall.
The IHS Markit US Services PMI fell to 54.8 levels in March 2019 from 56 levels in the previous month and below market expectations of 56 levels. The IHS Markit US Manufacturing PMI fell to 52.5 levels in March 2019 from 53 levels in February 2019 and below market expectations of 53.6 levels.
Japan’s consumer price inflation stood at 0.2% (Y-o-Y) in February 2019, unchanged from the previous month’s 15-month low and below market expectations of 0.3%. Prices of both food and transportation & communication fell for a third month in a row, while housing costs were flat.
The Japanese economy advanced 0.5% (Q-o-Q) in the December quarter 2018, better than the preliminary estimate of a 0.3% expansion and recovering from a downwardly revised 0.6% contraction in previous quarter.
The Nikkei Japan Manufacturing PMI was unchanged at 48.9 levels in March 2019, below market expectations of 49.2 levels.
Exports from China tumbled 20.7% (Y-o-Y) to USD 135.24 billion in February 2019, the most since February 2016 and far worse than market expectations of a 4.8% decline, amid weakening global demand, ongoing trade tensions with the US and a series of Lunar New Year holidays, which started in early February 2019.
Global Central Bank Policies Outcome:
Fed keeps target interest rate unchanged at 2.25%-2.50% in its latest FOMC meet, and sees no rate hikes this year and one rate hike in 2020. Fed was more dovish than the market expected in its just concluded FOMC meet on the 20th March 2019. Federal Reserve policymakers expect rates to remain at current levels this year, compared to December’s projection of two hikes. The FOMC also pledged to start slowing the shrinking of its balance sheet in May and stop the drawdown altogether at the end of September. The economic-growth projections were also lowered for this year by a full percentage point to 2.1%.
Click here to read analysis on “Dovish Fed is Positive for G-secs, INR, Sensex & Nifty”.
The Bank of Japan left its key short-term interest rate unchanged at -0.1% at its March 2019 policy-meeting, as widely expected. Policymakers also kept the target for the 10-year Japanese government bond yield at around 0% but offered weaker views on exports and output amid rising global headwinds.
The European Central Bank held its benchmark refinancing rate at 0% on 7th March 2019 and pushed out the timing of its first-rate hike in nearly eight years to 2020 at the earliest. Also, the central bank announced a new series of quarterly Targeted Long-Tern Refinancing Operations to be launched in September 2019, aiming to preserve favourable bank lending conditions and the smooth transmission of monetary policy and reaffirmed it will keep reinvesting cash from maturing bonds for an extended period.
The Bank of England’s Monetary Policy Committee voted unanimously to hold the Bank Rate at 0.75% during its March 2019 policy-meeting and reaffirmed its pledge to gradual and limited rate rises over the forecast period, despite persistent concerns about Brexit.
Bank Indonesia kept its benchmark 7-day reverse repo rate unchanged at 6% on March 2019 policy-meeting, as widely expected.
The Indian telecom industry is the second largest in the world by number of subscribers. The sector has witnessed exponential data growth over the last few years primarily driven by affordable tariffs, wider availability, roll out of Mobile number portability (MNP), 3G and 4G, evolving consumption patterns of subscribers and conducive regulatory environment. The telecom sector has grown at 19.6% CAGR in terms of subscriber base and at 7.07% CAGR from a revenue perspective over the last few years. Private access service providers hold major part of market share of the wireless subscribers.
On 22nd February 2019, the Telecom Regulatory Authority of India (TRAI) released a white paper on ‘Enabling 5G in India’. The TRAI notes that, globally, full scale deployment of 5G networks is expected to start by late 2019 or early 2020 and that pilots for these have already commenced. Key highlights from TRAI’s white paper on 5G includes:
- Committee expects mobile communication networks enabled by 5G technology will allow higher quality video services with mobility at high speed, business automation delivered through billions of connected devices, delivery of critical services such as tele-surgery and autonomous cars assured by low latency and ultra-reliable networks, and improved productivity assisted by high quality, real time data
- According to 5G high level forum 7, 5G is expected to be launched in India by 2020 and is predicted to create a cumulative economic impact of USD 1 trillion in India by 2035. As per Ericsson, 5G enabled digitalization revenue potential in India will be above USD 27 billion by 2026. GSMAi projects that after initially launching in 2020, 5G connections in India will grow to almost 70 million by 2025, equivalent to around 5% of total connections.
Optic fiber is the key back-bone for the 5G infrastructure and this market is estimated to grow at a CAGR of 11.7% during the forecast period (CARE Report) 2016 – 2025 and accounts for USD 27.88 billion in the year 2025. Based on end-user, the optical fiber market can be further divided into Broadcast, IT & Telecom, and Industrial, Defence, Medical and Others. One of the prime factors that are driving the demand for optical fiber cables is the growing needs for fast and improved networking and network services and growing penetration of broadband connections among developed and developing countries.
Shift towards Optic Fiber cables is inevitable due to its speedier data transmission, lower latency and larger radius connectivity. In the 3G phase, the major focus was connecting more and more individuals to internet whereas 4G phase led to an exponential increase in consumption of data. With 5G coming into play, there will be an accelerated shift towards digital lifestyle by enabling internet of things/AI/cloud for carrying out basic day-to-day activities. With many demanding requirements on data capacity and speed, the replacement of the backbone of the global communication network from copper to Optic fiber is inevitable. However, currently the supply – demand mismatch in the optic fiber industry has led to 40%-50% fall in spot prices of optic fiber. Steep fall in prices is a short term risk but demand for optic fiber products is intact.
Click here to read our analysis on “Next Generation of Wireless Technology is Ready to Take-Off”