The markets hammered mid and small cap stocks on global the back of trade war tensions, domestic credit and liquidity crisis. The increasing issues of governance and auditor integrity have virtually cut off credit markets for many companies and this will have an effect on equities. The markets will give premium valuation to the best governed companies and beat down valuations for the weaker ones.
Domestic equities will stay at higher levels on easing global risk aversion but given expectations of muted Q1 FY 20 earnings. However as low rates kick in with government spending and thrust on economy, earnings expectations can pick up going forward. The progress of monsoons have been 33% lower-than-average in June and is also raising concerns that parts of the country could face a worsening drought. . The India Meteorological Department has forecast average rainfall in 2019, while the country’s only private forecaster Skymet has predicted below-normal rainfall.
Fund Performance for the Month of June 2019
In June 2019, Sensex & Nifty declined in value by 0.81% and 1.10% respectively.
On the global front, Wall Street closed moderately in the green on Friday the 28th of June, amid expectations that the United States and China will be able to reach ceasefire in their trade disputes during Trump and Xi meeting. During the month, Dow Jones gained by 7.2%, Nasdaq surged by 7.5% and S&P 500 rose by 7%.
Stock markets across the Asia-Pacific region closed in the red on Friday as investors awaited development on trade talks ahead of a highly anticipated meeting between US President Donald Trump and Chinese President Xi Jinping at the G20 summit in Japan. The Nikkei 225 gained by 3.3%, Shanghai Composite rose by 3%, Hang Seng surged by 6% and Kospi gained by 4.3%.
FIIs/FPIs have bought Indian equity shares worth Rs.79 billion and Rs. 26 billion in May 2019 and in June 2019 respectively.
Following factors will be keenly watched by market participants:
- The level of oil prices linked to outcome from OPEC meeting as 14 oil producing countries which are part of OPEC are likely to extend supply cuts till the end of 2019 amid slowdown in global economy growth. During the month of June, Brent crude oil prices surged by 5%.
- Domestic market participants will be watching out for Union Budget outcome which will be announced on 5th July 2019. Key focus will be on reviving the growth especially consumption growth that had been buoyant but is now flagging, alongside other sectors that are visibly struggling.
The Indian economy advanced 5.8% (Y-o-Y) during Q4Fy19, slowing from a 6.6% expansion in the previous period and missing market expectations of 6.3%. It was the weakest growth rate since the first quarter of 2014, amid weaker consumer demand and fixed investment.
Infrastructure output in India increased 2.6% (Y-o-Y) in April 2019, easing from an upwardly revised 4.9% rise in the previous month.
The Nikkei India Services PMI dropped to 50.2 levels in May 2019 from 51levels in April 2019 and slightly above market forecasts of 50.1 levels. The reading pointed to the weakest expansion in services activity since May last year when the sector contracted, as disruptions arising from the elections hampered growth of new work intakes.
India’s retail price inflation rate rose to 3.05% (Y-o-Y) in May 2019 from an upwardly revised 2.99% in the previous month and slightly above market expectations of 3.01%. That was the highest rate since October last year, mainly supported by higher food prices. Still, inflation came in below the Reserve Bank of India’s medium-term target of 4% for ten consecutive months.
Wholesale prices in India rose by 2.45% (y-o-Y) in May 2019, easing from a 3.07% gain in the previous month and below market expectations of 3.1%. It was the lowest wholesale inflation rate since July 2017, amid a slowdown in cost of food, fuel and manufactured products.
India’s trade deficit widened to USD 15.36 billion in May 2019 from USD 14.62 billion in the same month last year, but below market expectations of USD 15.84 billion. Imports were up 4.31% to an all-time high of USD 45.35 billion, boosted by purchases of gold and oil. Meanwhile, exports rose at a softer 3.93% to USD 30 billion.
Global Central Bank Policies:
The Reserve Bank of India lowered its policy interest rate by 25bps to 5.75% during its June policy-meeting and changed its monetary policy stance to accommodative from neutral. CPI inflation is revised upwards to 3.00%-3.10% in H1 2019-20 and CPI inflation is revised downwards to 3.4%-3.7% in H2 2019-20.
Click here our read our analysis “G-secs to Shine while Credit Markets Bleed- RBI June 2019 Policy Review”.
Fed kept target interest rate unchanged at 2.25%-2.50% in its latest FOMC policy-meeting but signalled willingness to act on fragile economic conditions globally, which could mean rate cuts as early as July 2019.
Click here to read our analysis on “Fed Rate Cut Expectations and Impact on Sensex & Nifty”.
The Bank of Japan left its key short-term interest rate unchanged at -0.1% at its June policy- meeting, as widely expected, hours after the Federal Reserve signalled possible interest rate cuts later this year. Policymakers also kept the target for the 10-year Japanese government bond yield at around 0% but warned that downside risks regarding overseas economies were likely to be significant.
The Bank of England’s Monetary Policy Committee voted unanimously to hold the Bank Rate at 0.75% during its June policy meeting and reaffirmed its pledge to gradual and limited rate rise over the forecast period, despite ongoing Brexit concerns and global trade tensions.
Corporate profits in the United States declined by USD 72.8 billion, or 3.5%, in the first quarter of 2019 to USD 2,003.4 billion, after being unchanged in the previous period at USD 2,076 billion and against market expectations of a 2% gain.
The US economy advanced by an annualized 3.1% in the first quarter of 2019, slightly below earlier figures of a 3.2% expansion and in line with market expectations, the second estimate showed.
Nonfarm payrolls in the US increased by 75,000 in May 2019, following a downwardly revised 224,000 rise in April 2019 and missing market expectations of 185,000. Employment continued to trend up in professional & business services and in health care sectors. The US unemployment rate stood at 3.6% in May 2019, unchanged from the previous month’s 49-year low and matching market expectations.
US industrial output rose 0.4% from a month earlier in May 2019, reversing a 0.4% fall in April 2019 and beating market expectations of a 0.2% gain. That was the biggest increase in industrial production since November last year, boosted by a rebound in manufacturing and utilities output.
The US trade deficit narrowed to USD 50.8 billion in April 2019 from a revised USD 51.9 billion in the previous month and compared to market expectations of USD 50.7 billion.
The IHS Markit US Services PMI came in at 50.9 levels in May 2019, in line with a preliminary estimate and below April’s 53 levels, final estimates showed.
The US annual inflation rate fell to 1.8% in May 2019 from a five-month high in the previous month and just below forecasts of 1.9%, raising expectations that the Federal Reserve will start cutting interest rates this year. The core inflation rate, which excludes volatile items such as food and energy, edged down to 2.0 percent, also below market consensus of 2.1%.
Profits earned by China’s largest industrial firms dropped by 3.4% from a year earlier to CNY 1.813 trillion in the first four months of 2019, compared to a 3.3% fall in the January to March period. Profits at state-owned enterprises declined 9.7% while those at private firms grew 4.1%.
Industrial production in Japan rebounded 0.6% month-over-month in April 2019, following a 0.6% decline in March 2019 and compared to market expectations of a 0.2% advance.
The Nikkei Japan Services PMI edged down to 51.7 levels in May 2019 from the previous month’s 51.8 levels, as the rate of job creation weakened from April’s high.
The IHS Markit Eurozone Services PMI increased to 52.9 levels in May 2019 from 52.8 levels in the previous month and above preliminary estimates of 52.5 levels.
Indian Hotel Industry Overview:
India has moved from having more luxury and upper scale rooms, at the start of the century, to a more balanced supply scenario, with 19.8 % of the supply estimated to be available in each of the upscale and upper midscale segments, 22.5% of the supply estimated to be available in the midscale and economy segments and 38% of the supply estimated to be available in the luxury and upper upscale levels.
The top 10 markets in India (based on hotel inventory) have 67.7% of hotel inventory in the fiscal year 2017 and each market has at least 3,000 chain-affiliated hotel rooms. Supply share of the top three metros declined from 43.5% in the fiscal year 2002 to 37% in the fiscal year 2017. The share of the other three metros has increased marginally. Chennai added 4,500 new rooms between the fiscal years 2012 and 2017 while demand in Hyderabad stagnated between the fiscal years 2010 to early 2014 due to issues around the creation of the Telangana. Supply share of the four main non-metro cities increased from 10.8% to 16.5%, between adding 17,818 rooms.
There was substantial inventory creation in Pune and Ahmedabad, at a CAGR of 20.4% and 17.3% respectively, in this period, which contributed significantly to this growth. During the fiscal years 2002 and 2017, there were 4,002 rooms added in Jaipur and 4,453 rooms were added in Goa. The share of other markets has remained range-bound, supply addition was approximately at 32,000 rooms during the fiscal years 2002 to 2017. Continued supply in new tourist destinations, Tier II and Tier III towns, as also other Tier I cities outside the top 10 markets, helps deepen industry potential and creates opportunities for domestic hotel companies and brands.
The addition of over 88,000 rooms between the fiscal years 2007 and 2017 has predominantly been under international chain management or franchise, with Marriott, Starwood, Accor, Carlson, Hyatt, Hilton and Intercontinental Hotels Group taking about 45% of this additional inventory. In comparison, the big three Indian chains, Taj, Oberoi and ITC Hotels, added only about 12,651 rooms. International chains with a more modest presence in India, such as Wyndham, Choice and Best Western, added about 3,800 rooms in this period.
Currently in listed space, Lemon tree and Indian hotels have generated decent gains for shareholders than its peer group. Following table is a snapshot of financial strength of both the companies.