We have a series of issues in the economy which are impacting the market today, led by slowdown in global and domestic economy. Global issues are due to the conservatism in world trade and geo-political issues diminishing the benefits of globalisation. While domestically, it is the cyclical and structural problems due to continuous changes in policies, NPA and global slowdown. Today, market is trading in line with the announcements of economic data which are weak. This trend can change based on the corrective measures undertaken by domestic and international governments. On a positive note, we understand that these issues are largely acknowledged by the market, providing some optimism that measures will be implemented in the future. But delay and uneventful measures will not help the market.
Factors triggering the current descent…
- A much below than expected union budget which revealed the weakness of the government’s fiscal position regarding revenue collection, gaps in forecast, fiscal management and increase in taxation.
- Reduction in government spending and no supportive measures for businesses reducing the confidence to invest for the future.
- Weakness in global market due to trade-war, Brexit and geo-political issues in Italy and Argentina leading to poor performance of emerging markets.
- Neutral view of Fed stating that there may not be any rate cut during CY2019.
- Selling by FIIs triggered by super-rich surcharges and risk-off mode in global and emerging market.
- Much below than expected Q1 results showing signs of further downgrade in earnings. The actual PAT growth in Q1 is about 7% while market was hoping for more than 20% growth in FY20 due to likely revival in economy by the second half of FY20.
On a positive note, we are getting support from RBI through monetary policy. RBI has lowered its repo rate by 110bps to 5.40% on a consecutive manner during the last four policy meetings. It is still holding “accommodative” stance due to concerns about the sharp slowdown in investment activity along with continuous moderation in private consumption growth. RBI has lowered its growth forecast to 6.9% for FY20 from the previous estimate of 7% while marginally raising its retail inflation (CPI) for FY20. More such balancing acts are likely to happen in the future since real interest rate in India is still very high at about 550bps and downside risk to GDP growth is still high. (definition of real rate; long-term base rate minus recent consumer inflation (CPI)).
Also, most of the issues mentioned above are well acknowledged in the market. Government is working on it and further measures are expected to be announced in the coming weeks. This will provide a cushion to the market limiting the extent of losses during this phase of consolidation. We feel that accumulating during the next one to two quarters or SIP could be a good strategy for long-term investors. Investors will have to stick with good names, quality businesses and sectors while mid and small caps are opening-up with good opportunity to invest for long-term gains.
What can change this consolidating phase?
The sentiment of Indian equity market can revamp if the domestic economy improves by the second half of the fiscal year. A lot will depend on the supportive measures to be undertaken by the Government. Other factors which will help are distribution of monsoon rainfall, ease in oil prices and start of post-election business activities. At the same time, global market also needs to improve led by reduction in interest rates and quantitative easing indicated by key world central banks.
We need to change the sentiment of FIIs towards India which has been impacted due to increase in taxes and lack of earnings growth in corporates. FIIs have sold about Rs28,000cr in the last two months, dated 30th August 2019. Foreign investors are cautious in the global market and are in a risk-off mode. Equity market in US, Europe and MSCI-Emerging Market are down in a range of 5 to 10% in the last two month. Indian Mutual Funds have been positive during the same period but has not supplemented the market given the change in the momentum, weight of FII’s selling, selling from other investors like retail and reduction in liquidity multiplying the effect of FII selling.
Corrective actions which are required…
The global economy has to improve led by supportive policies, cut in interest rate, increase in liquidity and an end to trade-war. In the last quarter, GDP of important countries like US, Euro zone, China and India were muted and estimates for CY2019 have been lowered substantially. There are fears that this slowdown could get extended to CY2020 given the uncertainty over US-China trade agreement, BREXIT and geo-political issues. Given these issues, earnings growth is moderating while valuation is expanding. As a result, equity is losing its attractiveness as an investment class and funds are shifting to safe haven assets like bonds and gold. World Bond index and Gold are up in a range of 5 to 18% in the last three-months. To bounce from this situation, corrective action has to be announced by central banks by providing enough liquidity and rate cuts while governments have to announce worthwhile measures and trade deals. Any delay in timely decisions will impact the global economy and market accordingly.
In India, a replica of this negative effect multiplied due to lower than anticipated measures in the post-election budget to push the economy, weaker than thought economy slowdown, low tax collection, uneven distribution of monsoon and feeble Q1FY20 results. The government has to come out with steps to encourage investment in the country FM held a meeting with corporates and market players to develop consensus and steps to firm-up investments and boost the economy, which is showing heavy signs of slowdown. In the meeting, a complete rollback of super-rich surcharge was tabled, which was announced in the first stimulus measures meeting. The removal of long-term capital gains tax, dividend distribution tax, and long-term certainty in tax policy were among the other top inputs from the industry. Other steps suggested were to stimulate the economy with a cut in GST and increasing credit in the financial system. FM has heard all the issues and PMO is overviewing the work to revive the economy, providing a hope that government will announce further supportive steps to revive the economy FIIs are continuing as sellers even after the recall of surcharges due to risk-off environment in emerging markets and downside risk to earnings and economy. Global issues are not subsiding while the domestic market is floating on a hope that government will come-out with supportive measures. Development on these points is going to define the trend of the market in the short to medium term. Till the final measures are announced and understood, the market will move as per the upcoming economic data which are weak as on today.