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India Economy: Markets and Economy Dashboard - Jan20: Coronavirus threat triggers risk-off trade in asset classes

Our monthly, Markets and Economy Dashboard, provides a quick overview of key global and local events, domestic and global economic fundamentals and their impact on select asset classes. January saw a risk off move in a response to recent Coronavirus threat. Also, global economic fundamentals continued to be moderate overall as inflation across economies hardened but industrial output and manufacturing PMIs across most economies continued to be weak. Our and can be found at respective links.

Key global events: The killing of General Soleimani escalated tensions between the US and Iran in the start of Jan 2020, which saw a quick de-escalation too. US and China signed phase 1 of the trade deal on 15 Jan which expected to come into effect from 14 Feb 2020. Under the deal, majority of the tariffs would continue, but China has agreed to increase purchase of agricultural goods from the US. The US President indicated that majority of the tariffs would be taken off in phase 2. However, the recent threat from Coronavirus dampened spirits in the second half of Jan, as it led to a volatility spike on growth slowdown risks. As Coronavirus is spreading at a faster pace than SARS it has led to a sharp risk off move across asset classes. While gold and Japanese Yen strengthened, emerging market equities, oil and other commodities saw a consequent down move, along with an inversion in US yield curve. With the UK officially splitting from the European Union on 31 Jan (transition period until 31 Dec 2020), economic growth in the continent concerns are once again at the forefront thus leading to an inversion in UK’s yield curve too. 

Global economic fundamentals: Inflation of most of the major economies strengthened with China and India reporting Dec 2019 CPI at 4.5% and 7.4%yoy, respectively, primarily on higher food prices. GDP growth and industrial output continued to be weak across major economies too, except China. Industrial output growth for China continued to improve for second consecutive month in Dec 2019. However, Jan-20 manufacturing PMI across economies, including Australia, UK, Japan, China, Thailand etc. has been weak. Interestingly, unemployment rates across key economies continued to stable in Dec 2019, but for India, which continued to see a relatively high unemployment rate at 7.6%. (Global dashboard can be found ).

India’s economic fundamentals: GST collection, tractors and UV sales continued to strengthen to some extent in Dec 2019. However, air passenger growth and consumption of petroleum products scaled back after having shown some strength in Nov 2019. Notwithstanding the overall weakness (as exhibited by other high frequency indicators like IIP, core Industries growth, EXIM trade, etc.), we expect the economy to recover by the end of FY20. We believe the recently announced corporate tax rate cuts, already executed 135bp repo rate cuts, clarity on US China trade stand-off and other measures by the government should aid the recovery. Also, the union budget pencils in 13%yoy expenditure growth for FY21, which is a positive for growth recovery in our view. (India chart book can be found ).

How did key asset classes perform in Jan 2020?

• The up-move in US equity markets continued in most part of Jan, until the recent weakness on account of threat perceived from the Coronavirus, which led to S&P500 closing in red for Jan-20. While most equity markets have been weak since the disease outbreak threat intensified, Australian equities have held up rather strong, up about 2.9% so far in Jan 2020.
• Crude had a volatile run, having risen to US$68.9/bbl at the height of US-Iran tensions and then slipping to US$58.2/bbl on 31 Jan on fears emerging from the Coronavirus.
• During Jan-20, credit indices globally showed mild up-move, as yields fell marginally, including in the US, UK, Canada, Australia, China, etc. However, India saw yields harden, primarily on fiscal concerns.
• Reversing the bull move of Dec 2019, commodities came off, with Bloomberg commodities index falling 7.5% mom. As part of the risk-off trade, gold a touched a life-time high at US$1584/troy ounce, up 4.6% mom in Jan 2020.
• Palladium was the best-performing among metals, with a whopping 21% up move during the month so far. We attribute the strong Palladium prices over last three years (almost tripled) to the demand supply gap.
• Coffee prices were weak in Jan so far, partly reversing the up move seen in Nov 2019. UNFAO index moved up by 12.5% in Dec 2019, which we believe may cool off in Jan, given the muted agri commodities prices during the month.

Global yield behaviour - Yield curves of most countries flatten again

• The steepening of global yield curves seen in Dec-19, reversed completely in Jan-20, as growth slowdown fears took over after coronavirus outbreak. Multiple countries yield curves inverted again, after having steepened in Dec-19
• US 10-year – 3m yield spread stood at -3bp versus 32bp at the end of December. US fed maintained status quo on rates in its latest meeting in January.
• With the positive momentum of a decisive election win waning off, UK’s yield curve saw inversion too. We attribute the inversion in the curve to fears surrounding the economic impact of Brexit, as most legal hurdles are now done with. The transition period for Brexit ends in Dec 2020
• Led by similar concerns, Germany’s yield curve too flattened (which had steepened in Dec 2019), as German 10-year bund yields plunged to -0.43%, after having recovered marginally to -0.26% in Dec 2019
• 10-year yield in India stood at 6.6% as of 31 Jan, with the yield curve retaining status quo. While, post budget, 10 year G-sec yields opened significantly lower at 6.5% on 3^rd Feb, we expect yields to harden during the course of year on fiscal concerns again. Our FY21 budget note can be found .

India Summary

Fiscal update: The government allows fiscal slippage in FY20 in order to support the economic revival

• Overall GST collection in Dec stood at Rs1.03trn up 9% yoy versus 13.2%yoy growth in Dec 2018. The growth comes on a strong base for the second consecutive month. While compliance uptick could be the reason for growth, we would still see in positive light.
• FYTD20 (till Dec 2019) fiscal deficit at Rs9.3trn utilised 132% of budgeted estimate. These utilisation levels are significantly higher than what we have seen recently 
• Overall tax collections are anaemic, with gross tax collection down 3%yoy, led by weakness in both direct and indirect taxes.
• Though collections continue to be anaemic, government has managed to maintain expenditure growth so far. Both revenue expenditure and capital expenditure grew 15% yoy growth FYTD20.
• Union budget assures of expenditure growth in Q4FY20 and FY21 as the FM allowed fiscal deficit in FY20 to slip to 3.8% of GDP. Union budget pencils in 13%yoy growth in expenditure in FY21, with 18%yoy growth expected in capex

Credit and Monetary: Credit growth remains anaemic

• Second fortnight of Jan 2020 saw SCB’s non-food credit growth at 7.2%yoy. Credit growth remains anaemic since NBFC crisis flared up Sep-18.
• Sectoral credit break up (data available until Dec 2019) shows deterioration in credit growth of most subcategories. Ex-NBFC non-food credit growth continues to decline to 5.5% yoy, with personal loan growth remaining stable.
• Overall corporate credit growth during Q2FY20 was significantly lower at 4.7% yoy versus 12.6% in FY19.
• While the Jan ended with 10 year G-sec yields at 6.6%, February opening stood at 6.5%, buoyed partly by a budget which is in line with market expectations and partly by global growth concerns which have led to flattening pressure on yield curves globally. As coronavirus threat recedes and more clarity emerges on government revenues for FY21, we expect hardening pressure on 10 year yields to come back. 

Macroeconomic: Inflation hardens on vegetable, pulses, protein products and fuel prices

• Q2FY20 GDP fell to 4.5% yoy (six-and-a-half year low). While private consumption and government expenditure improved, fixed capital formation remained feeble.
• CPI for Dec 2019 continued to harden, led by food higher (particularly vegetables, protein items and pulses) and retail fuel prices. Interestingly, core and super core CPI showed divergent trends, primarily led by retail fuel prices. While the pressure on core inflation strengthened, super core CPI (which excludes retail fuel prices from the calculation) eased sequentially.
• WPI too strengthened, primarily due to base effect, food, minerals and fuel prices. The deflation in manufactured products series continued, impacted by weak pricing power and deflation in commodities.

Capex – Tender announcements and order awards weak

• Tender announcements overall absolute numbers continued to be weak with 35%yoy decline in 3 month trailing tenders announced in Dec-19. Though it has recovered from a 53%yoy decline seen in Jul, but a 35%yoy decline for Dec-19 would still be fairly weak
• 3-month rolling order awards too fell 6.2%yoy.
• Capacity utilisation fell to 68.9% in Sep 2019 versus 73.6% in Jun 2019.

Consumption – Rural recovery on the cards

• Consumption indicators, particularly vehicle sales growth (tractors, UVs and to some extent cars) have shown some recovery over last 2-3 months.
• After having risen in Nov 2019, air passenger growth and petroleum consumption scaled back in Dec 2019.
• Rabi sowing has picked up reasonably at 9.5% yoy as of 24 Jan. We expect growth in rabi to make up for the shortfall in kharif output, which would bode well for rural consumption.

Industry and trade – Weakness continues

• The weakness in core industries, IIP and MHCV growth continues.

·      Exports continue to be weak, led by ores, minerals and manufactured industrial goods, along with recent weakness seen in agricultural goods. Non-oil and non-gold imports too remain weak.