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India Strategy: Consumption headwinds may be ebbing

Recent government and RBI measures to propel growth comprise a mix of demand and supply-side stimulus. Signs of global trade stabilising from initial shocks are visible, notwithstanding at sub-trend levels. Tempered hawkishness between US and China is a positive development and we believe the talks in Oct 2019 could thaw the logjam for future deal making process. The spillover of global trade disruptions, which explains over 50% of recent contraction in discretionary consumption, seems to be stabilising. As a result, we see the fair possibility of a demand revival in Q3FY20 and thereafter.

Tentative signs of improvement

• Government of India (GoI) has resumed spending, with its total expenditure rising by 26% yoy in Aug 2019, pushing up YTD spending growth to 9.8%, including 10.7% growth in revenue spending.
• Increased agri sector inflation, indicative of better realisations in the sector and good monsoon, bodes well for rural demand.
• Agri sector is gaining from trade conflict; agri exports to China have risen by sharp 73% yoy since Apr 2018.
• Tractor sales for Sep 2019 turned positive at 0.5% yoy, a significant recovery from 30% production decline in Mar 2019. Indications are of a better outlook from festival demand, improved farmer cash flow and strong financing support.
• While auto sales continued to contract, seasonally adjusted data show some signs of improvement, indicating a bottoming out. BSVI implementation will impact demand, but our price sensitivity analysis for two wheelers points to a strong adaptive buyer behaviour.

Global trade conflicts impacted manufacturing, but shock subsiding: Sep 2019 PMI worsened for Europe and Japan, but improved for US and China. Global trade volumes expanded 1.9% mom SA in Jul 2019, despite 0.9% yoy decline and probably expanded 0.3% mom SA in Aug 2019. It is an improvement 4-5% annualized decline in early 2019.

De-escalation of US-China conflicts bode well: Recent ebbing of trade polemic between US and China comes as a positive development. We believe, unlike earlier attempts, the compulsion towards reconciliation would be higher in the Oct 2019 talks, notwithstanding the still hawkish US side. While US economy is still resilient, latest surveys show declining approval rating of President Donald Trump. Aggressive tariff hikes to levels not seen since the Great Recession, 1929, is seen to be impacting livelihood of households, increasing the risk of a recession during the election year, 2020. China has been diversifying its sourcing from the US by reducing tariff rates elsewhere but growth worries are prompting a mellowed Chinese position.

Ride the prospective recovery: Conviction on consumption revival

Basis our latest assessment of future outlook, our conviction on consumption theme has improved on expectation of gradual demand traction in both rural and urban areas.

THEME 1: India agri sector is gaining from US-China trade conflicts which is supporting improvement in domestic agri sector economics; supportive of rural themes

THEME 2: Weak sentiment in durables could be ebbing; with the bottoming out of global trade we see a fair possibility of consumption demand reviving Q3FY20 onwards, even as it feeds from recent domestic simulating measures.

THEME 3: BFSI sector still vulnerable; we remain Overweight select private banks - The decline in bank credit growth and renewed asset quality concerns will weigh on the sector, in our view. We could see margin pressures in the foreseeable future. Recovery in loan growth over the medium term will be the most crucial factor, in our view.

Portfolio view: IDFC India Portfolio list has been narrowed to 34 stocks from 44 earlier. We have maintained Overweight (OW) position in the consumer space (Added Godrej Consumer, Removed Asian Paints & Britannia). Maintained OW Automobiles (upgraded M&M from UW to OW, removed Bajaj Auto & Tata Motors). In BFSI we have maintained neutral weight (Enhanced weight in Axis Bank and removed SBI). Moved from OW to Neutral in Cement (Removed ACC). Maintained neutral call on Information Technology (Moved to OW in Infosys and removed Tech Mahindra and Wipro). Maintained OW in metals and mining (Added JSPL, removed Coal India & JSW Steel). Maintained UW on Oil & Gas (added BPCL, removed GAIL & ONGC). Maintained UW call on Pharma (removed Sun Pharma). Added weight in telecom (Bharti Airtel).