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India Strategy: Markets and Economy Dashboard - Dec-19; Ending on a positive note

In our monthly Markets and Economy Dashboard, we aim to provide a quick overview of key global and local events, domestic and global economic fundamentals and their impact on select asset classes. Our and can be found at respective links.

Key global events: December saw more definitive events globally, especially compared with rest of the year. US and China reached an interim agreement where expected tariff hikes were called off and China agreed to buy more of agricultural goods while Trump agreed to halve tariffs on a portion of imports from China. Though the announcement lacked some specific details, this certainly is a very positive development and has left the variety of asset classes buoyed. A conclusive British election with a clear majority to Boris Johnson was another positive development. House of Commons in UK finally passed Brexit withdrawal agreement and Britain is all set to leave EU on 31^st Jan 2020. On the other end, protests in HongKong continued and India saw some upswing in unrest owing recently passed Citizenship Amendment Act.  As biggest global event related uncertainties were taken care of, Fed hit the pause button maintain an accommodative stance with dot plot showing status quo in 2020.

Global economic fundamentals: Most of major economies saw a strengthening bias in inflation with China and India Nov-19 CPI at 4.5% and 5.5%yoy, respectively. Both the economies saw strengthening inflation on account of upward bias in food prices. Weakness in GDP growth and industrial output continued across major economies, except for China, where Nov-19 Industrial output saw some improvement. China’s manufacturing PMI too moved into expansionary zone with some strength exhibited by France and India’s manufacturing PMI as well. US, Australia, UK, Japan, Germany etc., continued to see subdued manufacturing PMI. Moreover, unemployment rates across developed economies remained stable in Nov 2019 as well. (Global dashboard can be found ).

Indian economy fundamentals: Some of the high frequency indicators like domestic air passenger growth, petroleum consumption, Nov-19 GST collection despite high base, sequential improvement in car sales pointed to an early upswing post a prolonged pain. While sustainability of this up move will be ascertained over next few months, it’s certainly a positive development. We expect economy to start posting a durable recovery by end of FY20 provided government expenditure sustains in light fiscal space concerns. Recently announced corporate tax rate cuts, already effected 135bp repo rate cuts and other measures taken by the government are also expected to help. Upcoming union budget would be a key event to watch out in near term. (India chart book can be found ).

How did key asset classes perform in Dec-2019 so far?

• US China trade talks progress was the driving force behind major asset classes’ performance during the month. Positive developments in talks led to buoyancy in equity markets, commodities and high yield credit. Consequently, Dow Jones developed equities index has been up 3.2% so far during Dec-19 so far while MSCI emerging markets equity index is up a strong 7.6% (led by China, Brazil and Argentina).
• The same momentum reflected in commodities too with Bloomberg commodities index up 5.5%mom. Brent crude is up 9.2% so far in December (as of 27^th Dec 2019).
• Gold is up 3.5%mom (Dec-19, MTD) after a 3.4%mom decline in Nov.
• Dollar has exhibited some bit of weakening momentum with a 1.4%mom decline while emerging market’s currency index is up about 1.7% during the same time. Currencies across emerging economies strengthened with Brazilian Real up 4.7%mom and Russian rouble up 3.5%mom. On the contrary, Australian dollar has depreciated by 3.1%mom so far.
• Nifty 50 has been up 1.6%mom so far, which we believe was partly on back of robust global momentum as domestically it was broadly a quiet month
• With the surge in risk appetite global high yield credit index has been up 2.5%mom while US aggregate credit index has been up mere 0.2%mom, so far. India’s credit index has been up mere 0.2% (despite volatile reaction to policy pause), influenced primarily by operation twist conducted by RBI.
• Global food prices are on upswing as UN FAO index is up 9.5%yoy. In last one year global wheat prices are up 9.9% while Barley prices are up 16.8%yoy.

Global yield behaviour – Pricing in recovery with an increased risk appetite

• Led by positive trade talks US yield curve continued to exhibit a steepening bias.  US 10 year yields have hardened by 10bp so far mom and 38bp from low in Aug-19.
• A decisive UK election also had positive rub off impact on UK’s yield curve where the inversion in G-sec curve completely came off and long and short term yield spreads turned positive.  
• Germany’s yield curve continued to see steepening too.
• Germany’s 10 year yield also continued to come off from lows (though it still remained negative). As of 27th December, German 10 year yields stood at -0.24% against -0.36% at end of November.
• As 27th December, India 10 year yield stood at 6.51%, as steepening bias in the yield curve came off, led by operation twist conducted by RBI.

India Summary

Government’s fiscal space continues to be tight amidst weak collection; Expenditure sustenance important for economic recovery

• Overall GST collection in Nov stood at Rs1.03trn up 6%yoy on a 13.6%yoy growth in Nov-18. This growth comes on a strong base and also marks the reversal of two month streak of declining yoy collections
• FYTD20 fiscal deficit at Rs7.2trn utilised 102% of budgeted estimate. Though current year’s utilisation is similar to last year, the overall trend is worse than the trend observed earlier.
• Overall tax collections remain anaemic. While indirect tax collection is down 1%yoy FYTD20, direct tax collection is up a mere 4%yoy.
• Though collections continue to be anaemic, government has managed to maintain the expenditure growth so far.  Revenue expenditure as well as capital expenditure have grown by 14%yoy, FYTD20.
• Unfortunately, weak collection continues to pose a threat to expenditure recovery in H2FY20. However, we believe that sustained government expenditure is a key factor to economic recovery and government will commit to it, even with a durable threat to fiscal deficit target for FY20.    
• We expect fiscal deficit to settle at 3.5-3.8% of GDP.

Credit growth remains anaemic; RBI manages to induce flattening bias in yield curve through operation twist

• Dec-19 SCB’s non-food credit growth came down further to 7.5%yoy. Credit growth continues to be anaemic.
• Sectoral credit break up data is available till Oct-19. Most of the subcategories exhibited deterioration in credit growth. Personal loans is amongst the stable ones.
• Overall corporate credit growth for Q2FY20 stood significantly lower at 4.7%yoy against 12.6% in FY19
• After climbing to a high of 6.8%, 10 year G-sec yields have retreated back to 6.51% levels. The G-sec 10 year yields had seen a sudden rise as RBI announced a counter consensus pause in its December meeting, but RBI recently has started conducting an operation twist aimed at creating a flattening pressure on G-sec yield curve, which has led to softer 10 year G-sec yields.

Inflation hardens on back of vegetable prices while GDP growth remains anaemic

• Q2FY20 GDP came in at a 6 and a half year’s low at 4.5%yoy. While private consumption and government expenditure exhibited improvement, fixed capital formation continued to be feeble.
• CPI for Nov-19 hardened led by food prices (particularly vegetables) while super core CPI continued to come off by 28bp mom on account of weak pricing power across categories.
• WPI (which has lower weightage food items) saw strengthening after 6 consecutive months of sequential weakening pressure. Deflation in manufactured products series continued again led by weak pricing power and deflation in commodities.

Capex – Capacity utilisation remains weak while order awards exhibit some recovery

• Tender announcements overall absolute numbers continued to be weak with 29%yoy decline in 3 month trailing tenders announced in Nov-19. Though it has recovered from a 53%yoy decline in Jul, but overall standalone, it continues to be weak.        
• 3 months rolling order awards were up 38%yoy in Nov-19, which is certainly a positive.
• Sep-19 Capacity utilisation came down to 68.9% against 73.6% in June-19.

Consumption – Some indicators exhibit early recovery, sustainability to be ascertained

• Consumption indicators, particularly vehicle sales and domestic air passengers growth posted a sequential recovery led by festive season and ensuing discounts
• So far staples continue to be stronger than discretionary numbers, especially in context of Q2 earnings performance.
• Rabi sowing has picked up reasonably and is up 6.6%yoy as of 27th Dec. We expect Rabi growth to make up for the shortfall experienced in Kharif output.

Industry and Trade – Weakness continues

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

·       While non-gold and non-oil exports continued to exhibit some recovery along with some strength in export volumes, deflationary commodities have been a major reason for value erosion in exports. We expect it to reverse.