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India Strategy: Markets and Economy Dashboard - Oct-19: Overall a stable month

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: October was mostly a stable month with moderate strength observed in investor risk appetite as China-US trade talks broadly remained on track. This was further augmented by another 25bp rate cut by Fed in last week of October, indicating a bid to support growth and inflation in US (but with a pause in rate cut cycle for the time being). Brexit delay weighed heavy on UK markets because although Boris Johnson managed to negotiate a deal with EU, but UK’s parliament voted for an extension to Brexit deadline in order to ratify the deal and convert withdrawal agreement in to a law. On the positive side, Boris Johnson primary principles of the deal passed by a 10-15 vote margin and Brexit should ideally be done with by 31^st January 2020.

Indian markets remain buoyant: Indian equity markets continue to cheer the benefits emanating from recently announced corporate tax rate cuts. This has already partly started reflecting in ongoing quarterly results and is also expected to support economic growth recovery H2FY20 onwards. Nifty 50 was up 3.5% in Oct-19 followed by a 4.1%mom up-move in Sep-19.

Global economic fundamentals: While the weakness in GDP growth, industrial output and manufacturing PMI continued across major developed and developing economies alike, CPI continued to come off across developed countries. However, for India and China September CPI saw some strengthening mom. Moreover, unemployment rates across developed economies remained stable in Sep 2019 as well. US fed also quoted weakness in global economy while it cut its rate by 25bp again. (Global dashboard can be found ).

Indian economy fundamentals: The high-frequency growth numbers pertaining to Indian Economy continue to worsen. This reflects in weak GST as well as direct tax collections, plummeting credit growth, struggling IIP and core industries output along with continuing weakness in vehicle sales. We expect economy to start posting recovery H2FY20 onwards supported by ongoing strength in central government expenditure, recently announced corporate tax rate cuts and a front loaded monetary easing by MPC. RBI has sustained its accommodative stance with a cumulative 135bp rate easing since Feb 2019, with another 25bp rate cut announced in Oct-19 policy. (India chart book can be found ).

How did key asset classes perform in Oct-2019?

• Brexit weighed heavy on GBP and Euro and they depreciated by 5.1% and 2.3% against USD, respectively, during Oct-19. In light of same uncertainty, FTSE 100 also fell by 2.2%mom, Germany’s equity markets held strong though, up 3.5%mom
• Owing to positive momentum emanating from US China trade talks, other asset classes exhibited strengthened risk appetite amongst investors. Consequently, EM equities index was up 4%mom during the month, while Dow Jones developed equities index was up 2.5%.
• With increased favor to emerging market’s equities, EM currency index was up 1.9%mom while Dollar index was down 2%mom in October
• Supported by moderate investor risk appetite - Global high yield credit index was up 0.8%mom. US aggregate credit index was up 0.3%mom too, which we believe found support from recently announced rate cut by Fed
• Nifty 50 was up 3.5% in Oct-19 as positive momentum of corporate tax cut lingers on and has started reflecting in ongoing earnings season partly.
• Crude prices have stabilized and recovered from the shock of attack on Aramco’s facility. Crude came down 1%mom.
• Gold was up 1.7%mom while Silver saw 6%mom upmove.

q Global yield behaviour

• With positive developments on trade talks, inversion in US yield curve finally saw reversion. Australia and Japan’s yield curve inversion reversed too.
• Inversion in Canada’s and UKs got better and continued to come off in Oct-19 as events based risks to global economy continue to recede.
• France and Germany’s yield curve saw a mild steepening.
• Germany’s 10 year yield also came off from lows (though it still remained negative). As of 31st October German 10 year yields stood at -0.41% against -0.7% at end of August and 0.57% at end of September.
• US 10 year yields exhibited some bit of hardening despite recent rate cut by Fed. This is led by hope of a positive outcome of US China trade talk and relatively hawkish commentary by Fed during the latest MPC meeting.

India summary

q Government’s fiscal dynamics – Government maintains expenditure momentum in Sep-19 despite weak momentum in tax collection

• Overall GST collection in Oct stood at Rs954bn, down 5% yoy. GST collection declined on yoy basis for the second consecutive month. The weakness in GST collection is led by weak economic backdrop as well as low compliance.
• FYTD20 fiscal deficit at Rs6.5trn leads to utilisation of 93% of FY20 budgeted estimate. While this trend is in line with last year, it is on higher side when compared with relatively longer history. We attribute this trend to weak collections while government continued with spending in a bid to support economy.
• Total expenditure till now at Rs 15tn (YTD FY20) surged 14.1% YoY, which is a significant rise from 6.5% YTD growth till Jul’19.
• Within the total expenditure, revenue expenditure grew by 14% YTD and net of interest payments it grew by a huge 16.3%. Capital spending also grew rapidly with a YTD growth of 15.3% YTD, which is a steep rise from a 28% contraction till Jun’19
• FYTD20 gross tax revenue collection is more or less flattish yoy with 2%yoy decline in indirect tax collection (led by weak momentum in GST) and a mere 5% growth in direct tax collection. While FYTD20 income tax collection growth stands at 9%yoy, corporate tax is up mere 2%yoy and is expected to remain anaemic on account of recently announced corporate tax rate cut.
• We believe that there is a fair possibility of fiscal slippage on account of a) weak GST collection, b) Corporate tax rate cuts and c) a weak momentum in income tax collection. RBI’s dividend and aggressive disinvestment will only solve a part of the problem. Moreover, given the weak economic backdrop, we believe that it would not be wise to cut down the expenditure. Hence we expect the government to go easy on fiscal space and support the economy. We expect fiscal deficit to settle at 3.6-3.8% of FY20E GDP, instead of 3.3% budgeted  

q Credit and monetary - Ample liquidity available but credit growth still anaemic

• SCB’s non-food credit growth continued to fall with 8.7%yoy growth in first fortnight of Oct-2019. In Jul-19, the growth stood at 12%yoy.
• Moreover, overall corporate credit o/s growth until Sep 2019 stood at feeble 4.7% yoy as against 12.2% yoy in Sep 2018.
• Corporate credit growth continues to suffer despite ample liquidity in the system. This weakness emanates from lower bank lending to corporates as well as weak o/s in commercial papers.
• G-sec 10-year yields have been stable in Oct-19 with weighted average rate at 6.7%yoy in Oct-19 (for most traded series). Going forward, we expect yield curve to have a steepening bias on fiscal slippage concerns.
• Commercial Banks’ sectoral credit break up data is available until Sep 2019. Ex-NBFC non food credit continues to come off with 6.4%yoy growth in Sep which is far from a high seen in Nov-18 with 11.4%yoy growth. Moreover, ex-NBFCs services credit declined by 0.4% yoy, for the first time in history. As banks have increasingly supported NBFCs, their lending to real sector has suffered. On the positive side, growth in personal and agri loan o/s series has been most stable.

q Macroeconomic – Weakness persists

• June quarter GDP was at a multi-year low of 5% yoy owing to overall weakness in the macroeconomic backdrop. On the value-added front, agriculture and weak manufacturing output led to the weakness and on the expenditure side, private consumption and gross fixed capital formation lagged significantly.
• Consensus expects Q2FY20 GDP to grow by 5.8%yoy with a significant weakening in private consumption expenditure
• CPI hardened in Sep-19 led primarily by food prices even though core inflation came off. While strength in food prices bodes well for rural economy, low core inflation is indicative of weak pricing power with producers.
• WPI came in at 40 months low at 0.33% as manufactured products prices moved to a deflationary zone. A decline of 0.4%yoy in manufactured products prices series reflects a) weak pricing power of manufacturers owing to overall bleak economic environment  and b) weak global commodity prices like basic metals  

q Capex - Three months trailing order awards still down 9% yoy in Aug 2019

• Order awards and tender announcements showed recovery in Sep 2019 versus Jul and Aug 2019. Sep-19 order awards were up 15%yoy (July orders were down 32%yoy three month trailing basis against 9%yoy decline in August-2019 on similar metrics).
• Tender announcements continue to be weak however with a 32%yoy decline on a 3 month trailing basis.
• Capacity utilisation in Jun 2019 stood at 73.6% against 76% in Mar-19.

q Consumption: Discretionary consumption has taken the hardest hit

• Consumption indicators continued to be weak across, led by poor vehicle sales (Sep-19 PV sales down 29%yoy on a 3 month rolling basis), weak air passenger volume growth (up a mere 1.2%yoy) and low petroleum products consumption (down 0.1%yoy, on a 3 month rolling basis) etc. The weakness was evident across.
• Rural consumption indicators are mixed at best. Kharif output is expected to be down 0.7%yoy as per advanced output estimates. Moreover, unseasonal rains in Oct and Nov have posed some threat to the crop to be harvested, which would impact the spending power of farmers in affected regions.
• However, expeditious PM KISAN payments may provide some sort of support to rural consumption though. Ministry of Agriculture, responsible for PM KISAN payments, has seen a rise of 50%yoy in FYTD20 expenditure.
• Strength in prices for agriculture produce indicates improvement in price realisation for the farm sector after nearly two years of weakness.
• So far, staples continue to be stronger than discretionary numbers.

q Industry and trade – IIP and core industries exhibited early signs of uptick

• Sep-19 Headline core-industries’ index declined 5%yoy, worst decline since series got rebased in 2011-12. This decline came in on a moderate base of 4.3%yoy growth in Sep-18
• Aug-19 IIP also declined 1.1%yoy. On economic activity side – all sub-segments were weak, particularly manufacturing and electricity, while on usage side capital goods, infrastructure goods and consumer durables were the weakest component
• The weakness in Industry output is led by overall weak economic backdrop as well as stronger than usual monsoon.

·      Overall, EXIM trade continues to be slow too. While merchandise exports declined 7%yoy in Sep-19, imports declined 15%yoy.

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