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India Strategy - Markets and Economy Dashboard - Sep-19; Mild risk appetite up-swing on positive news flows

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 few asset classes. Our and can be found at respective links.

Key global events: September saw some optimism post the ‘risk off’ in August, spurred by some positive global and domestic news: 1) Revival in US-China trade talks, causing China to restart purchase of American farm goods (the two countries expect to resume talks on Oct 10^th). Recent news of potential curbs on US capital flows to China would however, weigh on market sentiment in near term, 2) Further 25bp rate cut by US Fed in the month to 1.75-2%. Fed’s commentary though was not as dovish as markets were expecting it to be. 3)  However, on the downside, disruption of Saudi’s Aramco facility causing crude oil supply impact is a potential risk for India’s oil import bill.

Indian markets cheer corporate tax rate cuts: In India, the finance minister (FM) announced cut in corporate tax rates, lowering the effective rate to 25.2%. With this, the government is expected to have forgone revenue worth Rs1.44trn (0.7% of FY20E GDP). Moreover, the FM also announced a discounted corporate income tax of 17.01% for new manufacturing companies to be incorporated after 1 October 2019, provided these companies a) make fresh investments in the manufacturing sector, and, b) commence production by 31 March 2023. Nifty 50 has seen 7.5% rise since corporate tax rate cut announcements.

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 August CPI was flat mom. Moreover, unemployment rates across developed economies remained stable in Aug 2019 (Global economic dashboard can be found ).

Indian economy fundamentals: The slowdown in the Indian economy continued, reflected in plummeting vehicle sales and weak GST collections. Contrastingly, recent IIP and core industries data show some improvement; IIP growth of 4.3% in Jul was accompanied by 2.7% mom rise on a seasonally adjusted basis. RBI sustains its accommodative stance with a cumulative 110bp rate easing since Feb 2019, which, recent government measures including liquidity infusion, payoff of infra-spending, focus on MSME, transmission of rate reduction, corporate tax rate cuts and expected pick-up in government expenditure in Q2FY20 should help improve growth from H2FY20 (India chart book can be found ).

How did key asset classes perform in Sep 2019?

• In contrast to August-19, September was a “risk on” month, led primarily by positive developments in trade talks between the US and China. As a result, EM equities rose 1.7% mom in Sep (till 27^th Sep) as against 1.8% mom increase in equities of developed markets.
• The attack on Aramco’s facilities caused crude to jump 2.4% mom, but, Saudi’s reassurance of a quick recovery has managed to arrest the up move.
• The mild uptick in risk appetite caused the global high-yield credit index to surge 0.5% mom, but the US aggregate credit index saw 0.6% mom decline so far in Sep.
• India equity markets have been among the best performers so far in Sep, having risen ~4.4% MTD (as of 27 Sep). Much credit for this goes to recent corporate tax rate cut announcement by the FM.
• However, gold was down 2.5% mom in Sep so far, versus the spectacular 7% up move seen in Aug.
• Consequently, emerging market’s currency index is up 1%mom while Dollar index has been up 0.2% in September so far.

Global yield behaviour

• Inversion levels in the US yield curve came off a little in Sep so far. This has been led by the positive news flow around resumption of trade war talks between the US and China.
• Germany’s 10-year yield too came off from lows (though still negative) from -0.57% as of 27 Sep versus -0.7% as at end Aug.
• US 10-year yields hardened slightly on expected positive outcome from US-China trade talk, upward pressure on crude and relatively hawkish commentary by Fed during the latest Fed meeting.
• India’s recent corporate rate cut added to fiscal woes, leading to a steepening bias in the yield curve.

India summary

Government’s fiscal dynamics – Hoping for a reasonable expenditure support from RBI dividend in Q2FY19

• Overall GST collection in Aug stood at Rs982bn, up 4.5% yoy (much lower than running nominal GDP growth rate of ~8%).
• FYTD20 fiscal deficit at Rs5.5trn utilised 78% of budgeted estimate - slightly better than the trend seen in last two years.
• Even though Jul-2019 indirect tax collection (by central government) looked encouraging (up 54% yoy; because of accounting adjustment from transfer of GST to states), overall GST collection (a key metric here) remains dismal.
• Government expenditure recovered, as centre’s share in Jul-2019 GST collections was relatively high. Overall government expenditure grew 24% yoy in Jul 2019 with 83% growth in capex and 15% growth in Revex.
• The government has been able to create additional fiscal space worth Rs580bn through better than expected Rs1.48trn RBI dividend transfer in FY20. Media news suggest that even this year Rs 250-300bn of interim dividend will be paid by RBI. Thus, transfer of resources from RBI to GoI can potentially rise to 1.78tn in FY20. Hence, we expect stronger government spending in Q2FY20.
• Recently announced corporate tax rate cuts are expected to put upward pressure on fiscal deficit and we expect government’s aggressive disinvestment programmes to fill the loss of revenue (caused by corporate tax rate cut) to the exchequer.

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

• SCB’s non-food credit growth fell to 10% yoy in Sep 2019. In Jul-19, the growth stood at 12%yoy.
• Moreover, overall corporate credit o/s growth until Jun 2019 (data available with lag) stood at mere 8.4% yoy as against 13.1% yoy in Jun 2018.
• G-sec 10-year yields have seen a hardening bias (so far), post announcements of corporate tax cuts. The new found fiscal concern has also added a steepening bias to India’s G-sec yield curve.   Current 10-year G-Sec yield in India stands at 6.74% (up 27bp mom).
• Commercial Banks’ sectoral credit break up data is available until Jul 2019. The sectoral break-up revealed that while industry credit and personal loans continued to hold fine, while credit outstanding to agriculture and allied activities has been weak.

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.
• CPI and WPI were flat mom in Aug 2019. Core CPI too was flat. In Aug, while food prices strengthened, lower oil prices provided the buffer, resulting in inflation being flat mom. 
• Rupee saw some appreciation in Sep 2019 (up 1.9% mom) due to positive developments on the domestic front. However, we anticipate some depreciation pressure on rupee to return in H2FY20, as we expect widening pressure in fiscal and trade deficits. Our FY20 INR-USD exchange rate target is Rs73/USD for FY20.

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

• Order awards and tender announcements showed super mild recovery in Aug 2019 versus Jul 2019 (July orders were down 32%yoy three month trailing basis against 9%yoy decline in August-2019 on similar metrics). However, a decline of 9%yoy in order awards and 41%yoy in tender announcements is still worrisome, despite improvement.
• Capacity utilisation at 76% in Mar 2019 was close to long-term average levels. Capacity utilisation numbers for Jun 2019 are expected to be announced in the first week of October.

Consumption: Discretionary consumption has taken the hardest hit

• Consumption indicators continued to be weak across, led by poor vehicle sales (PV sales down 32%yoy on a 3 month rolling basis), weak air passenger volume growth (up a mere 4%yoy)  and low petroleum products consumption (up 1.5%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. However, expeditious PM KISAN payments may provide some sort of support to rural consumption though.
• The rise in wholesale price inflation to 6.4% for agriculture produce indicate improvement in price realisation for the farm sector after nearly two years of weakness.
• So far, staples continue to be stronger than discretionary numbers.

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

• IIP and Core Industries growth in Jul 2019 showed some stability on moving average numbers after exhibiting downward momentum for ~8 months. But absolute 6mma growth levels remain anaemic at ~3%yoy,

·       Overall, EXIM trade continues to be slow, along with weakness in core industries, IIP and MHCV growth.​