Market Research Report – Feb 2020
Many domestic and global statistics will show the way forward for our markets this month. These include India’s Consumer Price Index (CPI) numbers, government yields, and jobless claims, manufacturing index data from the US. Here are the details you need to know.
What’s been happening
The first month of the new decade started well, thanks to positive global sentiments on account of the US-China trade deal and the conclusion of Brexit. Indian equity markets did well in the first half of the month. The Sensex and Nifty 50 Indices fell by 1.3% and 1.7% respectively in January while BSE Midcap and BSE Small cap indices gained 3.3% and 7.1%.
However, markets witnessed a historic change in sentiments post the longest budget speech. The Union Budget did not give any short-term boosters. Markets didn’t take the Tax Deducted at Source (TDS) on dividend and the lower tax rates without deductions well. NRIs too have been disappointed because of the various amended provisions in the Budget.
However, the market moved up after the 2.5% fall on the Budget day. Indian equity markets gained in the week ended Feb 7, 2020. Upbeat economic data and the RBI’s steps to boost growth supported market sentiments. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) increased to an almost eight-year high and services business activity index saw the fastest increase in seven years.
Then, came Reserve Bank of India’s (RBI) various measures to stimulate the broader economy. This included the introduction of long-term repos. RBI’s Monetary Policy Committee (MPC) kept the key policy repo rate unchanged in its sixth bi-monthly monetary policy review. The policy repo rate presently stands at 5.15%. The reverse repo rate remains unchanged at 4.90% while the marginal standing facility rate and the bank rate remains at 5.40%. Though the RBI maintained status quo in interest rates, considering inflation is on the rise, it took measures to boost credit to the corporate and real estate sector. It tweaked the maintenance of cash reserve ratio (CRR) rules by providing relaxation in the calculation of total deposits.
Economic Indicators to watch out for
Note that neither India’s real Gross Domestic Product (GDP) nor corporate earnings growth has given any signs of recovery. GDP was at 4.5% in July 2019. The next GDP data release will be on Feb 28, 2020.
However, higher domestic air passenger traffic and increasing bank deposits indicate the resilience of growth. Even car sales and exports are showing signs of bottoming out. So, the worst of the growth slowdown is perhaps over. The good news is that analysis by the International Monetary Fund (IMF) indicates that India will be the second-fastest growing economy in 2020 and 2021, respectively.
The non-food credit growth was around 7%. This is a multi-decade low level. The deposit growth rate was at 9.5%.Banks are having surplus liquidity. This clearly shows that there is risk aversion. Even retail credit has moderated in the last two months. Improved credit growth will be positive for the markets.
India’s PMI rose to a seven-year high to touch 55.5 in January 2020 from 52.7 in December. This is an eight-year high. (PMI) rose to 55.3 in Jan 2020. The upturn in PMI came on the back of strong growth in new business intakes. This has been the strongest growth in over five years. Companies have attributed the growth to better demand and greater client requirements.
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Index of Industrial Production (IIP)
IIP has gone up in the past months. It increased by 1.8% during November 2019, as compared to a surge of 0.2% during November 2018.
According to a report from the US Labor Department, U.S. employment surpassed market expectations and went up by 2,25,000 jobs in January 2020 as against a revised increase of 147,000jobs in December 2019. The upside was driven by notable jobs in construction, healthcare, transportation, and warehousing.
The Institute for Supply Management (ISM) report showed U.S. manufacturing activity unexpectedly expanded for the first time in several months in January 2020. The ISM purchasing managers index went up to 50.9 in January after slipping to 47.8 in Dec 2019. The U.S. non-manufacturing index too rose to 55.5 in Jan 2020 from 54.9 in Dec 2019, with a reading above 50 indicating service sector growth. This is positive for global markets.
Outlook for this month
Since the budget, RBI policy meet and many of the major corporate earnings results are behind us, Indian equity markets will try to assimilate the measures. Markets will assess how these policy decisions will impact corporates’ performance. Another point is the overhang of the Coronavirus. This will largely drive the mood of the stock markets in the short term.
One key area of concern was the banks extending credit. Corporate credit growth had sharply slowed down resulting in more than halving of overall bank credit growth in the past year. Rather than extending credit to corporates, banks have been parking large sums with the government and the RBI at low yields. However, RBI’s policy measures are expected to yield results this month. Watch out lower loan rates to both retail as well as corporate customers. This should help boost market sentiments. Also, RBI’s steps would increase lending to micro, small and medium enterprises as well as the auto and home segments.
The recent uptick in inflation has created uncertainty about the maintainability of easy monetary policy. CPI inflation stood at 7.35% in December compared to 5.54% in November 2019. The jump was largely driven by food and vegetable prices due to seasonal factors. This is one of the reasons that has prompted the RBI to take measures to improve rate transmission by banks without tweaking interest rates.
However, since the jump in inflation is mainly on account of food prices which is seasonal, inflation is likely to ease in the coming months. Core CPI continues to remain stable and well within the RBI range of 4%.Investors should watch out for inflation numbers this month. Note that if the core inflation is below 4%, it will be close to record lows.
After a promising start and touching new highs, large-cap equity indices started losing steam in January 2020. While this was happening, mid and small-cap indices were progressively higher and there was improved price performance. So, keep an eye out for mid and small-cap stocks and funds this month.
In contrast to the equity market, the long-term yields on Government Securities have hardened in the past month. High market liquidity, significant bond purchases by the banks and RBI’s efforts to lessen the gap between long and short-term yield didn’t help. Fiscal concerns about higher fiscal deficit also seem to be a major reason for the uptick in yields. While there is a need to maintain temporary fiscal accommodation to boost growth, the yields need to be kept in line. Investors to check to see if RBI’s measures help lower yields.
What should you do?
Volatility will reduce substantially this month as there are no major domestic events. The markets might choose a wait and watch mode. Note that market upswings might lead to profit booking in certain segments.