Equity and debt outlook for March
IANS | 16 Mar, 2021
| Top Stories
Global equities continued to trade higher and exhibited unusually broad
momentum, delivering 12-month highs on several equities benchmarks up
until the middle of the month.
The last two weeks, however, saw broad deleveraging across equities and global asset classes.
saw a global sell-off in risky assets amidst a sharp rise in US bond
yields. Investors weighed a rise in bond yields on worries about
potential inflation with oil prices at a 12-month high and copper prices
near a decade-high. Global growth outlook has been revised higher with
economic output expected to grow at 5-6 per cent this year, making it
the fastest pace since the mid-80s.
The ongoing bond bear market
is unlikely to derail global equities as yet. By the standards of a
post-recession expansion cycle, neither the direction nor the magnitude
of yield increase appears odd. The underlying drivers behind the bond
yields' move matter more than their levels. Study of US bond yield
cycles depicts stocks-bonds correlation over shorter and longer
timeframes. In fact, in the last decade, whenever bond yields spiked by
50bps or more in a short period of time, equities performed well.
Generally, equity prices and P/E multiples have been positively linked
to bond yields.
Recovery far from central
bank's goals: Minutes from the Federal Reserve's January policy meeting
indicate that the FOMC officials see the economy "far from" the central
bank's goals. The meeting summary indicates it will likely "take some
time for substantial further progress to be achieved", highlighting that
the policy is unlikely to change soon. Fed Chair Powell adds that the
discussion on tapering is "premature"; indicates that "substantial
further progress" towards the FOMC's goals of labour market recovery and
inflation of at least 2 per cent is required for changing the asset
Covid & Vaccines
The progress on vaccination is being watched by markets for demand cues. The US seems to be on
to achieve near herd immunity by mid-year and could be a turning point
for global markets. Israel has vaccinated 82 per cent of its population
with 33 per cent of its population receiving both doses. However, we
don't yet see a sharp improvement in Google mobility for retail and
recreation in Israel which is even weaker than India's. Outperformance
in Covid containment leading to marginal hospitalization rate and death
rate has probably lowered risk
perception on the street in India
and hence driving retail participation. Daily new Covid-19 confirmed
cases averaged 12.5k in February vs. 15k in January and 25k in December
Although daily tests at 709k/day in February were lower
vs. January (774k/day), the positive rate increased marginally to 2.0%
in end-Feb vs. 1.9 per cent in end-Jan.
India has administered
only 14mn vaccines until February 26. The current rate is way below the
intended pace of vaccination expected. The second phase starting March 1
will cover bulk of the 300 million targeted to be vaccinated by
July-August. In a bid to expand the Covid-19 vaccination drive amid
fears of a second wave in some states, the Union Cabinet will allow
above the age of 60 or above 45 and with comorbidities to sign up to
receive the Covid vaccines at government as well as private hospitals
from March 1.
After lagging behind
significantly in January, MSCI India (USD) rose 5.1 per cent in February
and significantly outperformed peers MSCI AC Asia Pacific ex Japan
(+3.8 per cent) and MSCI EM (+4.4 per cent) on post-budget euphoria.
Mid-caps and small-caps outperformed large caps by ~4 per cent/5 per
cent, respectively, in February.
recorded net inflows of $4.1 billion into Indian equities in Feb and
remained net sellers in the debt markets with net outflows of $868
million. DIIs remained net equity sellers at $2.2 billion in February,
while insurance funds bought $206 million of equities in February.
Bond Markets and Currency
10-year treasury yields averaged at 6.09 per cent in February (19bps
higher vs. January avg.). On month end values, the 10Y yield was up
33bps to end the month at 6.23 per cent. US 10Y yield is at 1.40 per
cent (+34bps MoM,+26bps YoY).
INR lost 0.7 per cent and ended the
month at 73.47 per USD in February. In the last 12 months, INR (-1.8
per cent) has outperformed the broader EM FX (-2.6 per cent). DXY gained
+0.3 per cent in February (vs. +0.7 per cent in January) and ended the
month at 90.88 (-7.4 per cent in the last 12months).
reserves are close to their all-time peak at $584 billion as of February
19. FX reserves have decreased by $1.5 billion in the last 4 weeks.
fiscal deficit for April-January was Rs 12.3 trillion or 67 per cent of
the budgeted FY21 deficit (Rs 18.5 trillion). This compares to 106 per
cent reached during the same time frame in FY20.
RBI kept policy rates on hold, reiterated its accommodative stance,
indicated a phased withdrawal of last year's reserve requirement cut,
but simultaneously pledged to keep liquidity conditions accommodative to
ensure the government's larger-than-expected borrowing program goes
through non-disruptively - all of which was expected.
Q3 FY21 Earnings Season
India's Q3FY21 performance is noteworthy with more surprises than
disappointments. Earnings continue to beat estimates with almost 3
upgrades for every 1 downgrade in BSE200, highest in several quarters.
earnings momentum accelerated further in 3QFY21, aided by pickup in
sales growth. Aggregate sales growth of domestically-oriented companies
has turned positive after five consecutive quarters of contraction, and
points to a recovering domestic demand. BSE 200 saw second quarter of
upward revision, whereas the mid-cap index has seen 3 consecutive
quarters of upward revision in EPS estimates.
Adjusted PAT for
the BSE All Cap (~840 stocks) grew a handsome 33 per cent YoY in 3QFY21
which is the highest in nearly 4 years, after similar strength in 2Q.
Close to 70 per cent of this was on account of Materials/Energy -
benefiting from ongoing commodity inflation (including
oil inventory gains). Ex-Metals, growth stands at 24 per cent YoY.
Oil, Auto, IT and Pharma sectors are key contributors to the earnings
growth, while BFSI, Engineering and Media disappointed. Consensus
estimates continue to be upgraded and are now implying aggregate PAT
growth of ~30-35 per cent YoY in FY22.
Metals, PSU Banks and Industrials outperformed while Healthcare, Staples and IT were notable laggards in February.
The Macro Picture
PMI increased by 0.9pt MoM to 55.8 in January after a 1.4pt MoM decline
in December. Helped by stronger demand conditions, Services PMI rose to
52.8 in January from 52.3 in December, while Manufacturing PMI inched
up to 57.7 in January from 56.4 in December. The forward-looking demand
indicators remained constructive with composite new orders remaining
strong at 55.9, increasing 1.0pt MoM.
CPI inflation came in at 4.1 per cent, softening further from 4.6 per
cent in December. Food prices led the downside surprise, dropping 1 per
cent MoM on the back of last month's 1.5 per cent fall. Vegetable prices
continued to mean-revert, plunging 11.5 per cent MoM in January after a
9 per cent fall in December. Most other food prices, including pulses,
came in soft as expected, except oilseeds, which reflected rising global
prices. As a result, food inflation softened to 2.7 per cent YoY in
January from 3.9 per cent in December. Core prices (core inflation ex.
gasoline and diesel) increased 0.5 per cent MoM in January after a 0.3
per cent rise in December, likely reflecting a combination of pent-up
demand and input cost pressures.
Import Export: India's exports
up 6.16 per cent in Jan; trade deficit narrows $14.54bn, following
healthy growth in pharma and engineering sectors. Similarly, imports
dropped by about 26 per cent to $300.26bn during April-Jan this fiscal.
GDP at 96 per cent of its 1QFY20 pre-pandemic levels: India's GDP grew
0.4% in Q3 of FY21, underpinned by weak service sector growth.
key highlights were (i) trade, hotels, transport, and communication
services continued to contract, much more than some of the formal sector
indicators had suggested, indicating continued weakness in the informal
sector; and (ii) government consumption continued to contract, despite a
material pickup in central government spending, suggesting contractions
in state government spending offset the central government impulse.
Sequential growth was strong at 25 per cent QoQ, taking GDP to 96 per
cent of its 1QFY20 pre-pandemic level.
Economic growth revised
upwards: Global forecasting firm Oxford Economics revised India's
economic growth projection for 2021 to 10.2 per cent from the earlier
8.8 per cent, citing receding Covid-19 risks and the shift in the
monetary policy outlook.
GST collections: GST collections in
Feb'21 stood at Rs 1.13tn (7.4 per cent YoY), crossing the Rs1trn mark
for the 5th consecutive month. The govt has credited this to economic
recovery and the various measures taken by tax administration to improve
ï¿½ The upcoming GST Council meeting in Mar'21 will
likely take up rationalizing tax rates and mergers of multiple slabs, to
bring them close to being revenue-neutral and make the indirect tax
regime simpler (The 15th Finance Commission has recommended merging the
12 per cent and 18 per cent tax rates).
ï¿½ As part of efforts to
bring parity in taxation on Agri-inputs, the Department of Chemical and
Petrochemicals has approached the Finance Ministry for reducing GST on
pesticides from 18 per cent to 5 per cent.
ï¿½ Prime Minister
Narendra Modi expressed government's commitment to bring natural gas
under the GST regime to make prices cheaper and uniform across the
country. He also informed that the govt. was spending Rs7.5trn over 5
years to build oil and gas infrastructure.
ï¿½ Renewed interest
in bringing petroleum products under the ambit of GST, something that
has invited resistance from states in the past since VAT from these
forms ~25-30 per cent of states' own tax revenue.
and PE investments: M&A deal activity in 2020 jumps 33 per cent to
USD36.9bn. While, PE/VC investments in Jan'21 reported a 35 per cent
drop YoY to USD1.6bn from USD2.5bn. The number of deals reported also
remained flat at 80, according to EY-IVCA data. SEBI eased the listing
norms for large companies, apparently paving the way for the
much-awaited mega float of Life Insurance Corporation (LIC). The
regulator said large companies can now divest a minimum 5% in the IPO,
instead of 10%. Further, they will get five years, instead of three, to
raise the public float to 25 per cent.
Commodities: The run-up in
international commodity prices is on expectations of stimulus-led
demand coming ahead of supply normalization. Brent gained a whopping
17.5 per cent MoM in Feb to end the month at USD64.4/bbl. It made the
1-year peak at USD67/bbl, as the market looks ahead toward an
accelerated decline in record inventories. On the supply side, OPEC+
discipline and Saudi Arabia's decision to reduce output by 1mbd through
March were further amplified over the last week when US crude production
fell 3.2mbd amid an unprecedented polar blast. From the demand
perspective, the winter of 2021 stands out as one of the coldest in
decades, upending energy markets and sending prices for electricity,
fuel and vessels to record highs. Thrust on Atma-Nirbhar Bharat through
production-linked incentive (PLI) schemes
PLI scheme for Telecom:
The government approved a Rs121.95bn PLI scheme for Telecom gear
manufacturing in India, a move that will position the nation as a global
powerhouse for production of such equipment ahead of 5G roll-outs.
There will be a minimum investment threshold of Rs100mn for MSMEs with
incentives from 7 per cent to 4 per cent over five years and Rs1bn for
others with incentives from 6 per cent to 4 per cent over five years
above base year (FY2020). The government expects around Rs2.4tn of
incremental production (with Rs2tn in exports) and investment of more
than Rs30 bn.
PLI scheme for IT hardware: The Union Cabinet
approved the PLI scheme for IT hardware (laptops, tablets, all-in-one
PCs and servers) with an outlay of Rs73.5bn. The aim is to enhance the
development of the electronics ecosystem in India. The scheme is likely
to benefit five major global players and 10 domestic champions. The
scheme shall extend an incentive of 4 per cent to 2 per cent/ 1 per cent
on net incremental sales (over FY2020) of goods manufactured in India
and covered under the target segment, to eligible companies, for a
period of four years. The government expects domestic value addition to
increase to 20-25 per cent by FY20225 and employment generation
potential of over 180,000.
PLI scheme for Pharmaceuticals: The
Union Cabinet approved the PLI scheme for pharmaceuticals with an outlay
of Rs150bn. The aim is to increase production and export of (1
biopharmaceuticals; complex generic drugs; patented drugs or drugs
nearing patent expiry; cell based or gene therapy drugs; orphan drugs;
special empty capsules; complex excipients; phytopharmaceuticals, (2)
KSMs/DIs/APIs, and (3) repurposed drugs; auto immune drugs, anti-cancer
drugs, anti-diabetic drugs, anti-infective drugs, cardiovascular drugs,
psychotropic drugs and anti-retroviral drugs; in vitro diagnostic
devices; other drugs as approved; other drugs not manufactured in India.
The scheme will be available for three categories of companies having
global revenue (1) greater than Rs50 bn (incentive of Rs110 bn), (2)
between Rs5 bn and Rs50 bn (incentive of Rs22.5 bn), and (3) less than
Rs5 bn (incentive of Rs17.5 bn). Between FY2023 and FY2028, the
government expects total incremental sales of Rs2.94tn and total
incremental exports of Rs1.96tn along with 20,000 direct jobs and 80,000
Other Government policy updates
Monetization policy: PM Modi has said that about 100 under-utilized or
unutilized assets with PSUs will be monetized to create Rs2.5trn of
investment opportunities. India's government has shortlisted four
mid-sized state-run banks for privatization (Bank of Maharashtra, Bank
of India, Indian Overseas Bank and the Central Bank of India), under a
new push to sell state assets and shore up government revenues. Two of
these banks will be selected for sale in FY22.
ï¿½ RBI has set up
an expert committee on urban co-operative banks (UCBs) to provide a
road map for strengthening the sector and also evaluate the prospects
for consolidating the sector.
ï¿½ Finance Ministry directed departments and ministries to surrender savings anticipated in the Grants for FY21 by 20 Mar'21.
Ministry of Agriculture has informed that India's food grain production
is estimated to rise by 2 per cent in 2020-21 crop year to an all-time
high of 303.3MT due to better output of rice, wheat, pulses and coarse
Other Key snippets:
ï¿½ State Budgets: Some state
governments have given preference to the agriculture sector in their
Budgets for FY22 amid the ongoing farmers' protest against the Centre's
three farm laws- i) Rajasthan: has announced a separate budget on
agriculture from next year onwards, along with provision of
interest-free crop loans worth Rs160bn to the farmers, ii) UP: has
proposed Rs1bn for the Aatmanirbhar Krishak Samanvit Vikas Yojana and
Rs6bn for the Mukhyamantri Krishak Durghatna Kalyan Yojana, iii) Bihar:
has earmarked Rs5.5bn for the Har Khet Ko Pani scheme.
Election Commission has announced the schedule for upcoming Assembly
elections- West Bengal will go to polls in eight phases, Assam will see
three-phase voting starting 27 Mar'21. Assembly elections in Tamil Nadu,
Kerala and Puducherry will be held in a single phase on 6 Apr'21.
(Source: Indian Express)
ï¿½ Increase in the fuel prices throughout the country with petrol prices crossing the Rs100 mark in MP and Rajasthan.
Key Sectoral Trends:
Banking & Finance: Key trends observed in the credit card data put
out by the RBI for Dec-20 are: i) net card additions were much lower,
ii) monthly spends/card increased 2 per cent MoM in Dec-20, after the
decline in Nov-20, and iii) total industry spends were 4 per cent lower
YoY in Dec-20.
Capital Goods: Capital Goods companies sailed
through last-mile hiccups in productivity and supply chain in 3Q, and
are targeting strong growth in execution for 4QFY21, led by normalcy in
operations and acceleration in government & private spending.
Valuation re-rating continues, in line with growing optimism across
Telecom: We look at a few interesting data
points from the recently-released Nokia MBiT Index Report - 2021. At
311PB/day in Dec-20, 4G constituted 99% of data traffic across network.
Per-capita usage is up, while subscriber adds have slowed down. Strong
rural and class C circle data traffic growth (traditional stronghold of
Jio) and Jio's slowdown in data traffic growth suggests that Bharti is
probably making inroads here.
contractors reported healthy improvement in revenues and profitability
during 3QFY21, as project execution normalized to pre-Covid days. The
outlook remains strong, with all companies boasting of good order books
and strong award pipelines.
Pharma: The sector results were a
mixed bag, with one half of the sector beating consensus EBITDA
estimates while other half missing expectations. Although growth
recovered for most of the companies in the India formulations market,
the US business listed weakness across the board, owing to lower sales
of seasonal products and base-price erosion.
Chemicals: In the chemical markets, the global recovery continues, with
world chemical production up 1.8 per cent MoM in Dec-2020. India's
chemical exports grew 2.6 per cent YoY in Jan'21, while imports grew
16.0 per cent YoY. Global crop futures were largely stable last month.
In India, corn and soybean prices rose 3-7 per cent MoM.
FMCG: The FMCG industry in India has recorded a value growth of 7.3 per
cent in Oct-Dec'20 quarter helped by consumptionled recovery during the
festive period and increase in sales from traditional as well as
organized trade, according to data analytics firm Nielsen.
Advertising spends across media platforms in India will grow by 23.5 per
cent in 2021 to Rs801.23bn in 2021 after a sharp 21.5 per cent decline
in the pandemic-hit 2020.
The Indian IT industry revenues are
set to grow by 2.3 per cent to USD194bn in FY2020-21 and the exports
will go up by 1.9 per cent to USD150bn.
companies registered a 6.7 per cent increase in their gross direct
premium collection in Jan at Rs184.88bn.
Indian equities point of view, the solid Dec quarter earnings was
clearly a key highlight. Few, if any, would have been able to forecast,
at the start of the current fiscal in April'20, that Dec '20 quarter
would deliver the highest ever quarterly profits for the BSE200 set of
companies! Globally, however, the worries on inflation and the
unsettling moves on the US 10-year yield gave a glimpse, a "trailer" of
reality ï¿½ valuations could compress; economic growth could get
stunted, if bonds yields sustained and moved ahead.
current economic recovery to sustain, containing bond yields, not
through "yield curve management" but through moderating inflation
expectation will be a key variable to track for the rest of the year. On
this front, last week's correction of crude oil and copper may be a
sign in the right direction. If the recent surge in commodity prices can
be "managed" then future inflation expectations will get moderated
helping bond yields to calm down. Equity investors may be well advised
to add declining bond yields, in their daily prayers!
(Disclaimer: MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY)
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