Equity and Debt Outlook for March

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.

Equities 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.

FOMC officials

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 purchase guidance.

Covid & Vaccines

The progress on vaccination is being watched by markets for demand cues. The US seems to be on
track 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 2020.

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
anyone 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.

Domestic Markets

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.

Capital Flows

FPIs 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

Benchmark 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).

India's FX 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.

While, 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 policy

The 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

Corporate 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.

The 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.

Metals, 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.

Sectoral Impact
Metals, PSU Banks and Industrials outperformed while Healthcare, Staples and IT were notable laggards in February.

The Macro Picture

PMI

Composite 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.

Inflation

January 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.

Few 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 compliance.

o 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).

o 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.

o 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.

o 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.

IPO, M&A 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 indirect jobs.

Other Government policy updates

o 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.

o 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.

o Finance Ministry directed departments and ministries to surrender savings anticipated in the Grants for FY21 by 20 Mar'21.

o 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 cereals.

Other Key snippets:

o 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.

o The 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)

o Increase in the fuel prices throughout the country with petrol prices crossing the Rs100 mark in MP and Rajasthan.

Key Sectoral Trends:

o 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.

o 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 quality plays.

o 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.

o Infrastructure: Road 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.

o 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.

o Agriculture and 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.

o 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.

o 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.

o 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.

o Non-life insurance companies registered a 6.7 per cent increase in their gross direct premium collection in Jan at Rs184.88bn.

Outlook

From 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 - valuations could compress; economic growth could get stunted, if bonds yields sustained and moved ahead.

For the 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!

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Source: IANS