Key Macros & Market Outlook: Factors That May Affect Your Stock Prices In September 2018

GDP Growth

The proverbial elephant may have finally resumed its run after being thwarted by demonetisation in 2016; India’s first quarter GDP growth surged to 8.2%, defying expectations and fuelling optimism. That said, it would be unwise to read too deeply into Q1 GDP numbers, which seldom go on to draw the overall trend for the complete fiscal. Q1 GDP numbers can be considered, at best, a tentative signal of how the economy will perform over the remaining year. For instance - FY’17 growth came in at 8.1%, only to fall sequentially in each of the following three quarters, closing the year at a much lower 7.1% - well below both the Q1 growth number as well as the previous year’s number.  The rally in growth rate can be chiefly attributed to the growth in manufacturing (13.5%) – which, incidentally, witnessed a 1.8% de-growth in the same quarter last fiscal.

Fiscal Deficit

The April-July fiscal deficit stood reached 86.5 per cent of the 2018-19 budgeted estimate of Rs 6.24 trillion – slightly lower than the 92.4 per cent figure recorded for the same period last year, primarily on the back of higher non-tax revenues and lower administrative expenditures. The Q1 fiscal deficit number works out to was 9.6 per cent of GDP – the full year target being 3.3%. Global research powerhouse Moody’s expects India to miss this target, stating that “Higher-than-budgeted oil prices will add to short-term fiscal pressures, which points to a higher risk that the government’s deficit objective will not be met”

Inflation

The WPI fell to to 5.1% year-on-year (YoY) in Jul'18 from its unwelcome 4-year high of 5.9% in June. The reported number was lower than market expectations of 5.2%, as food prices dropped for the first time since June last year. Food inflation, as measured by Consumer Food Price Index (CFPI)), fell by 0.9% YoY in Jul'18. The temporary fall in food inflation has reduced both retail and wholesale headline inflation. However, the core WPI inflation still stands at 4.7% YoY, indicative of the underlying inflationary pressures that we’re facing due to rising global commodity prices and correspondingly high input costs. The CPU took a breather too, falling to a 9-month low of 4.2% in July, from 4.9% in the previous month.

Balance of Trade

Owing to the combined effect of the rise in imports and decline in exports, India's trade deficit worsened to a 5-year high of USD 18 billion in Jul'18, expanding by a consequential $2 Billion over the USD 16 billion reported in the previous month. Imports surged 27.8% YoY in July – predominantly on the back of oil imports which rose by 57.5% YoY. The steady increase in global crude prices has contributed to the rise in India's import bill. Imports rose much faster than exports fell.

IIP Growth

There was good news for India on the Industrial Growth front. The Index of Industrial Production (IIP), rose to a five-month high of 7% year-on-year (YoY) from a 7-month low of 3.9% YoY growth in May. Manufacturing & electricity were the chief contributors, along with the favourable base effect. The manufacturing output clocked a 6.9% YoY growth in Jun'18, whereas the electricity production was 8.5% higher than a year ago. India’s strong IIP growth numbers, coupled with the boost in manufacturing numbers, augurs well for the ‘recovery’ narrative that the equity markets seem to be pricing in optimistically.

Equity & Debt Market Outlook: September ‘18

Broadly, August was a bullish month for the equity markets, and a bearish one for the debt markets. The bellwether NIFTY index continued its steady ascent rising by 3.11%. Midcaps, after having a harrowing time in the previous few weeks, posted an impressive recovery with the NIFTY MIDCAP 50 surging 6.55%. Banks had a relatively disappointing month, with the BANK NIFTY growing by less than 1% in the month.

Plagued by the rising currency and resolutely high crude prices, bond yields rose by as much as 3.14%, spelling consternation for long-term debt fund investors who bore a significant mark to market loss in the month. From here on, we asses that the central bank should now pause for next two meetings and resume the rate hike (if any) only in the next year, after the trends in global commodity, MSP and fiscal has further evolved. Having said that, yields may continue to remain under pressure ahead of the elections, and with the currency weakening so heavily. Investors are advised to continue maintaining the larger part of their exposure to shorter term or accrual-oriented debt funds.

On the technical front, the NIFTY has been ‘hugging’ the upper Bollinger band for several weeks now, signalling a strongly bullish momentum even against the odds, as corporate earnings have only been lukewarm and the NIFTY’s P/E ratio now stands at a disturbingly high 28.4X. This month, the index is expected to remain muted, with the likelihood of a reversion to the 20-week moving average imminent. This may not be the best time to build up bullish positions; profit taking may well be on the cards.

The NSE Midcap 50 index, on a strong recovery path after its tumultuous tumble from January to July, rose 6.5% last month. However, this is not to be misread as ‘early signs of a recovery’, as the projection still remains strongly range bound. The upside for the Midcap 50 index is strongly capped at about 5,500 levels, with a meandering retracement to ~4,700 levels on the cards. September is expected to be a disappointing month for Midcaps, as a whole, as even bullish stocks go through retracements.

Summing Up

Domestic macro’s are improving, industrial growth is picking up, and corporate earnings are showing the green shoots of recovery. But overvaluation and global risks still loom large, hurting both the equity and debt markets. September is likely to be a month when most stocks broadly correct or consolidate. Investors are advised to take profits and rebalance their portfolios by going slightly ‘risk off’ at this stage. Those suffering from FOMO, beware of jumping in with both feet!

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