Review of Key Macros & Market Outlook: December ‘18

Fiscal Deficit

The central government's gross fiscal deficit rose to Rs. 6.4 lakh crores (nearly 104% of the budget estimate or 3.5% of GDP) in the April – October period.  It’s quite likely that the government will have to trim its expenditures if revenue collections do not show an uptrend by the end of Q3. With the government sticking with its 3.3% target, the chances for fiscal slippage loom large. The government appears to be increasing its expenditures since Apr'18; however, the total expenditure of 14.5 lakh crore is still marginally lower than the budgeted target that was completed by this time last year. Expenditures are likely to go up as we near the general elections next year, and this further compounds chances of fiscal slippage. On the revenue front, GST collections continued to show signs of weakness, though the figure had tipped the 1 Lakh Crore mark in September for the first time.

Inflation

The CPI figure fell to a thirteen-month low of 3.31% last month, after rising to 4.79% in the first quarter of FY19.  Food inflation dropped to -0.9% YoY, the lowest level since June ’17. Prices of pulses, sugar and vegetables were lower than last year prices. Fuel inflation, however, has grown at 8.5% since August this year. Despite most of the groups recording a decline in inflation in Oct'18, core inflation hardened marginally to 6.1% YoY, driven by miscellaneous items which jumped to 6.7% YoY in Oct'18 from just 3.5% in October ’17. On the other hand, Wholesale Inflation Levels, as measured by Wholesale Price Index or WPI increased to 5.3% - the highest level since June this year. WPI based inflation was 5.13% YoY in Sep'18 and 3.6% YoY in Oct'17. This increase is likely due to the recent spike in petrol and diesel prices. Chances of further monetary tightening by the RBI in December remain low.

Trade Balance

Having witnessed a welcome contraction to a 5-month low last month, India's trade deficit increased to USD 17.13 billion in October – driven by continued rise in exports. Exports bounced back compared to October ’17, growing by 17.8% in October ’18. Imports surged 17.6% YoY, hitting USD 44.1 billion in October on the back of oil imports; which rose by 52.6% on a YoY basis in October. Steadily rising global crude prices had contributed to the rise in India's import bill, resulting in a 5-year high trade gap figure in August ’18 – collaterally, the rise in imports had strongly outpaced the rise in exports. With crude prices tapering off since the start of October and now slipping below the $59/bbl mark, we may see India’s import bill coming down this month. The widening of the trade gap is an ominous sign, and the government must take steps to revive the external sector, considering that the CAD has already reached 2.4% of GDP in Q2 F19.

Equity & Debt Market Outlook: December ‘18
As predicted in the previous month’s review, November turned out to be a month of choppy consolidation for the equity markets. The NIFTY bounced off its 10K support level and closed the month with an impressive monthly gain of 490 points or 4.71%, while the Bank NIFTY rose marginally and the NIFTY MIDCAP 50 remained flattish. It’s been a mixed bag on the earnings growth numbers thus far; large caps have reported approximately 12 percent growth in PAT on average, while midcaps have reported a relatively impressive 17 percent PAT growth. On the other hand, small and microcap companies, on average, have reported poor 1.6 percent net profit growth for the quarter, and 13% of companies overall have reported a loss. The mixed results mean that stocks broadly continue to remain overvalued, with the NIFTY’s P/E ratio at 26.31X and the NIFTY MIDCAP 50’s P/E ratio at 53X. In tandem with falling crude prices, bond markets continued their impressive recovery in November, with the 10-year yield falling nearly 3% intra-month, lending a fillip to long duration debt funds.



Despite reasonably impressive results this quarter, Mid Caps do not appear to be out of the woods. The bearish trend that began at the start of the year continues to remain intact, and a correction is highly likely in December. This may take the Midcap 50 index back to below the 4400 mark over the course of the month.

End Note: The extended time correction in large caps and the price correction in the mid and small cap segments that started in January this year, are both quite likely to continue. With Q2 results not quite turning out to be the blockbuster than many analysts had predicted, there are no real drivers in sight, barring the impending assembly election results. Global events, crude price movements, and U.S equity market movements are likely to continue driving sentiment in the domestic markets; but a bullish breakout from these levels appears very unlikely for now. We’re probably going to see Mid-Caps correcting in December, and The NIFTY meeting very stiff resistance at the 11,000 mark before trending down once again. Don’t expect any fireworks as we usher in 2019.

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