Economy and Markets May 2019 EQUITY MARKET Global equity market - PowerPoint PPT Presentation

Economy and Markets May 2019

EQUITY MARKET

Global equity market snapshot: April 2019 Performance in April 2019 (local currency returns) Performance Year-to-Date (local currency returns) Performance Year-to-Date (US$ returns) Performance in April 2019 (US$ returns) Source: Bloomberg, SBIMF Research

Indian stock market sector-wise returns: April 2019 Performance in April 2019 (local currency returns) Performance Year-to-Date (local currency returns) • Nifty and Sensex were up nearly 1% each during the month. On YTD basis, both Nifty and Sensex were up 8%. • Large caps outperformed the small caps and mid caps during the month. Large cap index was up 0.8% while mid cap index and small cap index were down 3.8% and 2.7% respectively during the month. On YTD basis, large caps outperformed the mid caps and small caps by giving 7.1% returns while mid caps and small caps were down 3.6% and 0.6% respectively. • IT and metals were the sector outperformers while telecom and real estate were the sectoral laggards during the month. On YTD basis, IT and consumer durables were the sector outperformers while auto and capital goods were the sectoral laggards. Source: Bloomberg, SBIMF Research

Narrow rally in the Indian equity market 83% of the top 2000 stocks delivered negative return 83% stocks delivered negative returns 17% stocks delivered positive returns 37.6 12 40 9.6 35 10 30 26.4 8 25 19.1 6 20 3.9 15 3.5 4 10 2 5 0 0 <-50 -25 to -50 -25 to 0 0 to +25 +25 to +50 >+50 1 year return: Apr 2018-Apr 2019; return distribution of top 2000 stocks by M-Cap Source: Capitaline, SBIMF Research

High frequency indicators have moderated during Jan-Mar 2019 • Growth in high frequency indicators have moderated during Q1 2019. • Most recent is moderation in consumption demand (2-wheelers and car sales, FMCG products or sale of discretionary products). Consequently, domestic production and imports of consumer goods have moderated. Weakness in wage growth, depressed farm prices, moderation in NBFC loan disbursement (particularly in wholesale segment), and challenges in SMEs has affected consumer’s demand. • Investment related indicators and overall industry activity softened during the quarter. We will wait for election to tide over before reading into investment signals. Capacity utilization has improved and companies have deleveraged their balance-sheet in last three years indicating both need and ability to undertake physical investment. • However, even as bank lending to industrial sector is improving, signs of stress in non- Bank segment needs to be watched. Liquidity crunch in NBFCs and solvency challenges of certain non-bank financial entities may dampen overall commercial credit growth. • Infrastructure (production, bitumen, steel and cement) activities are holding strong. • March witnessed pick-up in goods exports and overall freight activity, but would wait for couple of months to ascertain the sustainability. • Services indicator depict mixed signals. While PMI services moderated, survey portrays positive outlook. Services exports growth have moderated. AUM growth of mutual fund has slowed down. Growth is supported by relatively better inflow in equity oriented schemes. Source: CMIE economic outlook, SBIMF Research; NB: 1. Green denotes improvement in the growth and Pink indicates a moderation. 2. We use some subjectivity in categorizing the data by looking at both the trends in the recent months as well as trends relative to long term average. 3. We have shifted to steel consumption data from steel production data since Jan 2019.

Consumption demand is weakening Domestic sales of two-wheelers and cars, which act as a good FMCG Sales growth grew moderated to 6.2% y-o-y in gauge for rural and urban demand, have been moderating Q4FY19 vs. 12.5% y-o-y in Q3 FY19 Domestic production growth of both consumer durables Domestic air traffic growth has moderated recently; partly also and non-durables have softened due to supply side shocks (cancelling of the flights). Source: CMIE Economic Outlook, Capitalline, SBIMF Research

Factors weighing on consumption demand Depressed farm prices: agri output (real GDP) is growing at 3.4% Rural wage growth has been depressed for long but agri income (nominal agri GDP) moderated to sub ~2% Even urban wage growth has softened • Other factors affecting the consumption demand: 50 44 BSE 500: Avg cost per Employee (% change) 45 o Moderation in NBFC loan disbursement (particularly 40 in the wholesale segment) 35 o GST impact on informal segment 30 o Sand mining ban in select states 25 o Weakness in real estate prices for long 19 19 20 17 o Weak labor participation in recent years 15 14 15 10 9 8 7 10 7 3 5 2 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Source: CMIE Economic Outlook, Capitalline, SBIMF Research

Risks skewed towards weak monsoon in 2019 Monsoon has been below the first predictions for the last IMD predicts ‘normal’ rainfall in its base case while Skymet five years anticipates ‘below normal’ rainfall Monsoon probability distribution for 2019 IMD first predictions vs actuals (% deviation) Year First prediction Actual rainfall IMD Skymet Criteria 2013 Normal (-2%) Normal (5%) Excess 2% 0% Rainfall that is more than 110% of LPA 2014 Below Normal (-5%) Deficient (-13%) Above 10% 0% Rainfall that is between 105 to 110% of LPA 2015 Below Normal (-7%) Deficient (-15%) normal 2016 Above Normal (+6%) Normal (-3%) Normal 39% 30% Rainfall that is between 96 to 104% of LPA 2017 Normal (-4%) Below Normal (-5%) Below 32% 55% Rainfall that is between 90 to 95% of LPA normal 2018 Normal (-3%) Deficient (-10%) Deficient 17% 15% Rainfall that is less than 90% of LPA 2019 Normal (-4%) • Indian Meteorological Department (IMD), the government weather-forecasting agency, predicts 2019 S-W monsoon to be normal (96% of the LPA). On the other hand, according to the Skymet, the private weather forecasting agency, 2019 monsoon is likely to be ‘below normal’ to the tune of 93%. Skymet is relatively more concerned of El-Nino risk than the IMD and hence the difference. • Both these agencies see the error margin in their forecasts at +/- 5%. Spatial and temporal distribution of monsoons will be available in the second update in June. • The IMD had been over-estimating the monsoon outcome in last five years. And this keeps the risk of the final monsoon outcome being weaker than originally penciled. Even as IMD calls for a normal monsoon, the probabilities are more skewed on the weaker side. Only 39% of probability is assigned to normal monsoon. There are 32% chances of monsoon being below normal and 17% chance of deficiency in 2019 summer rains. • Skymet is calling for 55% chances of below normal monsoon and 15% chances of drought in 2019 • The weakness in monsoon can adversely affect the summer crop cultivation and can be an added challenge to the weak farm income and consequently rural consumption demand. In parallel, it may also lead to some rise in food prices, but given the ample food stock of key grains, the price increase may be a bit gradual and later in the cycle. Source: CMIE Economic Outlook, Skymet, IMD, SBIMF Research;

Domestic industrial activity moderated in recent months Construction related indicators are holding healthy as Domestic industrial production has moderated primarily evidenced in cement production and steel consumption due to softer manufacturing sector growth Investment related indicators (such as capital goods production and imports) showing signs of softness • The overall industrial activity has moderated in the recent months. • While the construction related indicators are holding healthy as evidenced in cement production and steel consumption, investment related indicators (such as capital goods production and imports) showing signs of softness. • We will wait for the election to get over before reading much into the investment signals. The capacity utilization has improved and companies have deleveraged their balance- sheet in last three years indicating both the need and ability to undertake physical investment. Source: CMIE Economic Outlook, SBIMF Research

PMI softened due to domestic factors; exports outlook positive Manufacturing PMI moderated in April due to softness in Export growth improved to 11% y-o-y in March 2019 vs. production but exports prospects have brightened recently 3% y-o-y in Feb 2019; • Manufacturing PMI has moderated to 51.8 in April vs. 52.6 in Services sector activity, too, moderated in April 2019 March led by softness in new orders which is creating a domino effect and restricting growth of output, employment, input buying and business sentiment. The slowdown is reportedly curbed by the elections and firms have adopted wait-and-see approach until public policies become clearer post the elections. • Amidst weakness in domestic demand, exports offer some optimism. Respondents to PMI survey expect export growth to provide support. In fact, recent export data suggests an improvement in growth to 11% y-o-y in Mar vs. 3% y-o-y in Feb. • PMI services fell to 51 in April vs. 52 in March due to weaker rise in new business and output growth. However, the services sector is optimistic about pick-up in activity post election and has ramped up employment in April. Source: CMIE Economic Outlook, Markiteconomics, SBIMF Research