Dear Readers,

While July month commenced the declaration of 1st quarterly results by companies, the importance of those results was undermined by other global factors in the month of Aug. Rupee depreciation, crude price rise, increasing Current Account Deficit (CAD), and worst floods in Kerala in more than a 100 years took precedence over corporate earnings. While the indices gave good returns, during the course of this post, I will explain the issues going into Sep and what to look out for, which can aid/affect the stock market performance. A statistic on the corporate earnings for Q1FY19. These are the best Q1 earnings in 8 years.

 

The expectations for the Nifty earnings growth for FY19 are around 20%. Q1FY19 has been decent with 26.3% increase in profits (excluding banks). Corporate banks, as well as PSU’s, are showing better results owing to stabilization, resolution and recovery in NPL’s. FY19 might be the year when the losses abate for banks and the turnaround in PSU’s help the earnings growth.

Stock Market Performance:

This was probably one of those times, when all the indices gave positive returns, but at the same time, the returns difference between the best performing index and the lowest returning index was an astonishing 11.8%. Best of the lot was the Healthcare (Pharma) Index while the Oil & Gas sector gave the lowest returns – understandably on the back of rising crude oil prices.

Sensex indices and their returns:

 

Nifty indices performance:

 

It is common knowledge that market breadth has been shallow and only a narrow list of stocks (7 or 8 stocks) have been major contributors to the last 1000 point rally & pushed the indices up, while the broader market remained subdued since Jan 2018, and few of those stocks went on to hit life time highs in Aug. Reliance and TCS continued their tiff to lead the market cap list and have crossed the Rs. 8lk cr market cap.

Given below are the stocks contributing to the Nifty journey YTD:

 

Similarly, the Nifty Midcap and Nifty Small Cap journey was defined by these companies:

The stocks giving the best returns from general category as well as the penny segment are as follows:

I hope this is sufficient information on the stock market. Let us look at the issues influencing the global as well as Indian financial markets at this time.

Crude Oil & Rupee:

A continuous slide in both – crude oil as well as rupee (vs. USD) is putting immense pressure on the markets. Bond yields have risen to > 8% and analysts expect that 8.25% -8.5% is not out of the scope going forward. This would mean increase in interest rates, and a 0.25% rate hike is expected in October monetary policy.

The rupee slid 11% till the end of Aug and as I write this post, another 2% is gone, making it a 13% fall for 2018, the fastest, highest fall in many years and is at life time highs currently, breaking even the 72/USD mark. How far can it go is anyone’s guess but I believe that many analysts, investors, govt, officials are prepared for a 75 mark.

It is not that the rupee is falling, but the dollar has strenghtened sufficiently to make other currencies look weak.

But since we are concerned about Indian’s CAD, the 11% depreciation coupled with crude price rise does matter a lot, considering crude is the most important part of our fuel imports and with higher crude price, we are importing higher inflation. The days of low oil prices helping the govt mop up more than Rs.2.5 lk cr each year would be gone, if the Govt decides to cut excise duties.

An important point of note is that GST collections might not be close to stabilization yet, as govt seems to cut the tax on certain goods at regular intervals and this is decreasing the predictability of revenues on a monthly basis. However, the last 4 months collections are above the Rs. 94,000 cr mark and the expectation in the budget was for Rs. 100,000 cr. mark. So, there is a little mismatch of expectation vs. reality on that front and at the same time, the unfortunate floods in Kerala will definitely impact GST collections, insurance companies, and business in general. While some auto companies have given good monthly sales numbers, Maruti has given lower growth for the previous month due to the flood issue.

MF/FII Activity:

In the month of August, FIIs sold shares worth Rs.2028 cr. However, purchases from mutual funds slowed down further to Rs.4084.53 cr. For YTD, FII’s remained net sellers and MFs remained net buyers with the fund flows decreasing considerably.

Outlook for September:

  • Situation remains volatile on the rupee, crude, CAD fronts. RBI is at the center of the storm and has been supportive, by selling dollars to the tune of almost $22 bn, to arrest the fall in rupee. Expecting stability with strengthening dollar is difficult in the very short term.
  • US-China trade wars are taking an ugly turn with US imposing tariffs on more than $200bn worth of goods and China is retaliating in the same measure. There is going to be serious collateral damage on other countries as well. US is also busy implementing economic sanctions on other countries – Iran, Russia etc. These countries are good trade partners for India and US is demanding its pound of flesh from India, for its friendship.
  • US diktat on the ban of crude oil imports from Iran completely by Nov 1 is putting additional pressure. Iran accounts for 25% of India’s crude imports and it is becoming a very tight situation. The 2+2 dialogue between India & US is expected to discuss and find some solution to this diktat as well as other defense deals with Russia.
  • Fuel prices are at lifetime highs and the govt is not expecting to cut excise duties as this might result in a higher CAD, which doesn’t augur well for general macroeconomic numbers. Demand for fuel hasn’t abated even at these higher prices as economic activity is in full swing. Any loss of momentum can derail the GDP growth and in an election year, it is the most dangerous situation for any incumbent.
  • Elections for 5 states are coming in the next quarter and this will put pressure on the govt, to announce SOP to rural and low-income families. Already the Ayushman Bharat Scheme to support Medicare for 10 cr families has been announced and is being implemented, though with its own set of challenges. I have already written a detailed answer on the same to a recent query.
  • The effect of all these factors will influence the currency & stock markets. While valuations in some sectors continue to be high. safety & quality requirements have resulted in most investors flocking to large caps. At the same time, good midcap stocks are seeing investor interest and I expect the breadth to increase in this month.

All in all, an eventful month is expected with policy decisions taking center stage for resolution of issues.

For key takeaways of Q1FY19 earnings from the top 10 sectors, do read: https://www.business-standard.co…

Financial data and source credits: Bloomberg, Moneycontrol, GSTN, Ministry of Finance, Kotak Securities, Bloomberg Quint, EquityMaster, FYERS, Economic Times, LiveMint, Business Standard.