Vijay Kumar Gaba: Economic and market review

Next post of Morning Trekk will be on Monday, 3 September 2018.

Thought for the day

"If I asked for a cup of coffee, someone would search for the double meaning."

—Mae West (American, 1893-1980)

Word for the day

Prima facie (adv)

At first appearance; at first view, before investigation

Malice towards none

There are two kinds of ecommerce ventures in India - (a) which can get sold to a global giant like Amazon; and (b) which may eventually shut down.

First random thought this morning

There is a race to appropriate the social and economic achievements made during past two decades. In particular, the finance ministers from UPA-2 and NDA-2 are at loggerheads over the statistical data about economic performance during 2004-14 and 2014-18 respectively.

In their rather naive sounding arguments, two things stand out conspicuously:

(a) No one is willing to accept responsibility for the failures and inadequacies; and

(b) All politicians continue to presume that they can fool all the people all the time.

Economic and market review - Concluding part

Besides the macro improvement and equity valuations, another thing that is conspicuously peaking is the allocation to equity in overall asset allocation.

After rising sharply after the demonetization exercise in late 2016, the growth in mutual fund's asset under management (AUM) has moderated in past few months. Moreover, the allocation to equity fund is at highest in more than a decade and debt allocations have fallen materially. Cash allocation as at the end of FY18 was also lowest in three years.

Read with the following other trends in the holding structure of Indian equities, the signals that we get are mostly pointing towards the risk that the markets may be ripe for a meaningful correction.

It may however be pertinent to note that historically (e.g., October 1999- February 2000 and July 2007 - January 2008) such situations have prevailed frustratingly longer.

Regardless, in my view if one is convinced that the risk reward proposition in equity investing is skewed more towards risk, it is always better to take an early position. Because, invariably the market moves at the peak and bottom are very sharp and difficult to participate if someone is not already positioned for such an event. This applies to both the traders and investors, alike.

Global flows into equity and debt instruments. As per a CITI Bank report YTD there’s been $96bn (0.5% of AUM) inflows into equity funds globally and $93bn (1.4% of AUM) into bond funds, according to EPFR. That’s a meaningful slowdown from the record inflows in 2017. Moreover, within equity funds, there are some early signs of a rotation towards the US equity funds at the expense of the rest of the world.
EM equities have seen $18bn outflows in the last three months. However, 12m rolling flows are still positive ($80bn). Further outflows would be a headwind for EM equities performance which is the most sensitive to fund flows.
In the context of India, the share of FPIs in Indian equities (BSE500 companies), has fallen to ~20%, lowest in 3yrs. The share of DIIs and retail in Indian equities has crossed 20%, and is marginally higher than FPIs.
The promoters' holding though has inched closer to 50% (49.75%), despite persistent selling by the government.

Domestic institutions have remained net buyers in the markets with almost US$9bn YTD inflows, offsetting much of the FPIs' selling.
Fresh equity issuances have also moderated in June quarter.

Net subscription into mutual funds has significantly moderated in 2018. However, SIP flows have remained strong so far.

Conclusion

(a) The improvement in macroeconomic conditions in India that started from 2QFY14, has mostly peaked and many parameters like CAD, inflation, rates, forex reserve, INRUSD have started to worsen. Even Fiscal deficit improvement is showing signs of peaking, as GST collections are failing to pickup.

(b) Most economists have moderated their FY19 GDP growth rates to 7.2-7.4% from earlier 7.4% to 7.6%. FY20 growth estimates are also not very encouraging at present. Widespread floods and drought conditions further cloud the growth outlook.

(c) Global growth is peaking. US, EU and China are forecast to witness growth moderation in 2019. The risks to the growth are more on the downside as threats of escalation of trade war, no deal Brexit, Turkey and Italy fiscal worsening hang over global financial markets.

(d) The credit profile of Indian household is worsening with rising debt and stagnant real income. This may make the slowdown in savings rate witnessed over past decade or so, a structural change. This may therefore increase the cost of funding for both the government and corporate borrower on structural basis.

(e) Indian equity markets have substantially outperformed their EM peers despite real earnings remaining almost flat since 2010, making us the most expensive market in Asia. On most parameters, Indian equity market valuations seem unsustainably high.

(f) Most signals are mostly pointing towards the risk that the markets may be ripe for a meaningful correction. However, historically, (e.g., October 1999- February 2000 and July 2007 - January 2008) such situations have prevailed frustratingly longer.

Also read Economic and market review