Market Commentary June 23, 2017

Equities have been mixed over the past couple of weeks as investors reflected on how far markets have outpaced economic policy and data. Indian markets have seen two weeks of mixed trading, a bit flat-footed as investors wait to see the impact of GST adoption on July 1st. The Nifty 50 gave up 93 points to end 1% down at 9575 after trading in a range of just 1.2%. Average daily trading volumes dropped back a little towards the trailing average at $4.2bn as FPIs sold a net $281mil in cash equity and domestic institutions were net buyers of $401mil. Volatility was low as the India VIX again traded in the 9 to 12 range but eventually closed two points down at 9. Breadth was narrow, with declines ahead of advances by 6 to 4. The immediate outlook seems to be for continued range trading as index futures closed at a premium of just 0.7%.

A new data series for the Index of Industrial Production (IIP) showed growth of 3.1% in April compared to 3.8% in March. The figure was depressed by seasonal weakness in Capital Goods, which contracted by 1.3%. Numbers may be subdued in the current quarter because of traders discounting heavily to move stock before they have to adjust for GST on July 1st. This may offset any benefit from remonetization but the combination of remonetization, restocking and rising consumer confidence from a good monsoon may deliver a sharp recovery in Q2FY18. Inflation figures for May showed a sharp fall as CPI came in at 2.2%, mostly driven by a decline of 1.1% in food prices; fuel and power prices rose. Core CPI rose by 4.1% but the below target figures were not enough to prompt any policy rate reduction by the RBI. In fact the MPC minutes showed quite strong resistance. Net Income Tax receipts for FY18 up to June 15 are showing an increase of more than 26% to almost $16bn.

The RBI has initiated action to resolve non-performing loan issues at public sector banks by disclosing that it was moving the banks to take insolvency action against twelve borrowers representing 25% of NPLs. The cabinet has agreed to introduce a Financial Resolution and Deposit Insurance Bill to provide a comprehensive framework for dealing with bankruptcy of banks, insurance companies and other financial companies. The Finance Ministry is encouraging public sector banks with appropriate resources to consider acquiring smaller banks.

The Global Adult Tobacco Survey shows that tobacco consumption in India fell by 6% between 2010 and 2016. The Youth segment (15-24 years) declined by 33% and the Juvenile segment (less than 15 years) by 54%. The biggest impact will have been on ITC which has been expanding its FMCG and leisure business segments. The company is now looking to drive the market share of its Savlon antiseptic towards $100mil in value. Lupin has received USFDA approval to market its generic Oxycodone Hydrochloride painkiller. The company has also launched its Buproprion Hydrochloride extended release tablets for the treatment of major depressive disorders. TCS is collaborating with Intel to design infrastructure reference architecture which will allow customers to rollout Internet of Things, Cloud and AI services. Bajaj Auto has cut the prices of motorcycles to shift stock and to adjust prices to a lower level of taxes which will apply under GST.

The monsoon is progressing well with good rainfall and spatial coverage. As a result, kharif sowing is ahead of last year. Consumer sentiment is rising, especially in urban areas. The government will go soft on small businesses struggling to adapt during the early phases of GST adoption. PM Modi has set off to meet President Trump in Washington. The market is closed for Eid, so this week’s action may be subdued.