• The New government presented the Union Budget in the firstweek of July.The  important takeaways were that the government targets to maintain the fiscal deficit for FY 20 at 3.3%,which was quite expected. In key items of interest to capital markets,(a) SEBI is to examine a proposal to increase the minimum public shareholding of companies to 35% (from 25% currently); and (b) the surcharge on income tax has been raised on individuals and certain other category of assessees which also covers FPIs who are organized as trusts. Both these moves were taken negatively by the markets, given the substantial increase in taxation for FPIs.
• Globally, the macroeconomic data remained weak in the month,with Purchasing Managers’Index (PMI) below 50 for EU, Japan and China. Only the US had a PMI above 50 but there too the manufacturing expansion has been slowing for some time. The IMF, in its World Economic Outlook, has downgraded global GDP for 2019 by 10 bps to 3.2%. It also notes that investment and demand for consumer durables is subdued across both advanced and emerging market economies. For India, IMF has scaled down its growth estimate for CY 2019 to 7% (reduction of 0.3%), due to weak domestic demand. Other economists on the street estimate India’s GDP to grow between 6.5-7% for FY20.
• During the month, emerging markets again underperformed the developed markets. MSCI EM index (USD) was down 1.7% while the MSCI World (USD) index, which tracks developed markets was up 0.4%. Equity Portfolio flows into EMs were lower in the month at USD 1.2 BN (Source : IIF). FII outflows from Indian equity were Rs. 12,400 crores, the first month for outflows since January 2019. Interestingly, over the past 12 months, gold has been among the best performing assets (it’s up nearly 16% in USD terms) even as inflation remains low, Equity Market Outlook.
• India’s macro economic indicators are showing sign of slowing down, however considering a low inflation couple with falling interest rate scenario and downward pressure on oil prices, demand should eventually revive.
• At present, consumer demand, especially for consumer discretionary items remains tepid, primarily due to the uncertainty surrounding the NBFCs which play a substantial role in consumer demand.
• The 1stquarterFY20 numberhave been mixedwith auto companies and other consumerdiscretionary companies showing weak numbers, whereas, companies especially banks and cement companies reporting better than expected numbers. With low interest rates, falling oil prices and softer commodity prices, we believe once the economic cycle improves, there is likelihood of significant margin expansion in the manufacturing segment in FY21.
• The falling bond yields in the recent months are making equities relatively attractive from an asset allocation perspective. Further, the correction over the past 12 months in small and midcap space is providing good investment opportunities from a medium to long term perspective. Data Item Growth 1 Month 1 year MSCI EM Index (USD) -1.69 -4.87 MSCI EM Index Local -1.46 -3.55 MSCI World Index (USD) 0.42 1.83 Nifty 100 Equal Weight Index -6.96 -11.70 Indian Rupee 0.33 -0.17 Dollar Index (DXY) 2.48 4.42 Crude Oil- Brent -2.07 -13.07 CRB Index -1.15 -6.78 Gold 0.30 15.75 Copper -1.10 -5.17 Iron Ore 3.92 90.70 Cotton (Cotlook A Index) -2.60 -23.47 JP Morgan EM FX Index -0.76 -4.27 Data as on 31st July 2019. Source: Bloomberg, NSDL and Sebi websites Indicators June-19 July-19 FII net flows (Rs. Crs) 2,596 -12,419 Mutual Fund net flows (Rs. Crs) 6,232 15,084 Exports (USD Billion) 29.99 25.01 Imports (USD Billion) 45.35 40.29 CPI 3.05 3.18 IIP 3.43 3.10 Data as on 31st July 2019. Souce: Bloomberg, NSDL and Sebi websites.