Equity Markets Round Up: June 2020 The equity markets continued their rally of the past two months in the month of June. MSCI India (USD) performed broadly in line with the MSCI EM (USD) index, and was up 6.6% during the month. The Nifty was up 7.5% during the month. This rally was despite rating agencies putting Indian sovereign debt on negative outlook, border skirmishes between India and China and the government’s subsequent harsh line on imports from China and the rising number of Covid cases. Global markets continued their rally, which began on March 23, after the US Federal Reserve eased financial conditions as it promised to infuse liquidity into the markets, including by buying corporate bonds.
The emerging markets outperformed developed markets during the month, breaking the pattern of the previous three months. Based on data analysed by Principal Global Asset Allocation, the global financial conditions are the easiest ever with low rates, strong growth in money supply and low credit spreads. Besides easier financial conditions, equities were also driven by positive developments on economic reopening and better than expected US economic data.
In India, economic activity has been picking up, albeit with some restrictions in specific areas where the spread of cases of COVID has been alarming. According to data, power demand in the first week of July is about 3% below last year’s number for the same period. Also, according to Google mobility data quoted by JP Morgan, things have improved sequentially with grocery stores operating nearly close to (about 5% below) normal.
Workplace mobility data showed it was (-) 38% for end June vs (-) 44% for end May and (-) 65% for end April. Most companies are now operating at 60-70% capacity utilisation, though a few are operating at higher rates as well. However, the picture is mixed, and PMI data for May indicates that both new orders and export orders remain weak. As expected, services PMI remain weaker than manufacturing PMIs as many services in entertainment, travel/ tourism and eating out remain under closure or are operating at low levels. One area that has seen relatively strong performance over this period is the rural economy.
This was supported by good performance of the cereal crops in the last Rabi season and higher prices of pulses etc. Besides, the government has been active in implementing welfare programmes in rural areas. Demand has been strong for pesticides and fertilisers for the kharif season. Tractor manufacturers also are seeing possibility of strong demand. Further, the monsoon season has begun well (rains were +20% over long period average for the month of June) and according to IMD projections, we may expect a normal monsoon this year. In other sectors, telecom has been the obvious gainer in the current situation as usage of data has increased as people work from home.
Two wheelers and lower end cars also will gain as people will likely avoid public transport, including shared mobility vehicles for some time. Consumer durables including laptops and routers will be in demand as people work from home and as students take classes from home. Further, other durables like washing machines and dishwashers (a virgin category for India) should also see rising demand.
In terms of flows, FII inflows into India were positive (at Rs. 21,832 crores) though EMs as a category had negative flows. Mutual funds were marginally negative in terms of activity in secondary markets. This year, unlike in the previous year, the market action has not been polarised with a few large cap stocks dominating the indices. As an indicator, the NSE 100 Equal weight index (where stocks are equally weighted) has done better than the Nifty index (where stocks are weighted by free float market caps) YTD.
Finally, data for CPI and IIP has not been published by the CSO as data collection has been disrupted due to the lockdown.
This will also make the task of estimating GDP numbers for Q1 a difficult one. The fiscal deficit for April-May came in at 59% of the full year target as revenues remain weak while the government has had to increase spending to meet the health crisis. GST collections for the first three months were 59% of the collections for the same period last year.
Advance taxes are also quite likely to remain weak for Q2, FY 21 as companies will be cautious and shall watch for the full year profits and shall prefer to maintain liquidity with themselves. Outlook To get a sense of the economic recovery, the markets will watch for commentary accompanying Q1, FY 21 results. However, there has been a rebound in the equity markets led by global liquidity and easy financial conditions as said above.
Conditions are likely to remain easy in the near term and this will be positive for risk assets. There could also likely be occasional news on perceptible progress towards a vaccine, or a substantial flattening of the COVID curve.
Incidentally, most of Europe has already managed to flatten the curve substantially. As such, the markets may remain supported on technical factors in the near term though volatility will be substantial. Investors may look to invest in a staggered manner in the markets in this environment.
Data Item Growth 1 Month 1 year
MSCI EM Index (USD) 6.96 -5.67
MSCI EM Index Local 6.24 -1.02
MSCI World Index (USD) 2.51 1.08
Nifty 100 Equal Weight Index 7.81 -11.04
Indian Rupee 0.14 -9.39
Dollar Index (DXY) -0.97 1.31
Crude Oil- Brent 16.47 -38.17
CRB Index -1.90 -11.70 Gold 2.93 26.35
Copper 11.88 0.37
Iron Ore 3.65 -12.99
Cotton (Cotlook A Index) 3.82 -11.75
JP Morgan EM FX Index -0.88 -13.63
Data as on 30th June 2020.
Source: Bloomberg, NSDL and Sebi websites Indicators May-20 June-20
FII net flows (Rs. Crs) 14,569 21,832
Mutual Fund net flows (Rs. Crs) 6,522 -612
Exports (USD Billion) 10.35 19.05
Imports (USD Billion) 17.12 22.20 CPI @ @ IIP @ @ Data as on 30th June 2020.