 "<b>Devangshu Datta:</b> Inching towards rock bottom")
The global economy is barely growing. The Baltic Freight Index, which tracks dry bulk shipping, is at unprecedented lows. China and the US are the only major engines of growth at the moment and both are in slowdown.
Manufacturing slowed in China in January. The Chinese New Year — the Year of the Monkey — is upon us. This usually means a rise in consumption coupled with a drop in manufacturing. A bounce-back in Chinese manufacturing is therefore, unlikely in February. Crude futures saw a brief uptick on hopes of Opec production cuts. But crude has fallen again, on assumptions of weak Chinese demand.
American unemployment dropped below five per cent in January, which is the lowest since 2008. But (non-farm) job creation at 151,000 in January was much lower than the 262,000 in December 2015. The rate of US gross domestic product (GDP) growth also dropped, to 0.7 per cent in October-December 2015.
Wall Street fears a double whammy. Corporate earnings growth is tiny, in line with low GDP growth. But the continued expansion could lead to the US Federal Reserve hiking rates again, anyway. So the response to the data was quite negative. The Nasdaq Index, which tracks technology stocks, took a real beating. Fed Chair Janet Yellen is due to brief US Congress next week and her tone could have a major influence on sentiment.
On the Indian monetary front, the RBI made accommodative noises and did nothing at its February policy review, as expected. There were signs that manufacturing had picked up in January, with the manufacturing Purchase Managers’ Index (PMI) at a four-month high. The PMI signalled a turnaround from December when the manufacturing PMI indicated contraction, though the Chennai floods were at least partly responsible for that.
The BoJ’s move could spark another round of devaluation. Investors and traders are confused since nobody really knows how to cope with low rates and negative yields on this scale. Forex markets have already seen multiple rounds of monetary musical chairs. There have been violent moves. The USD first strengthened, and then weakened. The yen first crashed and then recovered. The yuan is being pushed down, with the People’s Bank of China resetting the permitted trading band lower.
The rupee may appreciate just because the RBI has done nothing. Reacting to desperate lobbying and fears of cheap imports, the government has imposed a minimum import price for steel. But the Budget will need to do much more if Indian industry is to receive a shot in the arm. Imports and exports have collapsed, with double-digit contractions in the first three quarters of the fiscal. The investment cycle is at its nadir.
Every signal from the government suggests it will shelve fiscal prudence and opt for pump priming. Sadly, recent events in Arunachal Pradesh more or less guarantee that not much business will be transacted in the Budget Session. Hence, the prospects of the Goods and Services Tax Bill getting passed recede again.
Corporate results have not been very strong in Q3, 2015-16. Corporates have benefited from lower raw material costs but interest costs have risen. Rural demand is weak, going by poor FMCG results and low tractor sales.
According to the website, capitalmind.in, 237 companies with revenues of above Rs 100 crore each announced results by February 4. These had a combined turnover of Rs 6.03 lakh crore and revenues declined by two per cent. But net profits grew by 12.8 per cent. Out of the Nifty basket, 28 companies have declared so far. Net profits have increased three per cent.
Although sentiment in India is better than elsewhere, retail investors have been net sellers since early January. Mutual fund inflows remain positive but those inflows have shrunk drastically in the last three months (November 2015 to January 2016), hitting 20-month lows in Jan.
The US data and reactions to that may cause more FII (foreign institutional investor) selling in India, unless Yellen is dovish. To counterbalance that, there is always optimism about the Budget and that could buoy up prices. Technically, there’s support at Nifty 7,350 (near the recent bottom in early February), and at Nifty 7,250 (near the 52-week low in January). If the former support holds, well and good. If the latter breaks, the correction could go much deeper.