Market can get worse before it gets better

The news got worse last week, in many ways. The fiscal deficit is likely to overshoot the target for sure, despite plenty of accounting legerdemain from the finance ministry. The trade deficit is expanding by leaps and bounds.

The political establishment is chasing its own tail (vide CBI versus CBI) as assembly elections draw closer and opinion polls suggest that the Bharatiya Janata Party will be hard put to retain its hold on several states. Meanwhile, corporate results indicate that consumption may be softer than hoped-for and analysts are predicting downgrades for second-half earnings.

Global growth estimates are also being cut. That could have an upside in that it may put a ceiling on crude prices. Oil has moderated quite a bit as a result but of course, there is also a floor on prices, given the US insistence on trying to shoulder Iran out of the market. Minimally, we can expect the crude import bill to be about 35 per cent higher this year.

The fiscal deficit hit 95 per cent of the full-year target in the first half. That’s a little worse than in 2017-18 when it hit around 91 per cent. There was a considerable overshoot in 2017-18, of course. The 2018-19 numbers may be shored up by breaking into piggybanks such as the National Small Savings Fund and diverting Goods and Services Tax collection to keep government expenditure off-Budget. The profitable public sector units and the Reserve Bank of India have already had their reserves tapped. Nevertheless, the fisc is likely to overshoot — the central fisc could well be 3.5 per cent of GDP and some pessimists are talking about 4 per cent, given the likely jump in spending as elections draw closer .

The trade deficit has risen to $94 billion for the first half, which is about $20 billion more than in the corresponding six months of 2017-18. Exports actually declined in USD terms in September, which is a worrying signal given the falling rupee. That gels with estimates of a global slowdown, with the World Bank cutting its 2019 global GDP estimates. The current account deficit will be north of 2.6 per cent of GDP and it might edge towards 3 per cent.

The weaker rupee has also affected the price of raw materials and higher import tariffs have raised the price of whole ranges of goods. Margin pressure was already apparent in Q2 results where operating margins have fallen for a whole range of companies and Interest costs have risen as well. Consumption may be affected now. Maruti sold fewer vehicles, for instance.

The auto sales numbers for October this week, and the Purchasing Managers’ Index data will be watched with some anxiety, given that it was festive season. If there's no significant bounce, the presumption would be slower consumption through the second half. Analysts are now looking at full year earnings growth of 6-8 per cent for the Nifty, where the earlier estimates were in the range of 15 per cent plus.  

A look at the mutual fund data could also be illuminating. There’s been a sharp shift out of liquid funds as a result of the NBFC crisis. That has already led to higher bond yields though RBI intervention has helped to control that.

If there’s been a slowdown in retail inflows to the equity segment, the stock market will be in trouble as well. October saw foreign portfolio investors selling over Rs 240 billion and they sold over Rs 114 billion of rupee debt as well. Domestic institutions bought Rs 210 billion but that obviously wasn’t enough to shore up the market since direct retail investors were also net sellers.

The post-Diwali period usually sees retail direct equity investors staying away — this is the time for consumption rather than investments. But retail inflows to the equity fund segment are stickier. Those systematic investment plans from retail clients will be vital to keep the market from heading further south.

Where upcoming corporate results are concerned, the PSU banks and PSU oil refiner-marketers will be the most sensitive segments. Everybody needs to get a sense of where non-performing assets are headed and the big PSU banks are the key players where that is concerned. Credit growth cannot improve until and unless those balance sheets stabilise. Given that interest costs have risen, enormous improvement is not expected, but the market would be happy if there were some signs of a clean-up.

Global markets saw their worst month since November 2011 when the Greek crisis was blowing up. The proximate causes were the escalating US-China trade war, threats of Iran sanctions being ratcheted up, Brexit, nervousness about upcoming November mid-term elections in the USA, electoral reverses for Angela Merkel in Germany, and Italian instability. The US bond market is now running at yields above 3 per cent for treasury bills, and most major global stockmarket indices are running at losses for calendar 2018.

Technically speaking, the market indices are all trading well below their own 200-day moving averages  That means stocks are doing worse than they were, 10 months ago. Most technicians see that as a signal of a long-term bear market that could get worse before it gets better. The next “non-economic” trigger could be the assembly election results in early December.