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* Indian equities bounce back on oil price correction:
Over the past one month Indian stocks are up 5.6% and have outperformed DMs (0.2%) and EMs (+1%) as oil prices crashed 23%. Net institutional flows in Indian equities have reversed in Nov’18 so far (buying of US$290mn by FPIs and selling of US$185mn by DIIs; MFs buying slowed significantly to US$157mn). The bond market saw positive flows from FPIs of +US$875mn which provided support to the INR along with the sharp correction in oil prices.
* Slowing global growth will weigh on India’s growth story:
Global growth is expected to slow down for large economies like the US and Eurozone (exacerbated by global trade war and Eurozone crisis including Brexit) starting from FY20, which has raised hopes of fewer than earlier anticipated rate hikes by the US Fed in 2019. We believe this is not a bullish signal for EMs as the US rate hikes will continue albeit at a slower pace in a slowing global demand environment, which is negative for EM equities. However, a slowing US economy without global disruptions will result in a relatively weak USD and provide respite for EM currencies, especially the ones with improving growth outlook. India continues to be the fastest growing large economy in the world, but slowing global demand and sharp earnings downgrade since the beginning of FY19 has created uncertainty on the growth outlook. India has the added uncertainty of 2019 general election results and we believe that the market is pricing in a low-margin victory for the NDA as compared to 2014.
* ‘Quantitative tightening’ will continue to create volatility:
Tightening global liquidity due to the US Fed’s balance sheet reduction program (MBS and Treasury run-off rate will increase to US$50bn/month in 2019 as compared to US$30bn/month in 2018) along with the signal by the ECBs to end its QE by Dec’18 will continue to cause volatility in global capital markets going forward and thereby cap upsides for EM stocks such as India.
* Sharp correction in oil prices is a key positive, but its sustenance in 2019 is uncertain given that consensus forecasts for average 2019 oil prices at ~US$75/bbl is above the average price for 2018 at US$73/bbl.
* Banking liquidity continues to be in deficit; NBFC refinance improves though their slowing growth could impact MSME demand:
Banking liquidity continues to be in deficit territory of ~Rs1trn while anecdotal evidence suggests that NBFCs have been able to access the debt market albeit at higher costs. Risk perception for NBFCs at the system level has receded as evidenced by the dip in the weighted average yield for CPs traded in Nov’18 at 7.7% as compared to 7.8% in Oct’18. Data from the annual report of ‘MUDRA’ (Micro Units Development and Refinance Agency) for FY18 indicates that NBFC’s constituted 11% of the outstanding portfolio with the highest growth of 395% as compared to other institutions for the year. Slowdown in growth for the NBFC sector due to the tight liquidity could have a negative impact on MSME demand.
* Domestic macro indicators mixed:
Core inflation measure and WPI (5.3%) for Oct’18 continued to rise although CPI fell to 3.3% indicating the effect of falling food prices and rising fuel prices. IIP growth slipped marginally to 4.5% for Sep’18. Credit growth hit a 5-year high of 14.7%. Trade deficit rose to US$17bn in Oct’18 (impact of higher Oil price and INR depreciation) even though exports bounced back with a YoY growth of 17.9%.
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