The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) for December came in at a five-year high, but the stock market barely moved, with the Sensex closing the day absolutely flat.
Contrast the reaction in China and Hong Kong, where the Shanghai Composite index and the Hang Seng closed up 1.24% and 1.99%, respectively, in part because the Caixin Manufacturing PMI for China came in at a modest 51.5, but beating expectations. A reading above 50 indicates expansion, while a reading below that level signals contraction.
So why was the reaction of the Indian market so muted, compared to the bullishness in the Chinese market? Very likely it’s because valuations for Indian equities are already high, in spite of a lack of decent earnings growth. Simply put, the Indian markets may already be pricing in a revival in earnings growth. Hence the collective yawn in the markets to the PMI data.
Nonetheless, the fact remains that the manufacturing PMI is now indicating a robust recovery. What’s more, Chart 1 shows strong growth in new orders, which suggests that the recovery will continue. Note that while export orders too increased, growth in overall new orders was stronger, indicating that domestic demand is firm.
The new orders sub-index rose to 56.8 in December, the highest since October 2016, and new export orders too expanded at its quickest pace since June.
The PMI survey also said: “At the broad market group level, growth was recorded across all three monitored categories (consumer, intermediate and investment).” This is important because, if maintained, it shows a glimmer of an upturn in investment demand too.
But there could be another reason for Indian markets to be wary about the manufacturing revival. That is the possibility of it leading to higher inflation. As Chart 2 shows, the input price sub-index in December was the strongest since last April. “The introduction of the goods and services tax (GST) continued to lead to greater raw material costs, according to some panellists. Cost pressures intensified across all three monitored categories,” said the survey.
In a bid to tackle rising input costs, manufacturers raised prices at the fastest pace in 10 months. Companies increased output charges for the fifth month in succession, showed the survey. Higher inflation may prompt the already wary Reserve Bank of India to opt for earlier-than-expected rate hikes, particularly since the government may miss its fiscal deficit target. It could be this niggling worry that is behind the Indian markets’ lukewarm reaction.