Manufacturing PMI at an 8-year high offsets pressure from global equities
Markets were disappointed by the lack of meaningful overall or sector-specific stimulus in the budget
New Delhi: After a disappointing Union budget eroded ₹3.5 trillion of investor wealth on Saturday, Indian benchmark indices ended marginally higher on Monday as the Nikkei India Manufacturing Purchasing Managers’ Index (PMI) shot up to a near eight-year high offsetting pressure from global equities, especially China.
Manufacturing PMI was recorded at 55.3 in January as against 52.7 in December. A figure above 50 indicates expansion, anything lower signals contraction.
The survey by data analytics firm IHS Markit that tracks around 400 manufacturers said companies recorded the strongest upturn in new business intakes for more than five years, which they attributed to better underlying demand.
Pranjul Bhandari, chief India economist at HSBC Securities, said the outlook for manufacturing activity looks optimistic as the order-to-inventory ratio improved, and the business confidence index ticked up. “We think growth has bottomed out; we expect growth to rise from 4.9% in FY20 to 5.9% in FY21, but half of the uptick is likely to be due to a low base," she added.
With improvements in a number of leading indicators, including goods and services tax (GST) collection and core sector industries, analysts had expected factory output to report modest growth in January.
The Economic Survey has projected India’s economy to grow at 6-6.5% in FY21 as against 5.8% estimated by the International Monetary Fund.
Fitch Ratings Ltd on Monday said the budget does not materially alter its view on India’s economic growth outlook. “We believe the budget contains some measures, which may support GDP growth in the medium term, including reduced individual income tax rates, some easing of restrictions on foreign portfolio inflows, continued focus on public infrastructure spending, and schemes of which the details remain to be announced to encourage manufacturing in the electronics and textiles sectors," it added.
However, analysts warn the stock markets currently have limited scope for any upside due to stressed corporate balance sheets, and do not foresee any rapid revival in growth.
According to Deepak Jasani, head of retail research at HDFC Securities Ltd, stock markets tend to show a knee-jerk reaction on budget day, but a trend is established only after a detailed study of the fine print of the budget. “The market was positive today after details of the budget were digested by investors. January manufacturing PMI also boosted sentiments to some extent. However, this could be a temporary bounce in the markets, it can last a few days."
Data suggests that markets tend to fall in the month after the budget as the euphoria around it dies down. To be sure, markets have fallen after one month of the budget in three out of five budgets. The Sensex fell 4.26%, 6.17% and 7.34% in 2015, 2016 and 2019, respectively a month after the budget was presented.
The markets were expecting a more expansionary approach in the budget to revive growth, but it does not tread that path and will be a source of near-term market disappointment, Edelweiss Securities Ltd said. “India has had a good run but with a global rain check and coronavirus, a fiscally measured budget, and our view that the fair value for the market is closer to 12,300 on Nifty, the market is set for a breather," it said.
Stock markets were disappointed by the lack of meaningful overall or sector-specific stimulus in the budget, no changes to capital gains tax on equities versus expectations of abolishment of long-term capital gains tax on equities and low visibility on the government’s medium-term plans for public sector undertakings.
According to ICICI Securities, missing triggers like big-bang personal income tax cuts and measures for boosting real estate and the non-bank sector could keep equity markets range-bound, especially in the light of coronavirus-related sell-off in global equities.
Others concur. “The Nifty can potentially go down to 11,000 levels if there are further negatives related to the capital markets or taxation that come out in the fine print. The risk-reward ratio turns very favourable closer to 11,000 levels of Nifty-50 as our one year Nifty-50 target works out to 13,400 levels," said Rusmik Oza, head of fundamental research at Kotak Securities Ltd. He added that any further escalation of the coronavirus outbreak can be negative for Indian equities.
Analysts at Morgan Stanley feel that the measures contained in the budget support investment over consumption and as such are in line with earlier government steps such as reduction in corporate tax rates. “We believe that such a move does not create macro stability risks and at the same time, the growth recovery will likely be gradual," a Morgan Stanley report said.
The budget proposed steps to attract risk capital. Measures to boost foreign capital include tax exemptions for foreign sovereign wealth fund investment in infrastructure, an increase in the foreign portfolio investment limit for corporate bonds to 15% of outstanding and opening up of certain specified categories of government securities to non-resident investors, which could pave the way for their inclusion in overseas bond indices.
Markets are now moving their focus to the monetary policy to be announced on Thursday, corporate earnings and the coronavirus outbreak.
Nomura expects the central banks to maintain its accommodative stance and offer forward guidance to emphasize that it sees the inflation spike as transitory, with headline inflation likely to head back towards and then below its 4% target over the next 12 months. “Also, RBI is likely to project growth to pick up sequentially, but to highlight that it will remain below potential over the year. Such dovish communication should set the stage for a 25-basis point repo rate cut sometime in Q2, in our view," it added.
“If the slowdown persists in the economy in FY21 and corporate banks report lower numbers than estimated, then earnings forecasts of 25% for Nifty-50 could potentially decline to around 18%," said Oza.