Retail buying may pick up in new fiscal
Full-year corporate results, which will start trickling in over the next fortnight, would influence investment patterns
The March settlement saw an unusual pattern of strong institutional investment versus negative returns. Institutions contributed net ~183 billion in equity investments, including ~116.5 billion by foreign portfolio investors (FPI) and ~66.9 billion by domestic institutions. But the Nifty closed 3.6 per cent down from end-February levels. The deduction: retail selling was heavy enough to force prices down.
Domestic institutional attitude and FPIs attitudes are rarely aligned. When they are, it is extremely unusual for markets to move the opposite way. This drop underlines the “big hitting” from retail in the past two years.
March is the financial year-ending and investor attitudes are influenced by tax considerations. We’ll have to note mutual fund inflows in April to gauge if retail sentiment has dipped in more permanent fashion. For what it’s worth, despite two negative months in succession, major market indices returned 10.2 per cent in 2017-18.
There is temporary relief in store, at least for bond markets. The central government will restrict first half borrowings to ~2.88 trillion, which is considerably less than the ~3.72 trillion it borrowed in the corresponding period (Apr 2017-Sep 2017) of 2017-18. The GoI is committed to borrowing ~6.05 trillion in FY 2018-19. This implies the upwards pressure on bond yields will increase after September 2017.
The Reserve Bank of India (RBI’s) Monetary Policy Committee is expected to hold policy rates and money supply steady in its bi-monthly review this week. Inflation moderated in February and there’s no particular reason to hike rates. However, the RBI is very unlikely to cut rates due to rising crude prices and global central bank attitudes.
The US Federal Reserve hikes rates in March. Markets are pricing in at least two more, possibly three more, hikes in 2018. The European Central Bank and the Bank of Japan are making noises about moving back towards normalcy, which means that both central banks may taper respective quantitative easing programmes. That reduces money supply and less liquidity equals lower appetite for “risk-on” assets like emerging market equity.
The worries on the crude price are increasing. The Indian crude basket was up above $70 in March. The import bill is likely to be considerably higher in 2018-19 versus 2017-18. The import bill for 2017-18 (Apr 2017-Feb 2018) was 22 per cent higher than the corresponding period of 2016-17.
The other big fear for investors is that the trade war between China and the US will gain intensity as both nations now start to hike tariffs and Europe could also get dragged into a trade war with America. There is now a significant chance of a slump in global trade due to beggar-my-neighbour policies.
On the corporate front, there is a focus on the scams and scandals emerging from the banking space and now, the malaise is infecting private banks too. The ICICI Bank-Videocon imbroglio directly embarrasses one of the most respected individuals in Indian banking. As of now, the bank’s board seems to be standing behind the CEO-MD, Chanda Kochhar.
On a more cheerful note, the Tata Steel offer for Bhushan Steel indicates that the new Insolvency & Bankruptcy Code is making a positive difference. The haircut for the debt in default, is less than 30 per cent, assuming the Tata proposal is approved by the National Company Law Tribunal. The case has also been resolved in a short time frame.
Meanwhile, the government continues to move along on the Air India disinvestment. Assuming it goes through, and there’s plenty of opposition, a major burden would be lifted off the central exchequer. But airlines rarely do well when crude prices are high. Despite Air India’s large fleet of 115 aircraft and many lakhs of bilateral agreements, it doesn’t seem like value for money. The buyer would have to assume ~330 billion of debt and also commit to retaining a huge workforce.
Domestic politics will play an increasing part in shaping sentiment as 2019 draws closer. The Karnataka assembly elections in mid-May could be a sentimental trigger. It will lead one way or another to reassessment of the Bharatiya Janata Party’s ability to retain power in the 2019 Lok Sabha elections. If the results favour the Congress, it could trigger another bout of panic selling.
The technical position suggests that the market is headed for a deeper correction. The 200 Day Moving Average has been broken by the major indices and this, in crude terms, indicates that stocks are doing worse than 10 months ago. Breadth is poor with two out of three stocks in the NSE list trading below respective 200 DMAs. The median correction from peak is about 34 per cent for the broader market. Again, that’s indicative of retail panic.
As mentioned above, it’s unusual for markets to fall in the face of institutional buying. Retail buying might pick up with the new fiscal, leading to a strong rebound. Or, there may be a disconnect where big stocks do better on institutional support while smaller scrips face more hammering. Or, institutions may cut back. As of the next fortnight, full-year results will start trickling in and that would influence investment patterns.