Markets recoup budget losses riding on oil relief
Stocks surge most in 4 months, tracking gains in Asian markets
MUMBAI: Indian shares surged on Tuesday after a sharp budget-day sell-off. Stocks rose the most in more than four months, tracking gains in Asian markets, as crude oil prices slumped to the lowest level in 13 months.
Lower crude prices will benefit a range of industries that use oil and its derivatives, including airlines, consumer goods makers, vehicle manufacturers, paint companies, and refineries. A lower oil import bill will also help create more fiscal space for the government to stimulate the economy.
BSE’S benchmark Sensex surged 917.07 points, or 2.3%, to 40,789.38. This is the biggest gain since 23 September 2019. The broader 50-share Nifty advanced 2.32% to 11,979.65 points. With this, both the indexes have recouped losses incurred on the day finance minister Nirmala Sitharaman presented the Union budget.
Asian markets gained, supporting Indian stocks. Shares in Japan, China, Hong Kong and Korea advanced as much as 2% after Monday’s record $720 billion wipeout in China because of fears related to the deadly coronavirus outbreak.
Investors are weighing China travel restrictions and business shutdowns alongside measures Beijing is introducing to support growth as the hit to its economy mounts.
Meanwhile, Hong Kong reported a death from the coronavirus, confirming the second fatality outside mainland China.
On Tuesday, crude prices hovered around $54 per barrel. Prices have fallen 20% in the past month, indicating oil could have slipped into bear market territory. Brent prices are down 17% this year.
“In best-case scenario, we see a slight reduction in global GDP in first half of 2020 from our previous outlook. In the worst case, we expect a recession. In the best-case scenario, global GDP sees reductions of 0.2% in Q1 and 0.15% in Q2, and China’s by 0.8% and 0.2%, respectively,” said Claudio Galimberti, head of demand, refining and agriculture analytics at S&P Global Platts.
In India, which imports more than 80% of its oil needs, low prices may give the government more room to announce reforms and manage the tight fiscal situation, analysts said.
“Lower crude prices are a big positive for Indian markets while gains in other global markets boosted sentiment,” said Atul Bhole, vice president of investments, DSP Mutual Fund.
“After the sharp sell-off on budget, there is a realisation among investors that there was nothing negative in the proposals.”
As the government’s budget proposals didn’t bring in any material policy changes that significantly altered growth outlook, liquidity continued to chase Indian equities. On Monday, foreign institutional investors bought Indian shares worth $258.53 million. They are net buyers of shares worth $1.37 billion this year. Domestic institutional investors, including mutual funds and insurance companies, have bought a total of ₹3,572.82 crore in stocks in 2020. They bought ₹1,286.63 crore on Monday.
“We ascribe the fall of 3% in
Nifty on 1 February to high expectations of a growth-and investor-friendly budget and weakness in global markets. Our expectation of a slow recovery in growth, supported by ample liquidity and lower cost of fund remains,” Nomura said. The brokerage, however, thinks the budget announcements on personal income tax and dividend distribution tax could hit flows, persistency and value of new business margins for insurance firms.
With Indian equities trading at almost 19 times forward price-to-earnings, a 40% premium to MSCI Asia Pacific excluding Japan index, there is near-term downside risk to the markets, particularly in the light of rising coronavirus concerns, according to Goldman Sachs.
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NEW DELHI: Moody’s Investors Service on Tuesday said economic growth projections made by finance minister Nirmala Sitharaman in the Union Budget 2020-21 appear ambitious given the structural and cyclical challenges facing the Indian economy.
The budget expects nominal gross domestic product (GDP) growth of 10% in FY21, followed by 12.6% and 12.8% in FY2022 and FY23. But, Moody’s saw GDP growth rising to around 8.7% in the next financial year beginning April 1 from about 7.5% in the current fiscal.
Stating that growth outlook will remain weak, it has put real GDP growth during the fiscal ending March 31 at 4.9%, slightly below the government’s forecast of 5%. For the next fiscal, it estimated real GDP growth of 5.5%, lower than 6-6.5% projected by the Economic Survey.
“Growth has remained relatively weak as a prolonged deleveraging cycle and ongoing stress among non-banking financial institutions (NBFIS), which has constrained the financial system’s overall provision of credit, weigh on consumption and investment,” it said in a detailed commentary on the budget.
For FY21, it lowered real GDP growth forecasts to 5.5% from 6.3%. For the following fiscal, it put the real GDP growth at 6% from 6.7% projected earlier.
“The significant slowdown in financial sector credit growth from NBFI liquidity constraints and asset quality issues among public sector banks has exacerbated prolonged weakness in private investment and a material decline in consumption, due in part to financial stress among rural households and weak job creation,” Moody’s said.
The nominal GDP growth, it said, has also declined significantly.