The global equity markets continued its buoyancy, led by USA. Indian markets too participated in this rally, with Nifty gaining 7.5%, Nifty Midcap 100 and Nifty Small cap 100 indices gaining 10.8% and 15.3%, respectively. Among large sectors in market, financials, energy and auto outperformed Nifty while FMCG, IT, pharma and commodities underperformed Nifty.
Globally, the sentiments for equity as an asset class continues to swing between positive sentiments (hope of medical solution to virus, expectations of further policy stimulus, economic recovery on opening up) and weak fundamentals (expectations of negative data points on economic growth and corporate earnings over next 6-9 months). We expect both these positive and negative sentiments to influence the market sentiments over next 3-6 months. The market moves would be more like swinging between the two as both positives and negatives are likely to dominate each other alternately; like what we saw in past six months. Just to reinforce the volatile swings in global markets, S&P 500 Index in USA had a 20% fall in Q1CY20, followed by 20% rise in Q2CY20.
As the lockdown period kept on getting extended, the expectation over time to go “back to normalisation” is getting elongated. This is reflected in continuous downgrades of growth estimates across global agencies. In June, IMF released its outlook on economy, projecting CY20 global GDP de-growth at 4.9% (1.9% lower than estimated in April 20). IMF also estimated a sharp recovery in CY21, with global GDP growth at 5.4%. For Indian economy, IMF expects de-growth of 4.5% in FY21 and growth recovery at 6% in FY22.
Indian economy is opening up but at a slower pace than expected earlier. The reason being quite a few states are opting to continue with lockdown as virus spread is still rising. June saw a reasonable increase in economic activity vis-a-vis previous month. Quite a few companies have commented that activity levels in June have been better than what was earlier expected by them. We track some high frequency data (electricity generation, petrol and diesel sales, automobile sales, credit growth, GST collection, etc.) on both YoY and MoM basis. The interpretation of data differs across sectors and while MoM growth is encouraging, we would like to monitor the time when the sectors are likely to report numbers that will be flat or show growth on YoY basis. We now expect that in H2FY21, many industries would start getting back to normalcy wherein they report a YoY flat or slight growth in volumes.
Markets were impacted in middle of the month by reports about confrontation at Ladakh border between India and China. While the initial news and reaction has been absorbed in markets, any news flow around escalation in the conflict can create negative sentiments. Similarly, any trade action taken (tariff or non-tariff) has potential to impact some sectors and companies where inter-dependency with China exists.
The macro-economic data declared during the month shows fiscal deficit in April and May (inFY21) at 58.6% of that budgeted for FY21 (v/s 52% in same period for FY20), current account surplus at 0.1% of GDP for Q4FY20 (0.9% deficit in FY20). The output of eight core sectors was down by 23.4% (Y-O-Y) in May 2020. The south west monsoons have covered India ahead of estimates and this brightens the prospects for agricultural crops and rural economy.