Indian equity markets are likely to stay in a corrective phase in the near-term given the mixed signals from the economy. While GDP growth returned to positive territory in the December quarter after two quarters of sustained contraction, analysts feel the pace of recovery currently is uneven at best with only select sectors poised to do better. Also, directionally, domestic markets are expected to swing to global bond yields, geopolitical tensions and developments around new US stimulus announcements. On Friday, Indian shares plunged nearly 4%, the sharpest drop in 10 months amid a global stocks rout triggered by rising US government bond yields.
According to analysts, the threat for a sovereign downgrade for India looms ahead due to lower-than-expected nominal GDP. Divergence of Q3 GDP growth with strong corporate earnings, goods and services tax (GST) collections and other high frequency indicators data indicate that the informal or unorganised sector still has not come out of the covid pain, they said.
Deepak Jasani, retail research head, HDFC Securities said, “Nominal GDP growth at 5.3% in Q3 FY21 may increase the risk in a sovereign downgrade by global rating agencies. As the unorganised and informal sector is still struggling, it will take some more time for a full recovery of the Indian economy. However, most importantly, the persistent rise in US bond yields may see foreign institutional investors (FIIs) dumping Indian debt instrumentswhich will weaken the Indian currency. A weak rupee, consequently, may impact the strong FII inflow into Indian equities. These may not augur well for the overall Indian markets and hence we anticipate further corrections in markets for some more time.”
India’s real GDP data, released on Friday late evening, showed a growth of 0.4% YoY in Q3FY21, emerging out of an economic recession. However, the services sector contracted 1% YoY, with only financial, real estate and professional services performing better in Q3FY21 compared to preceding quarters. Sectors like education, hotels, restaurants and travel and tourism, which are yet to be open fully may see further implications of short term lockdowns in few cities currently, according to experts.
What also worries economists is the contraction in private and government consumption expenditure. “Consumption expenditure, however, was a laggard (down 2.2% YoY) in Q3FY21, led by contraction in both personal and government consumption. The 1.1 percentage points contribution by discrepancies to GDP in 3QFY21 is the highest in FY21 so far,” said analysts at Motilal Oswal Financial Services.
Aditi Nayar, Principal Economist, ICRA Ltd also said that despite the pickup during the festive season, private final consumption expenditure continued to contract in Q3 FY2021, and trailed the performance of investment and government spending.
She added that various lead indicators have recorded a loss of momentum so far in Q4 FY2021, in contrast to the improvement in sentiment brought on by the vaccine rollout. She expects consumption growth to strengthen only modestly in the near term, as a part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact intensive industries and the self employed.
In contrast to the mild and uneven economic rebound in the December quarter, India Inc reported one of the best business performances in the last three months of 2020. A Mint analysis of 2,485 publicly-traded companies (excluding banks, financial services and insurance, and oil and gas) in Q3FY21 showed that net profit after adjusting for one-time items grew at the fastest pace in at least 25-quarters, at 71.95% from a year earlier, according to data compiled by Capitaline. That compares with a 34.88% rise in the September quarter. During Q3FY21, net sales growth of these set of companies grew 7.07% from a year earlier—a seven-quarter high. Out-of-home consumption, festive demand and improved consumer sentiment, besides benefits of tight cost control led to better-than-expected earnings growth during the quarter.
Analysts feel that for the over 100% rally of Indian markets from the covid crash in March last year to stay intact, overall economic revival and sustaining corporate earnings is crucial. Shibani Kurian, Senior EVP & Head- Equity Research, Kotak Mahindra Asset Management Company, “From an equity market perspective, revival of economic growth and the impact of the same in terms of improvement in the corporate earnings trajectory would be one of the key variables to watch out for. The continuation of strong corporate earnings would be the key from a market perspective for valuations to sustain. Some of the key risks for the markets includes the flow of global liquidity, any rise in covid-19 cases leading to localised lockdowns, disrupting economic activity and any disappointments in corporate earnings growth.”
India volatility index or VIX has jumped 22.93% alone on Friday, indicating further corrections in the markets. VIX or fear gauge, a measure of investors perception of fear and anxiety, has risen 33% since January. The volatility index typically has an inverse correlation with markets.