Stock Market Concerns - RBI Annual Report

Some statistics of stock market for 2020-21 financial year 

1. Sensex surged 77% in 2020-21.   It was 28,265 on 1st of April 2020 & ended at 50,136 on 31st March 2021
2. Peak was reached on 15th February 2021 @ 52,154 
3. 25 Initial Public Offers (IPO's) were issued by corporate's during 2020-21 of which 21 had generated positive returns for investors  
4. Equity market recorded a net inward Foreign Portfolio Investment (FPI) of Rs.2.8 lakh crores during 2020-21 (compared to a net outflow in FPI of Rs.6,024 crores in Previous year)
5. Direct participation of retail investors was the hallmark for the year 2020-21 with 1.43 crore new Demat accounts opened during the year (compared to 50 lakhs in previous year).  Retail holding in NSE listed companies increased to Rs.13.6 lakh crores from Rs.7.2 lakh crores in the previous year 
6. Asset under management of pension funds soared past Rs.5 lakh crores

Desipte covid concerns what are the major cases attributed to this sharp surge in stock market in India. 

The market factored in the following factors for the sharp recovery.   Easing of Covid and consequent expectation of recovery in economy, better performance by corporate's especially during Q3 & Q4 of 2020-21 triggering record GST collections, Rs.1.5 lakh crore Performance Linked Incentives (PLI) for key manufacturing sectors, record high FPI inflows during 2020-21, lower interest rate regime triggered by lowering of repo rates by RBI and global economic recovery to name some of the key factors.

Now for the concern of RBI for this sharp upward swing of stock markets.  The following are the major factors RBI lists in its report under the title "Is the Bubble in Stock Market rational"

1. This order of asset price inflation (77% in 2020-21) in the context of the estimated 8 per cent contraction in GDP in 2020-21 poses the risk of a bubble. 
2. Results suggest that the stock price index is mainly driven by money supply and FPI investments. Economic prospects also contribute to movement in the stock market, but the impact is relatively less compared to money supply and FPI. This assessment shows that liquidity injected to support economic recovery can lead to unintended consequences in the form of inflationary asset prices and providing a reason that liquidity support cannot be expected to be unrestrained and indefinite

To conclude, meteoric rise in Indian stock market is a cause of concern considering the fact that there is no strong fundamental reason but short term temporary reasons which can reverse any time causing the bubble to burst.  Investors especially retail investors should exercise caution when treading into the market and it is advisable to use a mix of equity and debt to achieve their financial goals

Milestone - PFRDA - NPS

The Pension Fund Regulatory Development Authority (PFRDA) tweeted on May 26th 2021, that they reached a milestone of Rs.6 lakh crores of Asset under Management.  The best part is the last Rs.1 lakh crore happened in just 7 months (Press Release)

                            Source : PFRDA Tweet 27.5.2021

With asset under management crossing Rs.6 lakh crores and subscribers touching 4.28 crores, PFRDA is on a roll.  

What triggered this upward movement?

• Fairly good returns on equity investments.  Equity schemes have given around 13% to 15% returns for the past 5 years, some scheme names have been given for quick reference  

• Fairly good returns on debt (Government bonds) investments.  Debt schemes have given around 9% to 11% returns for the past 5 years, some scheme names have been given for quick reference  

• Fairly good returns on Corporate bons investments.  Corporate bond schemes have given around 9% returns for the past 5 years, some scheme names have been given for quick reference 

• On an average a conservative investor can earn a 11% returns which can never be imagined under EPF or PPF

• Another advantage of NPS is its low cost structure.  Annual cost fees in NPS is currently capped @ 0.1% which is far lower than mutual fund schemes

• The most attractive part of NPS  is tax benefits under 80CCD(1) - 10% of salary subject to a maximum of Rs.150,000, 80CCD(2) - 10% of salary with no monetary limit  & 80CCD (1B) - Rs.50,000

Major drawbacks of NPS

• Liquidity - investments are locked till the investor attains age of 60.  Yes there is a partial withdrawal option of 25% of own contribution but this will be a small portion

• At time of withdrawal if corpus is more than Rs.5 lakhs then 60% of the corpus can be withdrawn and balance 40% should be compulsorily invested in an annuity.  Income from this annuity is taxable

Conclusion

NPS is a good investment vehicle for the long term which gives superior returns and tax savings.  Cost of maintaining NPS being low also brings in more attractiveness to this scheme.  Though there are draw backs on liquidity and tax on annuity, NPS is a superior scheme for investment which I recommend.

Sensex - Reducing fear of Covid?

Sensex closed today @ 51,017 points which is just 2.2% short of the all time high of 52,154 reached on 15th February, 2021.   

2021-22 has clocked till now 2% increase in sensex or 988 points.  Today market posted strong gains due to gains mainly in financial & IT stocks.  Nifty financial services index increased by 0.52% & Nifty IT index increased by 1.76% during the day to move up the index. 

Stocks are projected to be uptick in the short term due to reduction in Covid infections in India, expected better performance of Indian corporate's and rising trend in US & Europe stocks   

Black Gold Inching towards 100 - Roll it back

Per litre petrol Cost today 25.5.2021

Mumbai : Rs.99.71
Chennai : Rs.95.06

Kolkata : Rs.93.49

Delhi : Rs.93.44

Let us take Chennai for further analysis.  

Price of WTI crude on 1.1.2020 - $ 61.13 per barrel

Price of WTI crude on 25.5.2021 - $ 65.65 per barrel

Increase % = 7.4%

Price of 1 litre petrol in Chennai on 1.1.2020 - Rs.78.20

Price of 1 litre petrol in Chennai on 25.5.2021 - Rs.95.06

Increase % = 21.6%

What caused this disparity? Why so high increase in domestic petrol prices?

Is it Currency?  No only marginally

USD vs INR on 1.1.2020 = 71.36

USD vs INR on 25.5.2021 = 72.79

Increase % = 2%

Is it Taxes in India?  Yes significantly

Twice in 2020 taxes were increased on petrol (March & May) - totally Rs.13 per litre or 65% increase in tax from Rs.19.98 to Rs.32,98 per litre in 2020

Overall impact on petrol price per litre = 17%

Indirect tax collections in 2020-21

Provisional figures released by Government on 13.4.2021

Shortfall of Rs.0.5 lakh crores in GST collection was more than offset by an increase of Rs.1.46 crores in central excise collections which mainly constituted tax on petrol & diesel.  The increase of 12% in indirect tax collection is mainly because of higher tax on petrol & diesel.

What the Government should do now

With the economy projected to get back into normal mode in Q3 2021-22 there should be a push for industrial development consequently improve collections under GST.   In parallel there should be a reduction in excise duty on petrol & diesel to pre 2020 levels and reduce inflationary impact on the economy.  It would do a world of good if Petrol & diesel are brought under GST ambit rather than erstwhile excise & VAT regime

Will the Government Act on this or push for more taxes on fuel and thereby fueling inflation which is the last thing the economy wants at this moment 

Crpto Currency - Waiting for a reason

Crypto currencies had dream run with its main constituent Bitcoin in 2021 up until  April rising over 97% from $29,111 in 1st of January 2021 to $53,260 in 30th April 2021.   Then the drop started in May by 34% and now trading at $ 37,707 which still is a good growth of 30% for 2021.  

The market capitalisation of crypto currencies stood at $1.58 trillion on 24.5.21 which was $2.2 trillion on 1.5.21, in 25 days time a whooping $ 620 Billion has vanished in investors wealth.  

  

What triggered this slide in May?  Two factors are cited, one Elon Musk (Tesla).  Tesla stopped accepting Bitcoins as payment for their cars, there was also talk of Tesla selling off some of their Bitcoin holdings.  Tesla cited environmental concerns caused by crypto currency mining as its main reason for not favouring Crypto currencies this is an U-turn by Tesla from its earlier statement.  

Second reason is China announcing that it will crackdown on crypto currency mining as a part of an effort to control financial risks and also to control high electricity consumption which are gulped down by Crypto currency miners who are majorly concentrated in China 

Question : Are the above the major factors to wipe away value from crypto currencies and will these factors continue to determine value of crypto currencies in future?  To my knowledge No.  Crypto currencies were moving up mad @ 97% in the first 4 months of 2021 and it was looking for some reason to wind down when it conveniently found reason in Tesla & China and dropped 34% in one month.  Now that crypto currencies are down from their high levels they will look to consolidate in the days to come and again look for excuses to move down or move up.  Volatility is a hallmark of crypto currencies and it will always play a major part as there is no regulation from Governments and it will find some reason for moving up or down dramatically making headline news everytime.

Just a spoke in the Growth Wheel - All is well still - Will be back in track in Q2 & Q3 of 2021-22

All was going on well till mid of February when Covid made a big comeback into India and now has started to slightly taper down albeit slowly.   This surge will stunt economic growth as demand drops and people start to become cautious again and start to increase their savings rather than spending.  Jobs are once again in the spotlight with hospitality and entertainment sector ensuring many of them vanish leaving earnings to drop significantly.   Good news is that there is no full lockdown similar to last year.  Lockdowns now are only regional ones now, those too ensuring economic activities are not stunted to a large extent leading some scope for earnings to happen.  A bold step by the Government is implementing vaccination for all adults of 18+ from 1st May, this is the only way to contain the virus added with following Covid protocols by all citizens of India.  Industry which saw smart recoveries in Q3 & Q4 of 2020-21, will take a hit in Q1 of 2021-22 and look for revival in Q2 once the pandemic is contained.  Reserve Bank of India (RBI) Industrial outlook survey of the Manufacturing Sector for Q4 2020-21 was released on 7th April 2021, which was projecting quite an optimistic picture for the industry for Q1 of 2021-22.  Will that be realised?

                   Source : RBI

Q1 of 2021-22 will show a subdued growth in contrast to RBI projections due to unprecedented covid surge.  Indian corporates proved their resilience in Q3 & Q4 of 2020-21 but it will be a difficult task in Q1 & Q2 of 2021-22, recovery should start from Q3 of 2021-22.

Stock Markets

Recovery of business and hence stock market was quite upbeat in Q3 & Q4 clocking an upward swing of 20%, in contrast the months of April & May 2021 till now has seen a see-saw swing and expectations are bears will rule the market.     

                                                         Stock Market Movement 

Corporate results for Q1 2021-22 is expected to be subdued and markets will factor in the same in Q1.   Should expect a flat or depressed market for 2021-22 albeit some short term volatile movement and rallies 

Rupee Movement 

Q3 & Q4 saw Rupee strengthening or holding ground due to better corporate and stock market performance.  

Q1 2021-22 (April) saw a sudden depreciation of the Rupee due to Covid surge and domestic stock market weakness.  However uptick in stock market movement & general US Dollar weakness (Dollar Index) helped Indian Rupee to move towards appreciation mode.  My prediction is Indian Rupee will be under depreciation mode till business sentiment moves up and Covid fears subside in Q3 2021-22.  When Rupee depreciates it will be time for RBI to intervene in the markets and ease out the Rupee a bit and to ensure cost of inputs especially oil do not spiral out of control consequently sending inflation into a tail spin, which is the last thing the country wants which is already reeling under pandemic stress.  

Oil Prices

With economies opening up crude oil is back in focus.  In Q1 2021-22 there is a 2% appreciation in Crude WTI from $ 61.45 to a barrel to $ 62.78 per barrel

Projection is crude will continue to marginally raise over the next two quarters in line with economic activity pick up

Conclusion

There will be a economic slowdown in Q1 2021-22 & part of Q2 also.  Q3 & Q4 of 2021-22 will bring in recovery and all will be well soon

Marching on in April

Stock Markets

Sensex surged 4% in the last week of April with 4 days of continuous increase despite turbulent times with Covid cases increasing significantly in India.  Surge is mainly due to better Q4 results of corporate (compared to 2020 Q4)

• IT & ITES stocks - Revenue growth of TCS 4.2%, Infosys 13.08%, Wipro 3.14%, Mindtree 5.2%  
• Bank stocks - Revenue growth of HDFC 13%, ICICI 17%, Axis Bank 10.98%  
• Automobile - Revenue growth of Maruti Suzuki 32%, TVS Motor 52.87%
• FMCG - Revenue growth of Britannia 9.68%, HUL 35%, Hatsun 23.89%  
• Manufacturing - Revenue growth of ACC 22.57%, Bajaj consumer 39.25%, Tata Steel 53.4%, ABB 7.02%, Biocon 16.3%, Carborandum 27.38%, Ambuja Cements 23.44%  

Overall corporate's are delivering better than expected results for Q4 2020-21 which keeps investors interested.   

Another major reason for the surge in sensex is that business sentiment is upbeat as can be seen by RBI survey  

        Source : RBI

Reserve Bank of India (RBI) Industrial outlook survey of the Manufacturing Sector for Q4 2020-21 was released on 7th April 2021, this shows a positive sentiment for Q4 2020-21 and Q1 2021-22.  Markets are factoring in this positive sentiment and gives a big thumbs up and consequently jump in sensex.    

As for Covid markets have already factored the same in 2020 and so more cases will not impact it unless it takes on monstrous proportion which I believe will never happen.  Though cases are on record levels good news is that till now 15 crore vaccination have been administered in India and there is a conscious push for faster vaccination in the days to come.  Government has realised vaccination is the only route out of this pandemic and stepping up all efforts which is appreciated.   

Rupee

Rupee in the last 4 days had an appreciating effect and appreciated 1.28% moving from 75.02 on 23.4.21 to 74.06 on 29.4.21, this primarily is due to a positive stock market which grew by 4% during the same time period.  Also the announcement that US Fed Reserve keeps its policy rates and assets purchases unchanged is pulling the dollar index down and it is at its one month low and currently at 90.63, this helps the Rupee to appreciate. 

US Dollar Index (DXY)

Goo

OIL

Good news is that petrol / diesel prices in India are unchanged since 15th April, which is a long record considering price movements in the last 1 year.  Primary reason for this is a slight drop in demand due to Covid & oil companies are in pause mode to see the trends in global oil market.  In the meantime there has been a sharp movement of oil and Crude WTI is trading at $64.98 per barrel