REAR GLASSES

(Review of Economic & Investment Activities) 

May 2021

Globally, the robust economic activities have been recorded as the developed nations passed the 2nd wave of infections which can be seen from the PMI index (which is an indicator of business activities both in manufacturing & services sector- index above 50 showing expansion in business activities as compared to previous month) which increased to 62.9 from 62.5 back in March for Eurozone and for US economy it has increased to 60.5 from 59.1. However, for India, due to the restrictions led by the 2nd wave PMI has seen a little change; 55.5 from 55.4 during March.

Capital Markets: During the last month, Indian equities have seen outflows worth ~$1.3 Bn while debt and hybrids have seen an inflow of $29 Mn and $80 Mn respectively from FPIs & FIIs. At the same time, MFs pumped ~$1.77 Bn into the equities during the last month. The outflow has been attributable to the recent spike in the no. of infection which almost touched 4 lacs by the end of April, followed by partial lockdowns in some of the states- resulted in the earnings downgrade by the brokerage houses. However, Nifty 50 remained on March-end levels after correcting ~4% during the month. Some of the factors which prevented the fall were positive sentiments from the global markets led by a rally in the US market due to stimulus, optimism regarding vaccination, accommodative stance from RBI, and lighter restrictions in place as compared to the previous year.

On government bond front, the yield reduced to 6.03% from 6.177% on 10 Year sovereign bonds due to the announcement of RBI to purchase the bonds from the secondary market worth Rs. 1 Tn by June this year starting with Rs.25,000 crores during April itself to keep a lid on long term interest rates- which shot up to 6.20% after the union budget because of the massive government borrowing programme. As per the estimates by BofA Merrill Lynch, the access of Rs. 5.02 Tn over and above the total funds that can be absorbed by the banks and other institutions, RBI would absorb through a mix of open market operations and G-SAP (Government Security Acquisition Program which aims to purchase the government bonds from the secondary markets in order to keep the long-term interest low reducing the steepness of the yield curve).

Crude Oil: The factors which supported the increase in the price of crude oil had been force majeure by Libya for banning the export from the port of Hariga and OPEC boosting consumption expectations by 0.19 Mn barrels a day as the vaccination drives across the world speeds up. Simultaneously, USA increasing inventories levels which increased by 0.594 Mn barrels against the expectation of reduction by 3 Mn barrels, OPEC’s planned output increase starting from May (bringing back 2.1 bpd from May to July out of 8 bpd production cut) & growing number of cases across India and Japan- being 3rd and 4th largest importers of crude oil acted negatively for crude oil and eventually it closed on $63.40 per barrel as against the march close of $64.73 per barrel. Coming to India, the consumption for gasoline, diesel and ATF reduced by 6.3%, 1.7% and 11.5% respectively from march levels due to restrictions in place- led to a 7% decrease in overall fuel demand as compared to pre-covid levels back in April 2019.

Gold: Observing the increase in the yield of US treasury along with the inflation, the yield has increased from ~1% from the start of the year to ~1.65% by the end of the month. At the same time, the inflation has increased from 1.4% in January to 2.6% by mid of April- showing that still, the real return on the treasury is negative- which is the case for sovereign debt of the developed nations making a stronger investment thesis for gold. As per one of the reports from world gold council, historically to make a significant impact on the gold price, the real rates have to spike over 2.5% to make treasuries attractive as compared to gold and within 0%-2.5% range of real returns, the impact on the price of the gold is expected to be minimal.

INR vs. USD: INR depreciated by ~1.2% during April and closed at 74.10 per USD because of the reasons such as widening trade deficit ($15.24 Bn in April against $13.93 Bn during March) due to higher imports of gold, petroleum products and electronic goods, concerns regarding economic growth, net outflows by FPIs/FIIs from capital markets and RBI’s announcement related to Government Securities Acquisition Programme. Simultaneously, proposed $2 Tn plus of stimulus for infrastructure along with rising yields on treasuries, US equities outperforming peers due to robust economic recovery (almost 90% of the US scripts beat street estimates as per Bloomberg) strengthened USD.

In all newsmakers for April has been FII/FPI outflows due to US markets outperforming their counterparts and raising the yield on treasuries aligning with rising inflation, G-SAP, increasing number of COVID infections and uncertainty due to the localised restrictions. What would drive the markets during May; fear over subdued economic activities due to increasing cases, proposed production cuts across auto sector or optimism regarding fading away the 2nd wave along with ramp up of vaccination drive? Let’s see throughout the month.

Report by Clovek Research

Research Analyst:

Devchandra Ramani |

[email protected] |