Markets Remain Cash-driven

What is driving the stock market again when broad economic indicators do not support the bulls who are on a run that may lead them to a risky zone? The answer is - money is available in plenty abroad with the central banks, including an all-important Federal Reserve is printing easy dollars in the hands of global fund managers, scouting around for handsome gains, if not a killing. 

No wonder, the foreign institutional investors, FIIs, poured in net of $1.04 Billion in September, the highest monthly inflows since May,2019. The FIIs were moving in a reverse direction, selling Indian equities worth  $4.13 Billion in July-August this year. With their foreign peers setting the trend, the domestic institutional investors, are also joining the party!       

The net consequence, apart from the Sensex moving up again beyond the 40,000 mark, was that the Rupee rebounded , now trading around plus 70 to a Dollar, which is of course a good news for the Indian economy that requires hoards of hard currency for filling up fuel tanks of its millions of vehicles. Net-net India is a deficit economy on merchandise trade and any strength to Rupee helps the economy, though a view has emerged about the currency being over-valued and hurting our exports. 

When economic indicators suggest a good going, it is easier to invest in the market, either by yourself or through a well-managed mutual fund. The exuberance may blind an investor with irrational decisions, but a bright broad picture would then justify it all. But then, market is not that straight a game. It  hides more than it  reveals. 

In the  present state of the economy, what is getting revealed and what is being hidden? Let's see what the high frequency data points to: The latest numbers relate to de-growth by 5.2 per cent in September 2019 of eight core industrial sectors which contribute to the overall Index of Industrial Production. These sectors are rightly called as core sectors as they comprise coal, steel, electricity, crude oil, natural gas, refinery products, cement and fertiliser. Excepting fertiliser, most other sectors saw drop in production for the month on annualised basis . Coal production dived by over 20 per cent and Coal India, which as a major producer, would have seen the major output decline, is now getting bought in the market! 

Exports slipped by 6.57 per cent in September 2019 with several of key sectors reporting serious setbacks in their monthly shipments. Shipments of petroleum products were down close to 18 per cent, engineering goods by over six per cent, leather and leather products by over 10 per cent. Trade blows are being felt by exporters. Even imports were down by about 14 per cent, as demand for goods went down.    

The government could collect Rs 95,380 Crore from Goods and Services Tax (GST) in October, contracting  year-on-year by 5.29 per cent from Rs 100,710 in October, 2018. This is one of the important data points, telling a tale of the economy. If GST collection is slowing, it is a result of weakness in sale of goods and services, be it passenger car, commercial vehicle, jewellery, air-conditioner, refrigerator or even eat-outs. 

Is the contraction in GST being mirrored in the balance sheets of the companies producing goods  and dishing out services? It is certainly being mirrored ; but then, as an analyst, it depends on how you take it. When it comes to corporate earnings, there is a refrain going around that the results are better than expected. The point is : what was the expectation. In most cases, the results have not shown as bad a damage as expected; so a case is made out for being positive , going forward - after all, the economy would not always stay in a tailspin. Those expecting tailspin turning into a tailwind, are doing the bargain hunting in the market. 

As an investor, you must ask how does go about bargain hunting? The dilemma is : 'Safe' and well-run companies with low or manageable debt are expensive, quoting at above 50-60 times earnings. Having burnt fingers, neither a fund house nor individual investor is willing to bet on companies, which suffer on either of the following counts- corporate governance (being the top criteria), high level of debt, non-sustainable competition. Besides, the firms which rely largely on government businesses like those in infrastructure building could face slackening trend in the coming months on the back of exchequer struggling hard. Having exhausted 93 per cent (Rs 6.55 Lakh Crore)  of the budgeted fiscal deficit (Rs 7.03 Lakh Crore) for the FY'20, the only option before the government would be to compress expenditure. 

A widely-held expectation that the economic recovery should be led by the government may, thus not be realistic while the private sector is busy repairing its balance sheet, operating at capacity utilisation in the early '70s. That leaves us all , the consumers, however much stretched we are, to lead the economy back to health. We did our part in a modest way during Diwali. Whether we can do in the ensuing months  as well would depend also on some heavy lifting by the corporates . They must tempt the weary consumers to return to shopping with deep discounts, easy finance . After all, finance minister Nirmala Sitharaman has given them a windfall of Rs 1.45 lakh crore by way of a big cut in corporate taxes. Though, no big bang is on the horizon. 

So, that is the backdrop for investors in the stocks; the rally is driven by purely heavy cash flows from overseas, followed by domestic investors in trendline. As far as fundamentals are concerned, it is hope which is driving things around.