Posted at 9:34 AM , on August 2, 2020
The Nifty may have closed the week below the psychological resistance of 11,200, but the rally has still been quite strong. Over the months of June and July 2020, the Nifty rallied by 16% with the gains divided equally between the two months. What were the triggers for the Nifty rally; the best 2-month Nifty performance since the year 2009.
Drivers for the Nifty
While the Nifty performance in the months of June and July at 7.35% and 7.49% were almost the same, there were a number of subtle underlying shifts that happened in these months. In the month of June, it was the private banks and the PSU banks that were the stars. However, with the results season setting in, July was more a return to reality for financials. Instead, the month of July was dominated by IT and the Pharma space. These two sectors had lagged in the month of June. The June quarter results worked in favor of the IT industry. Infosys, Wipro and HCL Tech reported flattering numbers for the quarter while TCS managed to hold operating margins at attractive levels despite pressure on the top line. Auto stocks did well in both the months as the factories finally started churning out cars. However, the bounce comes on the back of a sharp fall over the last 2 years and must be taken with a pinch of salt. Metals were a rare surprise in July as hopes of a sharp revival in China GDP gave hopes of revival in metal stocks.
Posted at 9:31 AM , on August 2, 2020
The latest half-year report of the World Gold Council (WGC) has brought out some interesting trends in gold demand across the world. The overall demand for gold is down 6% at 2076 tons in the first half of 2020. That is not a surprise considering that gold prices are at an all-time high. Gold in the international spot market scaled $1950/oz, breaching the previous peak of 2011. So the 6% fall in gold demand is fine. But, what is really surprising is how the components of demand for gold have shifted.
Sharp fall in jewelry demand
Over the last 20 years, the average gold consumption for jewelry purposes has been over 1000 tons in the first half. That has fallen drastically to 572 tons in the first half of 2020. It is not just about the price of gold. Back in 2011, when the price of gold was above $1900/oz, the jewelry demand had been closer to 900 tons. The difference in 2020 is that the high gold prices have also been accompanied by a growth slowdown due to the Coronavirus pandemic. Unlike the slowdown of 2008, this time around the economic weakness has manifested in the form of economies like the US contracting by 33% in the Jun-20 quarter. In addition, the lockdown has resulted in the loss of jobs, a sharp reduction in income levels, and also a tremendous loss of purchasing power. This has deeply impacted consumption. Major markets like India have seen compression in jewelry supply and also demand.
Posted at 9:26 AM , on August 2, 2020
It is a well-known fact that FIIs sold in excess of Rs.125,000 crore in equity and debt in the month of March. However, post-Mar-20, the flows into equity have been more or less positive. However, FIIs continue to sell in the debt market. In fact, in the Jan-Jul 2020 period, FIIs sold Rs.108,000 crore of debt in the Indian markets. What exactly is driving the aggressive selling by FIIs in the debt market? It is not about FII limits at all because FIIs have not used up even 50% of their available limits in G-SECs and in corporate bonds. There are 3 factors driving debt selling by FIIs.
All about negative real rates
The real rate of return is what investors earn on their investment after inflation is factored in. Till one year back, Indian bonds offered real bond yields above 4% making them very attractive by global standards. However, over the last 1 year, the bond yields have fallen to below 5.8% and the inflation has shot up closer to 8%. As a result, the real return on bonds has become negative. It is interesting when you compare the real rates of Indian debt with other countries. Other than Turkey, India has one of the lowest real returns on debt in the world. Even mature economies like Japan, EU region, and Australia are now offering real rates of returns that are better than India. As a result, most of the risk-off flows into debt are moving away from India into a developed market, which offers better real yields on the debt.
Posted at 3:19 PM , on July 7, 2020
When the Nifty scaled the 10,600 mark on July 03rd the index had gained a full 40% from the lows of March 23rd, with almost all the gains coming after the lockdown was announced. Can the Nifty sustain the rally in the coming weeks?
Banks triggered the rally
If you look back at the rally since the start of June, it has been largely driven by private banks and PSU banks. Apart from banks, rate-sensitive sectors like autos helped along the way. Clearly, the jump in rate-sensitive stocks was led by hopes that the Indian economy would bounce back and the recovery would happen sooner rather than later. The contraction in GDP is a reality but what the markets are betting on is a pick-up in growth post the September quarter. That is what has buoyed the Nifty rally.
Posted at 3:15 PM , on July 7, 2020
For the March 2020 quarter, the Indian economy reported a current account surplus for the first time in 13 years. The last time India had reported a CAS was in the March 2007 quarter which is why this assumes added significance.
Lower trade deficit
If you look at the full financial year FY20 the trade deficit was nearly 15% lower than the previous year. Of course, this can be partly attributed to weak oil prices and partly to the lag effect of the COVID-19 pandemic. But trade deficit compressed from a high of $15 billion per month to as low as $6 billion per month. The COVID shock also led to an overall compression in world trade and that was also responsible for the sharp fall in the trade deficit. This was one of the key reasons that accounted for India shifting to a current account surplus.