Renewed fear

Fortnightly update - 24 December 2020
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Bullwhips are here to stay

The new virus strain is 70% more transmissible than before. In Europe, equities slumped the most since October as neighbours closed their borders to the UK. We saw a knee-jerk reaction globally — the US Dollar strengthened, and oil prices plunged.

The new strain threatened optimism over a vaccine-fuelled rebound in economic growth.

Indian equities also witnessed a significant shakeout — economically sensitive sectors, such as banking, infrastructure and autos, took a hit. Similarly, sectors sensitive to exports and imports — metals, commodities and energy saw a negative impact and continue to underperform as border restrictions could hit their supply chains. At the same time, defensives — IT and pharmaceuticals — are seeing flows despite current volatility.

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DIIs were net sellers in December

With the Fed keeping rates low on all their recent policy meetings, money continues to flow, out of developed markets, to emerging markets (particularly India). On the other hand, domestic institutions — including mutual funds — were net sellers.

We could see flows taper down from here.

High valuations and Trump threatening to stop a new COVID bill, could be dampeners, and we could see more volatility before the year ends.

Improvements in consumer sentiment

The Refinitiv Ipsos Primary Consumer Sentiment Index was up 2.1 percentage points in December — positive momentum in employment and economic expectations

Retail inflation declined to a 3 month low of 6.9% in November, led by easing food prices — however, core inflation (excluding food and crude oil) stood at a 2-year high of 5.5%

According to a report by Boston Consulting Group, household consumption would reach pre-COVID levels only by 2022 —but, consumption would grow at 11% CAGR till 2030 as contributions from tier 2 and tier 3 cities would persist

Toll collections grew by 10% year-on-year in November — this points to an improvement in consumer and commercial mobility.

Improvements in domestic business activity

Nomura India Business Resumption Index reported an improvement to 92.9 for the week ending 13 December, from 89.6 in the week before — increased power demand, labour participation and mobility were key drivers

Owing to a low base effect, advance tax paid by companies rose by 50% year-on-year in the December quarter — this is still too early to expect a rebound in corporate earnings

Indian exports contracted by 8.7% in November, compared to 5.1% in October — renewed restrictions, across trading partners, has reduced export demand

Allocation changes

We continue to remain cautious on equity. We are evaluating options to redeploy while safeguarding gains. Meanwhile, we continue to deploy gold.