Devangshu Datta: Becalmed by the global slowdown

Slow growth in China, Europe and the US means the correction in the market could continue unless some domestic factors come into play

The last fortnight has seen global markets displaying schizophrenia. The current consensus about the American economy is that the Federal Reserve is not going to raise policy rates until early 2016. Hence, US dollar treasury yields have dropped as the bond market rallied. But stocks have crashed.

Meanwhile, the Chinese central bank has cut its 14-day repurchase rate, which is being interpreted as a sign of slowing growth in the People’s Republic of China. Chinese gross domestic product (GDP) data is due in the coming week and likely to be parsed in great detail. In Europe, Germany is apparently teetering on the edge of recession, while France and Italy are both clearly in the red zone.

Crude has fallen to lows and looks set to fall further, along with many other commodities, given the weak global demand. In wider geopolitical news, the Ebola epidemic is a new cause for concern while the battle against the Islamic State, sanctions against Russia and so on continue.

Closer to home, JPMorgan has cut Indian GDP estimates. The Index of Industrial Production (IIP) suggests Q3 will be weak. But inflation is also down. Foreign institutional investor (FII) selling has triggered a correction in Indian stocks despite strong retail sentiment and net buying from domestic institutions.

The government is moving on the policy front, with the announcement of labour reforms. On the other hand, it has not delivered on its unrealistic promises about retrieving black money from overseas. At the time of writing, election results from Maharashtra and Haryana are awaited. If those are in line with exit polls, that would be a shot in the arm for the Bharatiya Janata Party.

Lower crude prices should lead to a more comfortable trade balance and reduce the oil subsidy dramatically. Public sector oil marketing companies could turnaround. Reliance Industries has seen positive re-rating.

While the soft trend lasts, it gives a free shot at decontrol of diesel and creation of a new gas pricing formula. The latter is expected in mid-November. Given crude coal and gas prices are all moving lower, the ailing power sector could also do better. In turn, that may make things easier for public sector banks with exposures there.

Banking has seen speculative support. Some traders are hoping the Reserve Bank of India will respond to low inflation and slow growth with a rate cut, though this seems unlikely before January, at the least. September consumer inflation dipped to 6.46 per cent year-on-year (y-o-y) for (August y-o-y was 7.7 per cent) with food down to 7.7 per cent (9.4 per cent in August). Wholesale inflation was at a five-year low of 2.4 per cent in September, with food hitting 3.5 per cent and fuel at 1.3 per cent.

The IIP slid to 0.4 per cent year-on-year in August (it could go negative on revision). The impression of slowing growth is reinforced by lower September car sales. However, commercial vehicle unit sales were decent (up nine per cent y-o-y) and two-wheelers (up 19 per cent) saw good growth. So, the low car sales could be an aberration. Nevertheless, the combination of low inflation and low IIP suggests that the boost from election expenditure is over and consumption is weak.

While lower crude prices are good, the underlying cause – weak global demand – has negative implications. It could impact foreign direct investment and FII inflows. It has hit exports. The September trade deficit is at an 18-month high. Exports rose 2.73 per cent in September to $28.9 billion, imports climbed 26 per cent to $43.2 billion. Of course, a strong dollar and weaker rupee could help.

The global slowdown could hit information technology (IT) and other service exports, though the key US market is doing okay. Overall service exports were flat in August 2014 year-on-year. The market was disappointed by the Q2 results of TCS and HCL, though Infosys did well. This could translate into sentimental breakdown across the IT sector. Sentiment was also affected by the Securities and Exchange Board of India’s strong action against DLF.

Technically speaking, US equities have seen net losses since January. India is strongly influenced by US trends. The major Indian indices are up by 23 per cent, so net losses in calendar 2014 are very unlikely. But unless exceptional domestic factors come into play, the current correction could run on for a while.