Devangshu Datta: Stray sparks for industry

While US macrodata include poor non-farm employment growth & declining producer prices, those from India indicate a collapse in exports & imports. The consensus expectations on India Inc's Q2

Most traders worship liquidity and bad news is good news in the topsy-turvy world of liquidity-worshippers. Trader-sentiment turned risk-on again after soft US macro-data was received since that is believed to ensure that the US Fed Reserve will further delay that long-feared hike.

The key data included poor non-farm employment growth and declining US producer prices in September 2015, negating any fears of inflation. America's exports also dropped to a three-year low, implying industrial slowdown. At the same time, the Bank of Japan and the European Central Bank reiterated respective commitments to maintaining liquidity until inflation (edging into negative territory in Japan and Eurozone) rises.

Some of that liquidity flowed into emerging markets (EM), leading to a recovery in EM equity values in the first half of October. However, the Institute of International Finance (IIF) predicts 2015 will see a net outflow of capital from emerging markets - the last such outflow occurred way back in 1988.

The macro-data from India was obfuscated by sundry base effects. Trade data indicates a secular collapse in exports and imports. Exports were down 24.3 per cent - the steepest fall in 75 months - to $21.84 billion in September 2015, against $28.86 billion in September 2014. This is the tenth month in a row when exports have fallen. Imports also fell, by 25.4 per cent to $32.32 billion for September 2015, versus $43.34 billion in September 2014.

Among exports, refined petroleum products dropped by over 60 per cent, engineering goods dropped 23 per cent and electronic goods dipped by over 16 per cent. The trade deficit declined as imports contracted even more than exports.

It is necessary to discount lower commodity prices and lower gold prices and to allow for an unfavourable base effect since trade data for September 2014 was strong. Still, non-oil, non-gold imports declined 5.2 per cent year-on-year, to $23.7 billion from $25 billion in September 2014.

China, which has seven times as large a share of global trade, saw a 20 per cent year-on-year drop in imports (US dollar terms) in September 2015, and China's exports also dropped 3.7 per cent year-on-year. World trade does seem to be contracting. The International Monetary Fund has cut its 2015 and 2016 world gross domestic product (GDP) forecasts for the second time, to 3.1 per cent and 3.6 per cent respectively, citing China's slowdown and weak commodity prices.

One ray of sunshine was the strong Index of Industrial Production (IIP), which jumped 6.44 per cent year-on-year in August 2015 versus August 2014. However, August 2014 IIP was weak. So, there is a favourable base effect in this case. However, the April-August period is up, indicating genuine recovery. In August alone, there was a 20 per cent year-on-year jump in capital goods. Let us see if this uptick is maintained in September 2015, given that non-oil, non-gold imports are a proxy for industrial demand.

Auto sales figures for September suggesting demand in this key sector, with its long value-chain and consumer-facing nature, is still spotty. There was growth in some key areas. Overall, sales were up just 0.14 per cent year-on-year. But while two-wheeler sales were negative, passenger cars saw growth (up 3.8 per cent) and domestic sales of commercial vehicles jumped 12 per cent, with the subset of truck sales up by a fantastic 66 per cent (off a low base in September 2014).

The base effects also need to be discounted when reading inflation data. The Consumer Price Index was up to 4.4 per cent for September 2015, versus September 2014 - a rise of 3.74 per cent year-on-year for August 2015. In this case, base effects had a negative impact, because crude fell sharply in September 2014. Overall, the CPI change is not scary but rural inflation is up.

Assuming that nothing earthshaking happens, the market will probably ignore the CPI until December data comes in. The Reserve Bank of India target for December 2015 is 5.8 per cent year-on-year and the central bank will then review its decisions to cut the policy rate in September.

The consensus expectations on India Inc's Q2 earnings appear to be negative. An analysis by this paper (http://goo.gl/59n5D6) of estimates by seven brokerages says the combined net sales and net profits of the 30 Sensex companies are expected to decline 4.5 per cent and 2.3 per cent, respectively, on a year-on-year basis. If so, this would be a fourth straight quarter of combined revenue declines for Sensex companies and the worst quarter in several years.

Among the few companies that have released results so far, Reliance has beaten estimates. Infosys and TCS have disappointed. While Infosys reported good sequential growth, the full year guidance implies low second-half growth. TCS missed consensus revenue growth estimates but hit the net profit numbers.

It's earning season all round the world. Walmart and Goldman Sachs caused global shivers because they delivered poor results and guidance, but Citigroup did well. The heavily tracked ZEW sentiment survey for Germany indicates that sentiment there has turned pessimistic.

The rise in India's stock indices was driven by foreign portfolio investors (FPI) rather than domestic institutional investors (DII). FPIs were net buyers in October after two months of heavy selling while DIIs sold after two months of strong buying. FPI attitude is also reflected in the rupee's rise to above 65 versus the US dollar. Technically speaking, the Nifty could test resistance close to its own 200 Day Moving Averages if the current uptrend holds.