It's all about fundamentals

Will these catch up with market returns this Samvat?

A recent report by CRISIL Research points out that the sales of new homes in the top 10 urban areas has fallen by eight per cent per year for the past six years. That works out to around a 40 per cent drop in sales over this period. 

Other estimates say there is between six and seven years’ worth of unsold real estate inventory — 75 months or more — in key areas such as the National Capital Region (NCR) and the Mumbai Metropolitan Region (MMR). Knight Frank estimates that NCR housing sales during the first half of 2017 (calendar) dropped 26 per cent year-on-year (y-o-y) despite real estate prices having dipped by 20 per cent y-o-y. During January-June 2017, 17,188 units were sold in NCR and Knight Frank estimates 180,000 unsold units exist in the NCR.  

There are some positive long-term factors. Mortgages have gotten cheaper as interest rates have fallen.  Legislation such Real Estate (Regulation and Development) Act (RERA) and goods and services tax (GST) and the thrust on “affordable housing” should make the market more transparent but it’s going to take time.  

Developers are desperately hoping that the festive season will boost sentiment. Real estate is, of course, the biggest of big-ticket purchases in the household consumption basket. India Inc is also hoping for a boost in consumption-driven industries such as higher vehicle sales, more clothes, in FMCGs, jewellery, etc as the festive season eases into the wedding season.  

The third quarter (Oct-Dec 2017) will be terribly important for an economy that’s seen lower growth now for six quarters. We don't have Q2 (July-Sep 2017) Gross Domestic Product (GDP) data, or many corporate results yet. But some data points suggest the slowdown continued in Q2. 

The GST is now into the second quarter of implementation and so industry and consumers have had some time to adjust to new compliance norms. Demonetisation is also almost a year behind us, so there has been cash replenishment and transient effects should have eased off. There could be a favourable base effect in Q3, given that growth tapered off in December 2016 due to demonetisation. 

One of the critical factors will be rural sentiment. That is always dependent on the performance of the agricultural sector. The monsoon has been reasonable though scattered, with the usual scenario of floods in some areas and deficit rain in others. Early estimates suggest lower kharif production. However, last year was horrible — demonetisation triggered deflation across the agriculture sector. So even a moderate agro-performance may lead to better rural sentiment. 

If favourable base effects, better rural conditions, etc, don’t trigger a significant rebound, the market will be disappointed. Many retailers, jewellers, etc, tend to do around one-third of their sales or even more during the festive-cum-wedding season. High-speed data from September suggests some kind of rebound may be on the cards. Vehicle sales were up along with consumer electronics. Gold sales are up. But much of this is equated monthly instalment-driven.

Durga Puja or Dussehra as North Indians call it, falling in September makes it harder to judge the extent of recovery since that would have boosted consumption. October 2017 may be a comparatively slower month since both Durga Puja and Diwali fell in October 2016. Ideally data from September-October 2017 should be clubbed together and compared to data from September-October 2016 to adjust for festive season effects. That’s how the Chinese handle their lunar New Year which can straddle two months. However, India always uses y-o-y and that could mean a market response to seasonal distortions.

If consumption did bottom out between January-September 2017, and the transient effects of demonetisation are indeed easing off, we should see a bump. That would translate into better numbers across vehicles, FMCG, gems and jewellery. The latter industry will undoubtedly be helped by the limit on non-PAN transactions being raised to Rs 2 lakh since that opened a route for black money conversion.

Interestingly, these sectors may also gain in sequential terms due to the GST since June-July-August saw widespread consumer caution as the new norms came into play. So we could see a post-Diwali bump in the numbers. That might translate into a market focus on these areas. 

The last Samvat saw a disconnect between fundamentals and market returns. Let’s hope the fundamentals catch up. Happy investing!