On a slippery slope

Trump's protectionist measures could have negative effects on India in future

Traders muttered “Merci beaucoup!” and went long after Emmanuel Macron became the youngest French president in history. But the Eurosceptics of the extreme-right Front Nationale (FN) won about one-third of the vote. In the French parliamentary elections of mid-June, the FN could be a major player. The UK also has elections in early June. That will shape Brexit. Germany is due to vote in September and Italy could call an election any time. In every case, Eurocsceptics will be influential.
 
However, European companies have also seen the best quarter in several years and that could positively influence pro-European Union sentiment. Questions also arise as to the European Central Bank stance in its June review. Will the European Central Bank maintain its negative policy rate and bond-buying programme? Strong earnings, upbeat economic data and lower political risks make a case for tightening the loose policy.
 
Meanwhile across that big pond called the Atlantic Ocean, US President Donald Trump continues to lurch into new crises. Trump sacked his police chief, FBI Director James Comey last week. It’s also unclear if he has the pull to take tax reforms through. The USA could be headed for legislative logjam.  America has also delivered relatively poor corporate results, including weak retailer performance. Inflation is higher than expected and employment gains are lower.  
 
Indian markets saw indices reaching for new highs. But volumes spiralled down alarmingly. The net institutional equity buying in May amounts to Rs 290 crore (foreign institutional investors or FIIs), and Rs 580 crore (domestic institutional investors). That’s a far cry from the Rs 11,641 crore that FIIs and domestic institutional investors collectively pushed into stocks in April. The low-volume pattern could indicate a market close to topping out. Retail demand seems to be fairly strong, however.  
 
Corporate results show reasonable revenue gains. Just 20 companies in the top 100 (Nifty and Nifty next) have declared so far. Total annual revenue gain (all four quarters) amounts to 13.5 per cent and net profits are up by 5.5 per cent. Taking only Q4, 2016-17 over Q4 2015-16, revenue growth is 21 per cent and profits are up by 7.9 per cent.

If Reliance Industries is removed from this sample, revenue growth is nine per cent for the year and profit growth is 6.7 per cent. Low oil prices and high refining margins have helped Reliance and presumably, other refiners as well. But the information technology (IT) industry is taking a hammering. So is pharma. There is a revival in specific auto segments, especially tractors and small passenger cars. But commercial vehicle sales seem to be down. A good monsoon, which is predicted, could push two-wheeler sales.
 
The rebased Index of Industrial Production (IIP) (2011-12) suggests that growth through the past five years has been higher than indicated by the old series (2004-05). It’ll take a while to make sense of the new IIP’s quirks. Manufacturing weight is up to 77 per cent from the previous 75.5 per cent. In the new series, IIP in April-October 2016 registered a growth of 6.3 per cent year-on-year. This growth decelerates to 3.3 per cent between November 2016-March 2017, an effect of demonetisation.
 
One can only hope that the Central Statistics Office will release back-calculations soon since the rebased and old indices cannot be directly compared. About 50 new item groups (comprising over 300 net new items) were added, while 42 item groups (including at least 124 items) were deleted from the IIP basket.

 

The new 2011-12 base year was also applied to the Wholesale Price Index and it eased to 3.85 per cent year-on-year in April 2017. Retail inflation via the Consumer Price Index was down to a historic low of 2.99 per cent in April. This could make the case for the Reserve Bank of India cutting rates and it’s a good illustration of how data tweaking may influence policy.  
 
As the goods and services tax comes in, and if the financial year is changed as well, calculation and comparison of macro-data will become difficult. Tax collection patterns will change, making assessment of government finances akin to throwing darts in the dark. Perhaps that opacity is desired, given the obvious reluctance to release data, six months after demonetisation.
 
Despite the drop in trading volumes, FIIs say they are very positive. Morgan Stanley (MS) has raised estimates for year-end index returns. MS estimates there’s a 50 per cent chance that the Sensex could be at 33K (up 10 per cent) by end-December 2017 and there’s a 20 per cent chance it could be down to 24K (down 20 per cent) and a 30 per cent chance it could hit 39K (up 30 per cent).  MS sees consumer discretionary firms and financial players as most likely gainers. MS also estimates that IT is under-valued. CLSA is backing India due to the renewed focus on banking reform. The major public sector banks are still due to deliver results — let’s see what transpires there.
 
There would be mid-term benefits from the crash in crude oil. Oil prices have been volatile in a band around the $50/barrel level. This is unequivocally good. However, metal prices are down. That has meant successful lobbying by domestic iron and steel manufacturers for “anti-dumping duties”. This trend towards protectionism may be a slippery slope.