Global
March 2021 proved to be a volatile month with no strategies (value, growth, economy facing) winning through. Anxiety around higher bond yields, slow roll out of vaccines in Europe, and banks taking a hit on over leverage by a family office, Archegos Capital -- all added to the volatility. That said, markets in the US hit new records as President Biden gave an assurance that the nation will surpass the goal of 200 million vaccination shots by June, and the announcement of a ^USD 2.2tn infrastructure spending package led to a more optimistic growth picture. With the recent global manufacturing PMIs moving higher, global trade may continue to see a sharp rebound with China leading the way. In fact, whilst the official GDP forecast for China is above 6% **, many forecasts we are seeing are nearer to 9% (recently IMF upgraded growth to 8.4%). Hence, markets may continue to build on recent gains from countries where vaccinations are being rolled out quicker, benefitting the most.
India
Currently, India is grappling with a more infectious second wave, but this time the government and public are better prepared to tackle it without disrupting the economy. The vaccination drive is also picking up pace and at some stage India is expected to be closer to herd immunity. Various media reports suggest that two more novel coronavirus vaccines are in their final approval stage which will accelerate the current inoculation drive.
We believe that until most of the countries reach herd immunity, global supply chain will remain disturbed, leading to higher inflation due to disrupted demand supply dynamics. This could potentially impact margins for most manufacturing companies. Till that time, we will continue to hear commentary on relatively strong demand.
Whilst the nation is battling the virus surge, the government expenditure on infrastructure is encouraging. Road and highway construction is moving at a fast pace, leading to strong demand for cement. In fact, capex from a few cement producers and chemical companies is already underway. Real estate sector has also reported good sales in Q4.
Reports from housing financiers, paint companies, cement companies are indicating that the demand is here to stay. We would, however, have to wait for a couple of months to call it a fresh real estate cycle.
Flow wise, FII buying moderated to ~USD 2.3 bn in March vs. net inflows of ~USD 3 bn witnessed in Feb. Encouragingly, DIIs turn net buyers for the first time in 2021 with net inflows of ~USD 0.7 bn in March 2021# (could be tax saving month phenomenon). Primary and secondary market deals in March 2021 were one of the highest we have noticed in recent years, and this also squeezed some liquidity from the secondary market and led to volatility.
Improving GST collections, E-way bill registrations, cement production, freight improvement and export-import growth points towards the fact that the economy is recovering faster than initially expected. The real test of economic growth will begin in the next few months as pent-up demand in most of the products would have been captured by then. We may see a downgrade in GDP growth if the recent surge in covid cases continues for more than a month.
Interest rates have also started reversing. India’s 10-year G-Sec rose to ~6.12% (~5.9% last month)# Recently, HDFC Ltd raised FD rates in few buckets and SBI raised its home loan rates by 25 bps. Though we see these as one-off reversals, this can potentially disrupt the recovery.
The Corporate Results season is on the anvil. Our interaction with most companies indicated that the growth momentum has further picked up and the demand is intact. Moderation is noticed in two-wheeler sales and tractor sales. The EBITDA margin will be key for this results season as most of the input prices have shot up. In our view, we are now in the last leg of earning upgrade cycle till we get more clarity on demand recovery.
Sources: Bloomberg