The hints of an economic slowdown are now giving multiple confirmations. After weak GDP; Core Sector, PMI Manufacturing and auto numbers hint at slowdown. After the June quarter GDP came in at a 7-year low of 5%, the PMI manufacturing also touched a 15-month low of just 51.2. In the auto sector, Maruti and Tata Motors saw de-growth of 33% and 51% respectively. Finally, the July core sector numbers also came in at a level of just 2.1%; driven lower by contraction in crude oil production, oil refinery products, natural gas and coal output. Multiple confirmations are a cause for worry.
Caught between a crumbling economy and frenetic capital outflows, Argentina imposed capital controls to prevent dollar outflows. A day after Argentina imposed capital controls, Euro and dollar denominated international bonds of Argentina cracked sharply. However, equity markets were up on Monday. In the last few weeks, the Argentine markets had seen heavy outflows leading to a sharp fall in the Argentine Peso. The official Peso had weakened 24% in less than 20 days as the Argentine economy looked very vulnerable and this is the case with many more Latin American economies.
Well before mega bank mergers were announced last week, Indian Mutual Funds had increased their exposure to PSU banks in year 2019. According to a report in ET, the government decision to liberally capitalize banks and the success of the NCLT process had enticed a lot of mutual fund managers to increase their exposure to PSBs. If one were to just look at the 10 merged banks, mutual fund exposure to these banks at Rs.7664 crore is at a 18-month high. Mergers are expected to bring cost savings and economies of scale to banks as well as make their treasury operations more profitable.
As the Indian money markets got tighter in the last one year, more corporates relied on foreign borrowings. In fact, corporate India’s foreign borrowings doubled to nearly $5 billion in July. Between July 2018 and July 2019, foreign borrowings of Indian corporates more than doubled from $2.18 billion to $4.98 billion. While 65% of the funds came through the automatic route, the balance 35% came through the ECB route. Adani Ports SEZ, RIL, REC and ONGC Videsh accounted for close to 75% of these funds raised. This demand was driven by domestic liquidity tightness and lower cost of funds globally.
Brent crude cracked below the $59/bbl mark on escalating tariff war concerns. With the US imposing fresh tariffs on China on September 01st and threatening another round on December 15th, the trade war only seems to be escalating. Trump has argued that the tariffs will not hurt the US economy as China has anyways weakened the currency. However, oil prices fell sharply on Monday as hopes of a sustainable rapprochement between the US and China seemed remote. Meanwhile, the Sensex and Nifty resume trading on Tuesday after 3-day trading holiday amidst interesting global cues. US stock futures dropped on Monday, Argentina put restrictions on dollar outflows and the UK PM spoke of snap elections with BREXIT. Indian PMI Manufacturing fell to a 15-month low giving hints of macro weakness.
Foreign portfolio investors net sold Rs.38,930 crore in FY2018-19, according to SEBI Annual Report. The SEBI annual report pointed out that FPIs were net sellers in equity and debt through most of the previous financial year. There were sharp inflows in the month of February and March but that still left a huge net selling by FPIs. The FPI selling was driven by factors like LTCG tax, liquidity crunch in the economy, escalating trade war, BREXIT fears, China slowdown worries and the IL&FS issue. Since the middle of 2018, there have been clear signs of risk-off trading happening in emerging markets.
