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Weak Q3 GDP may drag stocks further

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On Friday, Indian shares plunged nearly 4%, their sharpest drop in 10 months, as a spike in US government bond yields walloped stocks worldwide.

After two quarters of contraction, India’s real GDP grew 0.4% in the December quarter, but analysts said the lower-than-expected nominal GDP growth has heightened the threat of a sovereign downgrade. Weak GDP growth in a quarter of strong corporate earnings, goods and services tax (GST) collections and high-frequency indicators data also indicate that the informal sector is yet to emerge from the pandemic shock, they said.

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“Nominal GDP growth at 5.3% in Q3 FY21 may increase the risk of sovereign downgrade by global rating agencies if high frequency indicators over the next few weeks are not encouraging. As the unorganized and informal sector is still struggling, it will take time for a full recovery of the economy. However, most importantly, the persistent rise in US bond yields may see foreign institutional investors (FIIs) exiting debt instruments, which will weaken the Indian currency. A weak rupee, consequently, may impact the strong FII inflow into Indian equities. These may not augur well for the overall Indian markets and, hence, we anticipate further corrections/consolidation for some more time,” said Deepak Jasani, retail research head of HDFC Securities.

India’s services sector contracted 1% in the December quarter, with only financial, real estate and professional services performing better. Sectors such as education, hotels, restaurants and travel and tourism, which are yet to open up fully, may suffer due to sporadic lockdowns, experts said.

The contraction in private and government consumption has raised worries as well. “Consumption expenditure, however, was a laggard (down 2.2% year-on-year) in Q3FY21, led by a contraction in both personal and government consumption. The 1.1 percentage points contribution by discrepancies to GDP in 3QFY21 is the highest in FY21 so far,” said analysts at Motilal Oswal Financial Services.

Despite the festive season pick-up, private final consumption expenditure continued to contract, trailing the performance of investment and government spending, Aditi Nayar, principal economist, ICRA Ltd, said, adding that various leading indicators have recorded a loss of momentum so far in the fourth quarter, contrasting the improvement in sentiment due to the vaccine rollout. She expects consumption growth to strengthen only modestly in the near term, as part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact-intensive industries and the self-employed.

In contrast to the mild and uneven economic recovery, India Inc. reported one of the best business performances in the last three months of 2020. A Mint analysis of 2,485 publicly-traded companies (excluding banks, financial services and insurance, and oil and gas) in Q3FY21 showed that net profit after adjusting for one-time items grew at the fastest pace in at least 25-quarters, at 71.95% from a year earlier, according to data compiled by Capitaline. That compares with a 34.88% rise in the September quarter. During Q3FY21, net sales growth of these companies grew 7.07% from a year ago, a seven-quarter high. Out-of-home consumption, festive demand and improved consumer sentiment, besides benefits of tight cost control led to better-than-expected earnings growth during the quarter.

Analysts said that for the market rally to continue, overall economic revival and sustaining corporate earnings is crucial. “From an equity market perspective, revival of economic growth and the impact of the same in terms of improvement in the corporate earnings trajectory would be one of the key variables to watch out for,” said Shibani Kurian, head of equity research, Kotak Mahindra Asset Management Co. “The continuation of strong corporate earnings would be the key from a market perspective for valuations to sustain. Some of the key risks for the markets include the flow of global liquidity, any rise in covid-19 cases leading to localized lockdowns, disrupting economic activity and any disappointments in corporate earnings growth.”

The India volatility index, or VIX, jumped 22.9% on Friday, indicating further corrections in the markets. The VIX or fear gauge, a measure of investors’ perception of fear and anxiety, has risen 33% since January. The volatility index typically has an inverse correlation with markets.

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India’s services sector contracted 1% in the December quarter, with only financial, real estate and professional services doing better.bloomberg

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