The Week That Went By: Bitcoin And Indian Equity Market In The News

Welcome to the 16th edition of our Weekly Musings!

In the musings published last week, we discussed how India’s manufacturing and real estate sectors continue to witness a V-shaped recovery as the pent-up and festive demand have led to a serious uptick in consumer demand.  Simultaneously, the stock markets too, have been buoyant with high expectations from the industry as the corporate earnings made a comeback in the Q2 of FY21 due to lower operating costs.

The improvement in high-frequency indicators continues with no negative surprises as the confidence snowballs with a sustained reduction in new Covid-19 cases and a solid pace of economic recovery. While the import duty collections have seen a spike in the first 15 days of December, the overall collections continue to stay below the average FY2020 levels.

E-waybills, which are necessary for carriers to transport goods valued over Rs 50,000, have been rising after the generation of the same fell down sharply in April 2020. In fact, the average e-waybill generations for the last 3 months has been higher than the monthly average of FY18, FY19, and FY20.

Similarly, the railway freight volume has shown a significant jump, sequentially as well as on a yearly basis.

Railway Freight Volume

Source: Indian Railways, Tavaga Research

The Petroleum Planning and Analysis Cell (PPAC) data reveal that while the petroleum consumption, an important barometer to gauge the consumer demand continues to improve sequentially and on a YoY basis, the diesel consumption is yet to cross the pre-Covid levels.

However, the fall in demand for diesel products shouldn’t be seen in isolation as there are various reasons for it to not up the ante. For e.g., some top automakers have temporarily halted the production of diesel variants.

Petrol and Diesel Consumption

Source: PPAC, Tavaga Research

For the week ending December 16, 2020, the electricity consumption was 4% higher than the electricity consumption for a similar period in 2019. While India as a whole continues to witness an uptick in power consumption, the state-level data shows that the consumption has been quite volatile with stability yet to arrive.

FPI inflows above the $20 billion mark, the best year for Indian equities

Amidst the talks of excess liquidity in global markets, India too has been a beneficiary of record FPI inflows in FY2020-21 supported by a weak dollar, low yields, and expansionary monetary and fiscal policies of countries around the globe.

Investments by the FPIs have crossed the Rs 2.05 lakh crores mark in FY21 (up to 21st Dec 2020), the highest ever. In dollar terms too, the inflows have been the most in the last 8 years as FY2012-13 also witnessed FPI investments greater than $20 billion.

Typically, in India, such new investments into the broader markets are always seen after a sharp dent to the Indian economy as was seen in 2012 when India lagged its peers due to high borrowing costs, low credit growth, high inflation, and a fall in fresh corporate investments due to mandatory approvals for new projects.

FPI Net Inflows

A big spike in foreign inflows is majorly on the back of liquidity injection by central banks, the US election results (A blue-white house and a Republican senate augur well), and due to the talks of a fresh $900 bn stimulus to Americans reaching the final stage (offering direct transfers, unemployment benefits, and support to small businesses).

More importantly, the inflows have also been due to some other factors which are indirectly related to lower yields:

  1. The inability of American pension funds to deliver superior returns as these funds invest in fixed income instruments. With yields closer to zero, the investors have resorted to parking their money in emerging equity markets and with India poised to be the fastest-growing economy once again in FY22, the county has been the biggest beneficiary of the same
  2. The move of MSCI to raise India’s weight in the emerging market index has led to the nation getting a sizeable share of foreign inflows that chase the EMs. FTSE, another index provider, is expected to follow MSCI and raise India’s weight in the EM index and this could lead to more inflows.

Forging ahead, with a low-interest-rate environment and continuance in the accommodative stance by the RBI, India could continue to witness such inflows.

India’s Exports continue to decline; Trade deficit narrows as Imports Contract

With coronavirus induced lockdowns making a comeback in Europe and other nations, India’s exports failed to expand and grow beyond the September levels after a contraction in October. In fact, November witnessed a sharper fall in exports as they fell 8.7 percent last month, compared to a contraction of 5.1 percent in October.

India Balance of Trade

Against the November 2019 exports of $25.77 billion, the exports in last month were down by close to $2 billion to $23.52 billion. Imports fell by 13.33 percent to $ 33.39 billion from $38.11 bn in November 2019.

Major Indian export goods that widened the trade deficit include:

Product

Growth (in %)

Petroleum products -59.7
Engineering goods -8.1
Chemicals -8.1
Readymade garments -1.2

On the other hand, pharmaceuticals, gems and jewelry, and electronic durables registered a positive growth of 11, 4, and 1 percent respectively.

In comparison to the trade deficit of Q2 FY21, the deficit in Q3 is expected to double on the backdrop of a surge in prices of commodities, a rise in gold imports during the festive season, and a recovery of the Indian economy.

Even before the pandemic hit India’s external demand, the trade deficit has been on a rising spree as India’s exports have been negative in 15 of the last 17 months. Post march, that is since the Covid-19 pandemic hurt India’s economy, the nation’s imports, as well as exports, have been declining in double digits with India witnessing a trade surplus for the first time in 2 decades.

Bitcoin hits an all-time high; tops $23,000 for the first time ever

Amidst a weakening dollar and high inflation trajectory, traders and investors have resorted to buying the world’s largest digital currency that is up more than 200 percent in 2020 (YTD). As many see Bitcoin to be a portfolio diversifier like gold, this could well be a speculative activity as traders continue to build fresh bullish positions on the cryptocurrency.

Investors around the globe have even taken a step ahead and trimmed their stakes in gold by replacing them with bitcoin which is up more than 450% from the March 2020 lows.

Bitcoin

Source: Tavaga Research

The US dollar debasement, news of fresh stimulus being agreed upon by the Senate majority leader and the Democrats, and the subsequent quantitative easing by the Fed have led to bitcoin marching towards all-time highs.

Happy Investing!

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