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June was when India’s worst affected states began to roll back lockdowns imposed in the wake of the second wave. To be sure, the unlocking is being done in a gradual manner. Also, there were states where the second wave had hit later and lockdowns are continuing there. Maybe, that’s why the effect on business is still severe and it appears the recovery is not going to be a quick one. This runs contrary to expectations that the hit to the economy in the second wave was milder and the recovery would be quicker.
The IHS Markit Purchasing Managers Index (PMI) for services came in at 41.2 for June compared to 46.4 for May, joining the manufacturing sector in reporting a shrinking in activity in June. A level below 50 indicates contraction. Services activity was affected by subdued demand conditions with four out of five services segments reporting a decrease in business activity and new orders. Transport and storage was the only segment that reported growth. For more, read today’s Chart of the Day.
Meanwhile, this week’s Monsoon Watch shows rainfall has hit a dry patch, but this is not an unusual phenomenon. It’s early days yet and the weather bureau expects rainfall to pick up later in July.
Even now, there are states where there are restrictions imposed on what activity is allowed, to keep a check on the number of COVID cases. That does raise the risk of July too seeing some pressure on business activity. A bigger question for investors is whether the second wave has harmed demand more than expected, since this wave was more widespread in its geographic coverage than the first one.
That question acquires significance because the market has a rather sanguine outlook, as a certain level of economic activity continued during the second wave and vaccinations have picked up pace. Even on Monday, the stock markets went up by 0.6 percent at 12.30 pm despite the disappointing PMI numbers. A healthy earnings season in the June quarter has led to an upward revision in earnings estimates too, for FY22. If things don’t look up in the September quarter, then investors may wonder if they have jumped the gun.
Marico’s investor update does provide some solace, in that the management has indicated that demand trends are improving. However, it does see some impact on margins in the June quarter due to high cost raw material inventory and lower costs in the year ago quarter. It does expect margins to normalise in subsequent quarters. Do read our research note on its investor update to know the house view on the stock.
More investing insights from our research team:
Can the waning impact of second wave help Ujjivan SFB re-rate?
Vodafone Idea: Struggle for survival is on
What has this sole domestic producer of latex for medical gloves got to offer?
What else are we reading today?
How does the structural change of the last 30 years compare with that of the 30 years preceding liberalisation?
The Green Pivot | EV batteries in turbo-charge mode
Global tax deals: Now comes the hard part of fine print
GuruSpeak | Bhaskar Radadiya: A prop trader who has tasted success using the Wave Principle
What lies behind RBI’s unease over Big Tech in financial services?
Why value investing isn’t just about buying cheap stocks
This is as good as it gets for the US economy (Republished from the FT)
What happens if Chinese household wealth is unleashed on the world? (Republished from the FT)
Technical picks: CAMS, Greaves Cotton, Religare and GMR Infrastructure (These are published every trading day before markets open and can be read on the app)