Rural wages continue to rise, but the pace of that growth is moderating, says Nomura in its research note
Rural wages continue to rise, but the pace of that growth is moderating. With real rural wages moderating, both rural demand and inflationary pressures should moderate in the medium-term, says Nomura Financial Advisory and Securities (India) Private Limited in its research note on rural wages and inflation.
Several factors, including the government’s employment guarantee scheme and indexing rural wages to CPI inflation, have boosted rural wage growth and shifted the terms of trade in favour of the rural sector, according to the research note. However, the slowdown in urban areas is now starting to feed through into slower rural wage growth.
According to Nomura, over the last few years, rising real rural wages have both supported rural demand and increased the cost of production, thereby making inflation sticky. A moderation in real rural wages should cause rural demand to moderate, but medium-term inflationary pressures should moderate as well, as the cost of production (wages) eases.
The Nomura research note gives the following statistics: Growth in the average daily wage rate for agricultural labourers moderated to 13.1% year-on-year (y-o-y) in August 2013, significantly slower than 18.5% y-o-y in 2012 and 23.4% in 2011. After adjusting for inflation, the decline was even more stark — real rural wage growth moderated to -0.1% y-o-y in August from 9.3% y-o-y in 2012 and 13.4% in 2011.
The overall picture on rural wage growth is summarised in the following chart:
The markets started very strong, rising to a three-year high but a surprising selling pushed it down. Nifty has closed just above the 6,160 support level, indicating weak legs. For the third, there were huge volumes without any meaningful advance, which is a warning for the bulls.
We had mentioned yesterday that the first signs of market weakness in the ongoing bull- run surfaced yesterday. Today, the markets opened flat but shot up after half an hour without any news flow, to a three-year high. However, after that initial burst, the market started declining slowly at first and then with increasing speed.
The S&P BSE Sensex opened at 20,766 and the bulls, ,within the first hour of trade, charged it to its intra-day high of 21,039 before the bears came and propelled it down to its intra-day low of 20,656. The index closed at 20,725. (down 42.45 points or -0.20%).
Similarly, Nifty opened at 6,164, hit an intra-day high of 6,252 then went down and hit its intra-day low of 6,142 before slowly climbing up to close at 6,164 (down 14 points or -0.23%).
The breadth of the market was negative, with declines outpacing advances by 1.3 times. Out of 1,224 stocks, 666 were down, 496 were up and 62 were unchanged. The National Stock Exchange witnessed much higher volumes compared to the preceding four trading sessions slowed down this time, with 71.18 lakh shares traded. Once again, huge volumes without meaningful advance are a warning for the bulls.
Most sectoral indices were down except Bank Nifty, Auto, Finance and FMCG. The Bank Nifty breached the psychological 11,000 barrier but then retreated to 10,902, up 0.20% for the session. CNX IT and CNX Media were sharply down at 1.68% and 1.91% respectively.
Of the 50 stocks in the Nifty, 20 stocks advanced and 30 declined. The top five gainers were Ranbaxy (2.71%), IDFC (2.68%), NMDC (2.60%), M&M (2.56%) and GAIL (1.56%).
The top five losers were HCL Tech Jindal Steel (-4.63%), Wipro (-4.59%), Coal India (-3.81%), TCS (-2.58%) and BHEL (-2.28%).
Positive Chinese economic data sent some soothing signals to the markets worldwide. Its manufacturing output was better than anticipated. The initial 50.9 reading for a Purchasing Managers’ Index, by HSBC Holdings Plc and Markit, compared with a 50.4 median estimate from analysts surveyed by Bloomberg News. This put hopes that China’s economic recovery is alive and well, but the Shanghai Composite was seen down 0.86%.
Most Asian markets, except for Shanghai Composite and NZSE 50 (New Zealand) and BSE Sensex, were flat.
US stock futures rose during early morning trade on Chinese economic data. The European indices were solidly in the green.
Morgan Stanley finds that emerging markets (EM) consistently outperformed the MSCI AC World benchmark in 1‐month and 3‐month pre‐election horizons. In India’s case, however, a tight race is predicted and markets could be negative
Morgan Stanley Asia Limited, the research arm of Morgan Stanley, has estimated that the market performance one month prior to the elections could be negative as the Indian election scenario at the moment is “neck-and-neck”, with a chance of a “popular opposition” (read: BJP and allies) winning the elections. It also estimated that market could turn negative as a result.
The graph below shows how the market will pay out one month before the elections. When Indian citizens see the current race as “tight”, markets has given negative returns one month prior to elections.
It sees the incumbent Congress UPA opinion poll rating at lows, thanks to prevalent corruption and lack of measures to tackle against it. The note said, “74 out of 100 corporate leaders favor (Narendra) Modi over Rahul Gandhi” which is based on Nielsen/Economic Times CEO confidence survey. Morgan Stanley said that Modi needs to overcome his polarising record and BJP’s limited geographical appeal.
The current election race and its outcome will have bearings on the Indian stock markets. Morgan Stanley found out emerging markets (EM) consistently outperformed the MSCI AC World benchmark in 1‐month and 3‐month pre‐election horizons. It also noted that 17 out of 25 EM elections since 2000 outperformed world benchmark in 1‐month pre‐election interval. Only in three out of 25 elections (Korea 2007, Mexico 2006, Brazil 2010), both 1‐month and 3‐month pre‐election return missed the world benchmark.
Next year, as many as four EMs will be staging elections: India, Brazil, Indonesia and South Africa. The below graph shows that relative EM elections with subsequent distinct vote margin have outperformed the world benchmark before elections in all horizons.
India outperformed in the 2009 Congress victory, but marginally underperformed in 2004 Congress surprising comeback. Pre election outperformance in EM is accompanied by high volatility, said Morgan Stanley. The Indian stock market has seen unprecedented volatility in the last 6-12 months, with foreign institutional investors withdrawing from the country in droves.
The chart below shows how the Indian currency performed before and after the 2009 elections. Roughly a year before the election, it depreciated before picking up within 6 months from the 2009 election date. This time too, a similar pattern is being noted. The report said, “Local (EM) currency devalued by 3%‐6% in monthly basis, peaking in the 6‐12 month time horizon before elections.”
When BJP came to power in 1999, Morgan Stanley noted that markets outperformed by one percentage points when compared to emerging market benchmark. Similarly, when Congress was re-elected in 2009, markets outperformed 2.8 percentage points relative to benchmark.
Yesterday, Credit Suisse said that the Indian market is going up due to the ‘Modi’ factor.