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As on 31st December 2016

Monthly Review

The Nifty-50 continued to fall in December, but the fall was moderate (-0.5%) compared to the sharp fall in November. Nifty-50 still managed to end the calendar year 2016 with a small 3% gain for the year. However this meant that this has been the second consecutive year of nearly flattish Nifty-50 returns. The Nifty Midcap index had a sharper fall in December, but fared much better for the calendar year, with over 7% gains. On the global front, the Indian equity market underperformed major global indices, both the Emerging Market and Developed Markets for the calendar year.

In fixed income markets bond prices fell sharply in December (bond yields rose sharply by 27 basis points) since RBI did not cut policy rates in its Policy, and the Federal Reserve hiked policy rates by 25 basis points in the US. The spreads of corporate bonds over the 10 year G-Sec rose to 78bps from 66bps, due to higher supply.

Economy

Macros continue to report improvement with inflation moderated to 3.6% in November from 4.2% in October. Industrial production (IIP) contracted to 1.9% in October compared to 0.7% in September, which could also be due to the timing of the festival season that resulted in unfavourable base effects.

Outlook for Markets

Equity Market

While the quarterly results for the December and the forthcoming March quarters are both likely to be impacted to varying degrees by the slowdown in economic growth and curtailment of consumer spending, the impact on the next year’s earnings is likely to be limited. Therefore there is a possibility that next year’s earnings growth figure is likely to appear optically high. The Budget has the challenge of living up to the increased expectations in terms of reduction in tax rates and also deferring capital gains taxation proposals, and capital expenditure proposals (particularly with private sector capex unlikely to be significant). Some measures for job-creation might be required (possibly sectors with large labour requirements such as textiles, infrastructure and housing) in light of the potential job-losses in the unorganized sectors post the demonetization and the impending GST. Market valuations are reasonable, and equities could deliver returns better than other asset classes over a 2 to 3 year + period: the outlook would need to extend beyond calendar 2017, hence investors could consider spacing the investments over the next few months.

Monthly Review

The Nifty-50 continued to fall in December, but the fall was moderate (-0.5%) compared to the sharp fall in November. Nifty-50 still managed to end the calendar year 2016 with a small 3% gain for the year. However this meant that this has been the second consecutive year of nearly flattish Nifty-50 returns. The Nifty Midcap index had a sharper fall in December, but fared much better for the calendar year, with over 7% gains. On the global front, the Indian equity market underperformed major global indices both the Emerging Market and Developed Markets for the calendar year.

In fixed income markets bond prices fell sharply in December (bond yields rose sharply by 27 basis points) since RBI did not cut policy rates in its Policy, and the Federal Reserve hiked policy rates by 25 basis points in the US. The spreads of corporate bonds over the 10 year G-Sec rose to 78bps from 66bps, due to higher supply.

Economy

Macros continue to report improvement with inflation moderated to 3.6% in November from 4.2% in October. Industrial production (IIP) contracted to 1.9% in October compared to 0.7% in September, which could also be due to the timing of the festival season that resulted in unfavourable base effects.

Outlook for Markets

Fixed Income Market

Global growth was weak in the first half of the calendar year, but picked up in the second half. Economic activity in the developed markets has improved slightly. Global debt markets were sharply influenced by the US Presidential election results and the expected pace of interest-rate hikes by the US Federal Reserve. Consumer Price Inflation fell more than expected for the fourth consecutive month in November, driven down by sharply lower vegetable prices, along with the dampening impact caused by demonetization. The banking system had a liquidity surplus of around Rs 6.6 lakh crore after the demonetization. The Indian fixed income market has been expecting the fall in interest rates to continue to trend downward, but there has been a slight cautiousness post the RBI policy. If the local growth- shock in subsequent data-points is deeper than expected, or if the expectations on interest rate hikes by the Fed in 2017 are lowered, bond yields could resume their downtrend in India. Till then, the markets could be range-bound.

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