Monthly Review (As on 31st December 2018)
Equity Market review
Monthly Review
The Nifty-50 index remained flattish for the month of December, after the sharp recovery in November. For calendar 2018, the Nifty-50 finished with a modest gain of 3.2%, thereby outperforming global indices. This, however, does not reflect the significant pain which was visible in the broader market in India, with the Midcap-100 index finishing 2018 with a fall of 15% for the year. Apart from the higher valuations in midcaps at the beginning of the year, followed by disappointments in corporate results, the portfolio reshuffles necessitated by the new market-capitalisation definitions for the mutual fund industry also added to this divergent movement between a few Nifty heavyweights on one side, and the broad market on the other. December witnessed a stable performance for the month for the Nifty-50 despite the ruling party’s losses in the elections in three states, and the resignation of the RBI Governor. Foreign funds were buyers of $430 million of equities for the month. However foreign funds were net sellers for the calendar year 2018, which was for the first time after calendar 2011. Inflows in equity mutual funds slowed, and were reflected in a modest buying of $ 45 million. However, for the calendar year 2018, domestic institutions have been substantial buyers, of $ 15.9 bn in Indian equities.
Bonds continued to rally in December, with the 10-year G-Sec yields falling by 24 bps to 7.37%. The cooling off in fuel prices, lower inflation, fall in US treasury yields, and large Open Market Operations by way of purchases by RBI, led to this fall in bond yields. Foreign Institutions continued to buy in the fixed income market, with an investment of Rs 4750 cr. The spreads of corporate bonds over the 10 year G-Sec widened, from 79 bps to 94 bps on higher supply and a relatively weaker appetite for corporate debt.
Outlook for Markets
Equity Market
Calendar year 2018 was a poor year for the equity markets with modest positive returns of 3% for the Nifty-50 index and highly negative returns of 15% for the Midcap-100 index. Corporate earnings in the past couple of quarters have seen some uptick, but continue to remain below analysts’ expectations. The continuing number of earnings downgrades is making it difficult to have a sustainable re-rating of the Indian equity market, considering the premium that it has been historically commanding over many other emerging markets. The reversal for the ruling party in the recent State Elections has led to a further uncertainty in terms of the results for the Lok Sabha elections due in a few months, as well as a possibility of more populist measures. The strong domestic inflows continued for the 4th successive year, and this has contained the damage which could have otherwise been caused by the negative trend witnessed from the foreign institutions this year. On the economic front, while inflation and growth remained benign, the rising twin deficits (fiscal and current account deficits), resulted in a sharp depreciation in the rupee this year, though the rupee has partially recovered. The borrowing costs for Non-Banking Financial Companies (NBFCs) have risen post September, and while the liquidity situation has stabilized for now, this would be factors which would need to be watched next year as well.
Going forward, the earnings season (for the quarter ended December) which is about to commence, would influence the direction of individual stocks, particularly in light of the festive season failing to revive the demand for some of the sectors such as automobiles. This, coupled with the Budget in February (the last one in the present term of the Government) would play a role in shaping the direction of the equity market till the elections in May. On the global front, the US economy has been showing mixed signs, and there is some uncertainty on US growth as well as the pace of hikes in interest rates in the US in 2019. The second half of calendar 2019 could see a directional move in our equity market as there would be clarity emerging on most of the above factors over the course of the first half of calendar 2019.
Monthly Review (As on 31st December 2018)
Debt Market review
Monthly Review
The Nifty-50 index remained flattish for the month of December, after the sharp recovery in November. For calendar 2018, the Nifty-50 finished with a modest gain of 3.2%, thereby outperforming global indices. This, however, does not reflect the significant pain which was visible in the broader market in India, with the Midcap-100 index finishing 2018 with a fall of 15% for the year. Apart from the higher valuations in midcaps at the beginning of the year, followed by disappointments in corporate results, the portfolio reshuffles necessitated by the new market-capitalisation definitions for the mutual fund industry also added to this divergent movement between a few Nifty heavyweights on one side, and the broad market on the other. December witnessed a stable performance for the month for the Nifty-50 despite the ruling party’s losses in the elections in three states, and the resignation of the RBI Governor. Foreign funds were buyers of $430 million of equities for the month. However foreign funds were net sellers for the calendar year 2018, which was for the first time after calendar 2011. Inflows in equity mutual funds slowed, and were reflected in a modest buying of $ 45 million. However, for the calendar year 2018, domestic institutions have been substantial buyers, of $ 15.9 bn in Indian equities.
Bonds continued to rally in December, with the 10-year G-Sec yields falling by 24 bps to 7.37%. The cooling off in fuel prices, lower inflation, fall in US treasury yields, and large Open Market Operations by way of purchases by RBI, led to this fall in bond yields. Foreign Institutions continued to buy in the fixed income market, with an investment of Rs 4750 cr. The spreads of corporate bonds over the 10 year G-Sec widened, from 79 bps to 94 bps on higher supply and a relatively weaker appetite for corporate debt.
Outlook for Markets
Fixed Income Market
The Monetary Policy Committee kept the Repo rate unchanged at 6.5%, as food inflation continued to be low, and crude oil prices corrected sharply after the earlier rally. However, from current levels, there could be some upside risk to inflation, and therefore the MPC’s stance remained unchanged at this juncture. But if inflation continues to remain low, then it could indeed open up the possibility of a change in stance in future policies. Industrial production showed a stellar growth of 8.1% YoY in October, though these strong figures may not sustain without the base-effect advantage. Consumer Price Inflation fell sharply from 3.4% to 2.3% in November, on account of a continued fall in food prices; core inflation (excluding food and fuel), too, fell back from 6.2% to 5.7%
In the US, the target range for the Federal Funds rate was hiked by 25 bps in December, on expected lines. Going forward, the future actions from the Fed would remain data dependent and the number of rate hikes need not necessarily be as many as projected.
In the last few months we had been anticipating lower food inflation and possibility of weaker global growth, and had proactively increased the Duration across our funds. The pace of OMO purchases has been also been supportive. Looking ahead, assuming the underlying data remains supportive; markets would look forward to RBI’s communication on future policy action, its inclination to support the market on the liquidity front. We therefore remain constructive on duration, and have alongside added to select AAA bonds with spreads having turned attractive relative to G-Secs. In the near term we expect the 10 year Govt security to trade in the 7.25% – 7.50% range.
