Monthly Review (As on 30thSeptember 2020)
Equity Market review
Monthly Review
Equity markets took a small breather in the month of September with the Nifty-50 correcting by 1.2%. However, the rally continued in the broader market with a 1.8% rise in the Nifty Midcap 100 index. The slight weakness in the large-caps could be attributed to global risk aversion ahead of US elections, a second wave of Covid cases in some of the developed countries (which could further delay economic recovery) and a delay in a further stimulus by the Federal Reserve in the US. Further, the Supreme Court restrained banks from declaring moratorium loans as non-performing loans until further orders are issued, the uncertainty has added to the relative underperformance of stocks from the banking sector over the past few months. There were some significant developments in the form of the passage of Bills related to farm and labour. However, the expectations of any significant stimulus during the upcoming festive season may not materialize as the Government has not increased its borrowing target in the second half of this financial year. Institutions were sellers in the equity market, with $778 million sales by Foreign Institutional investors and $44 million by domestic funds.
Bond prices rose during the month, the 10-year Government Security yield fell by 11 basis points to 6.01%. The fall in bond yields could be attributed to RBI support in absorbing the G-Sec supply and due to a fall in crude prices. Foreign institutions were the buyers of debt securities during the month. Corporate bond spreads widened, from 47 bps to 67 bps relative to Central Government G-Secs, mirroring the rise in the spreads of State Government Securities.
Outlook for Markets
Equity Market
Though Covid cases continued to rise in India, there have been some positive developments in the form of the passage of the Farm reform and Labour bills in both the houses of Parliament during the Monsoon session. There have been announcements pertaining to steps to boost domestic manufacturing which could eventually create employment opportunities in the country and boost our GDP growth. The monsoon season ended with a cumulative rainfall figure which was 9% above its long period average, as well as a reasonably good distribution as well. With the exception of Commercial Vehicles, automobile sales registered a strong growth for the month of September. Overall economic activity for many other sectors has also witnessed similar improvement during the past 2 months. During the upcoming festive season, there are expectations that we could witness economic activity improving to pre-Covid levels, though the spread of Covid cases in smaller cities and towns continues to be a matter of concern..
With US elections coming closer, we could witness some volatility in global markets. Global markets would also continue to react to developments pertaining to the progress of vaccines to address the spread of Covid-19. In India, with the Q2 FY 2020-21 results season about to commence, the management commentary about the extent of recovery in various sectors would be keenly watched. On a broad basis valuations are already factoring in the next year’s (FY 2021-22) numbers, and therefore a further re-rating in the near-term appears to be difficult. We remain cautious in the near-term, but optimistic for the longer term we continue to prefer stocks that provide a longer-term growth visibility. We would also continue to have some allocation to stocks which have a modest growth outlook but which are presently quoting at low valuations (due to the strong bias towards high-growth that has been witnessed in the markets over the past few years).
Monthly Review (As on 30th September 2020)
Debt Market review
Monthly Review
Equity markets took a small breather in the month of September with the Nifty-50 correcting by 1.2%. However, the rally continued in the broader market with a 1.8% rise in the Nifty Midcap 100 index. The slight weakness in the large-caps could be attributed to global risk aversion ahead of US elections, a second wave of Covid cases in some of the developed countries (which could further delay economic recovery) and a delay in a further stimulus by the Federal Reserve in the US. Further, the Supreme Court restrained banks from declaring moratorium loans as non-performing loans until further orders are issued, the uncertainty has added to the relative underperformance of stocks from the banking sector over the past few months. There were some significant developments in the form of the passage of Bills related to farm and labour. However, the expectations of any significant stimulus during the upcoming festive season may not materialize as the Government has not increased its borrowing target in the second half of this financial year. Institutions were sellers in the equity market, with $778 million sales by Foreign Institutional investors and $44 million by domestic funds.
Bond prices rose during the month, the 10-year Government Security yield fell by 11 basis points to 6.01%. The fall in bond yields could be attributed to RBI support in absorbing the G-Sec supply and due to a fall in crude prices. Foreign institutions were the buyers of debt securities during the month. Corporate bond spreads widened, from 47 bps to 67 bps relative to Central Government G-Secs, mirroring the rise in the spreads of State Government Securities.
Outlook for Markets
Fixed Income Market
Leading global central banks in the US and Europe maintained a status quo on rates. Rates globally are likely to remain low for longer, and central banks’ policies are likely to be accommodative. Similarly, the recent measures by RBI in the form of Operation Twists & allowance of a higher HTM limit for banks indicate its intention to keep the rates low for longer in India. Headline inflation for August was slightly lower than expected at 6.7% YoY, led by a lowering in momentum in both food and core groups. Further, the moderation in imports was much more than the moderation in exports which has resulted in a narrowing of the trade deficit, and a surplus in our current account of USD 19.8 bn (3.9% of GDP) in Q1 of the current financial year.
The Central Government borrowing for FY 2020-21 has not been hiked further and is maintained at Rs 12 lakh crore for the year. However, if we do see some incremental borrowing in the last 2 months of this financial year, there is effectively a possibility of a borrowing of Rs 9-10 lakh crore (Centre+States’ combined) over the next 6 months. We may therefore not see a sharp rally in bonds from present levels; but with a drawdown in growth, sluggish credit offtake and RBI’s measures, bonds are unlikely to sharply fall. We therefore expect the 10 year G-Sec to trade in the 5.80% to 6.10% range in the near-term.