Monthly Review (As on 30th April 2020)
Equity Market review
Monthly Review
Equity markets witnessed a sharp bounce back in April, with the Nifty-50 as well as the Nifty Midcap 100 index rising by around 15% for the month. The rally has to be considered in the backdrop of the sharp 23% fall in the Nifty-50 in the prior month of March. However, with GDP expectations being further lowered and a sharp fall in crude oil prices, the rally in April may not be sustainable, globally as well as in India. Among sectors, we saw a sharp rally in pharma stocks due to optimism on faster regulatory approvals in some cases, and increased earnings visibility in others. Both foreign and domestic institutions were net sellers in equities during the rally in April.
10 year bond prices rose mildly in April, with the 10-year G-Sec yield falling only by 3 bps to 6.11% due to the expectations of a new 10 year benchmark bond issuance, while the yields on shorter-tenure securities fell sharply by 50 bps due to the excess liquidity in the system. The spreads of 10 year AAA corporate bonds vs G-Secs, widened from 89 bps to 101 bps, reflective of a renewed concern on corporate debt in the present environment.
Outlook for Markets
Equity Market
Markets had a relief rally globally, with the fiscal stimulus and monetary easing measures in some of the large economies, and expectations of excess liquidity being partly allocated to equities. The rally was despite the number of Covid-19 cases continuing to rise globally. The RBI has announced several measures in terms of liquidity, interest rates and moratorium, and has indicated a willingness to take more measures if required. While it was possibly imperative for India to have a nationwide lockdown and address the health pandemic at the very beginning, a significant prolonging of the lockdown period could lead to a sharp contraction in several businesses, along with potential unemployment unless we see further stimulus measures directed towards the segments of the economy which are the hardest hit.
While the initial tranche (and possibly the next tranche as well) announcement of a stimulus from the Govt. addressed the livelihood and survival requirements of individuals and businesses, the limited fiscal space available could result in a delay in measures to boost growth, to later during the year, after the lockdowns are fully lifted across the country. The rural economy has been thankfully impacted to a lesser extent by Covid-19 and has also gained from a bumper Rabi crop; though logistical issues might have impacted this economy as well, in April- May.
As an economy, we are large beneficiaries of the sharp fall in crude prices, and though our currency has depreciated, our foreign exchange reserves are comfortable. It is important to prevent a sovereign credit downgrade, as this could significantly impact foreign flows in debt and equity. We could also benefit from the increasing diversification which global consumers are looking at, to reduce their dependence on China.
We have been cautious on the equity market since January, when valuations were elevated, inspite of a slowdown in growth numbers. From a risk-reward perspective, we continue to remain cautious on equities, particularly after the rally in April, and remain underweight in our hybrid equity funds. We are looking at significant earnings downgrades for Fy20-21 in corporate India, only a part of which has reflected thus far. Our strategy would be to be stock-specific and look towards Fy21-22, and focus on companies with stronger balance-sheets, debt free and the ability to emerge stronger post the current crisis.
Monthly Review (As on 30th April 2020)
Debt Market review
Monthly Review
Equity markets witnessed a sharp bounce back in April, with the Nifty-50 as well as the Nifty Midcap 100 index rising by around 15% for the month. The rally has to be considered in the backdrop of the sharp 23% fall in the Nifty-50 in the prior month of March. However, with GDP expectations being further lowered and a sharp fall in crude oil prices, the rally in April may not be sustainable, globally as well as in India. Among sectors, we saw a sharp rally in pharma stocks due to optimism on faster regulatory approvals in some cases, and increased earnings visibility in others. Both foreign and domestic institutions were net sellers in equities during the rally in April.
10 year bond prices rose mildly in April, with the 10-year G-Sec yield falling only by 3 bps to 6.11% due to the expectations of a new 10 year benchmark bond issuance, while the yields on shorter-tenure securities fell sharply by 50 bps due to the excess liquidity in the system. The spreads of 10 year AAA corporate bonds vs G-Secs, widened from 89 bps to 101 bps, reflective of a renewed concern on corporate debt in the present environment.
Outlook for Markets
Fixed Income Market
The Government has announced its borrowing calendar for H1 FY2021, pegging gross borrowing at ₹ 4.9 lakh crore (~62.5% of gross borrowings for the fiscal), which is slightly lower than market expectations of ~65% of gross borrowings. The State borrowing calendar for Q1 was also marginally lower than market expectations. Consumer inflation came in at 5.91% YoY vs. 6.58% YoY last month, driven by a fall in food prices with core inflation remaining steady at 4.07% YoY. Manufacturing and trade was impacted by lockdowns in India and other countries.
The RBI announced further measures to support the economy, such as a cut in the reverse repo rate by 25bps to 3.75%, a second round of TLTRO (Targeted long term repos, ₹ 50,000 cr to begin with) specifically targeted towards NBFCs & Microfinance institutions, and enhancing the Ways and Means Advances limit for State Governments by 60%, to ₹ 67,000 crore.
The large liquidity infusion through the long term repos, the “Operation Twist” and expectation of further rate cuts, is likely to keep bond yields low. The cut in small savings rate and low bank deposit rates could eventually lead to an improvement in the demand for corporate bonds, which is presently contained to a very small set of strong corporates. We could therefore eventually expect high grade corporate bonds to do slightly better than Government bonds as the spreads could ease. Since there is an uncertainty as regards the nature and size of fiscal measures to boost growth, along with the challenges on the revenue front for the Government, we could see G-Secs continuing to trade around the present levels, and the new 10 year Gsec could trade in the range 5.75% - 6% in near term.
