Monthly Review (As on 31st Dec 2019)
Equity Market review
Monthly Review
Equity markets rallied for the fourth month in a row and the Nifty-50 closed at a new lifetime high of above 12100 levels. Broader markets underperformed the Nifty-50 for the month, with the Nifty Midcap-100 index falling by 0.7%. There was a rally in global markets with an improvement in sentiment based on expectations of the Phase 1 of the US-China trade deal. The slowdown in the Indian economy weighed on the domestic equity markets which did not perform as well as some of the global indices. Foreign institutional investors bought equities worth US$ 1 bn in December.
Bond prices fell in December, with the 10-year G-Sec yield rising by 9 bps to 6.56% for the month. The yield had spiked to 6.80% during the month due to the pause on policy rates by the Monetary Policy Committee (contrary to the market expectation of a further cut), higher consumer inflation figures (5.54%) and higher US treasury yields and crude oil prices. Foreign investors were sellers in the debt market. Corporate bond spreads were stable in the 87-88bps range.
Outlook for Markets
Equity Market
Calendar year (CY) 2019 was a good year for the Nifty-50 (up 12% for the year) and a poor year for the Nifty Midcap-100 index (down 4.3% for the year). This has been the second consecutive year of negative return for the mid-cap index, as well as the second consecutive year of its divergent movement relative to the large-cap index.
Disappointments in corporate profits as well as corporate governance issues in some of the companies have led to an underperformance of the broader market. Both foreign flows and domestic flows were strong in CY2019, with FII inflows of over $14.5bn and domestic inflows of $5.9bn. The component of passive (ETF) flows has possibly been higher, aiding a stronger performance of the Nifty-50 for the year on a relative basis.
The RBI and the Government have taken some steps to address the slowdown in the economy, such as successive cuts in the repo-rate and the slashing of corporate tax-rates during the year. However the slowdown in the economy appears to be broad-based, with consumption-oriented as well as investment-oriented sectors feeling the pain. The election results in some of the key states, as well as social unrest, could also have impacted consumer sentiment and demand.
Going forward, the escalation or de-escalation of the geopolitical issues in the Middle-East and the Budgetary proposals next month pertaining to the presence or absence of a cut in personal income tax rates / larger schemes for boosting rural incomes / higher Government spending to arrest the slowdown, would be keenly watched.
Even after factoring in a higher fiscal deficit, there is limited space available with the Government to spend or extend concessions, and this would continue to be a challenge. The upcoming earnings season too would be watched, particularly to identify sectors/stocks which are showing signs of bottoming/revival. On the global front, the developments in the US as well as in the Middle-East would influence fund-flows and sentiment towards the emerging markets. We remain positive in the longer-term on the broader equity markets but remain watchful in the near-term due to the above factors.
Monthly Review (As on 31st Dec 2019)
Debt Market review
Monthly Review
Equity markets rallied for the fourth month in a row and the Nifty-50 closed at a new lifetime high of above 12100 levels. Broader markets underperformed the Nifty-50 for the month, with the Nifty Midcap-100 index falling by 0.7%. There was a rally in global markets with an improvement in sentiment based on expectations of the Phase 1 of the US-China trade deal. The slowdown in the Indian economy weighed on the domestic equity markets which did not perform as well as some of the global indices. Foreign institutional investors bought equities worth US$ 1 bn in December.
Bond prices fell in December, with the 10-year G-Sec yield rising by 9 bps to 6.56% for the month. The yield had spiked to 6.80% during the month due to the pause on policy rates by the Monetary Policy Committee (contrary to the market expectation of a further cut), higher consumer inflation figures (5.54%) and higher US treasury yields and crude oil prices. Foreign investors were sellers in the debt market. Corporate bond spreads were stable in the 87-88bps range.
Outlook for Markets
Fixed Income Market
Fixed income markets witnessed a status-quo on policy rates by the The Federal Open Market Committee (FOMC) in the US, by the The European Central Bank (ECB) in Europe and by the The Monetary Policy Committee (MPC) in India. The message on growth was more constructive in the US relative to Europe and India.
In India, the Monetary Policy Committee’s pause (instead of the expected further cut in rates) surprised markets. The pause was attributed to consumer inflation moving well beyond the 4% target in the near–term, the lagged impact of monetary policy transmission yet to take effect, and the counter-cyclical fiscal policy measures awaited in the Union Budget in February.
Consumer Price Inflation was reported as 5.54% yoy (year-on-year) in November, compared to 4.62% yoy in the previous month. The uptick was led by the continued increase in food inflation (vegetables and pulses, and an unfavourable base). Core inflation remained flat at 3.5% yoy. Current account deficit narrowed considerably in Q2 FY2020 to $6.3 bn (0.9% of GDP).
RBI conducted, for the first time, an “Operation Twist”, meaning a simultaneous purchase (long tenor) and sale (short tenor) of Government securities under Open Market Operations (OMO) for Rs 20,000 crore in December, which brought down the 10 year Gsec yields from the intra-month high of 6.80% to 6.56% at the end of the month.
Considering the present slowdown in growth and a sub 3.5% core inflation, the rate-easing cycle may not have ended. However, we do continue to see the pause continuing in the February policy due to the higher inflation figures expected for December, and the high possibility of fiscal slippage in the Union Budget.
The 10-year G-Sec yields could trade in the 6.40-6.70% band over the medium term, with the upward pressure on rates due to the fiscal position and additional borrowing expected in March, being balanced by the above-mentioned “Operation Twist” of the RBI.
