Monthly Review (As on 28th February 2019)
Equity Market review
Monthly Review
The Nifty-50 index closed 0.4% lower in February, amidst volatility in the equity market, subsequent to renewed geo-political tensions. Broader markets were weaker, with the Nifty Midcap 100 index falling by 1.1%. Foreign funds turned buyers for the month to the tune of US$ 2.2 bn, while domestic institutions turned small sellers to the tune of US$86 mn in February.
Bond markets continued their fall in February, with the 10-year G-Sec yield rising by 13 bps to 7.41%. The higher fiscal deficit announced in the Budget, higher crude oil prices, slightly higher US treasury yields and lack of demand from FIIs were some of the factors influencing the fall in bond prices in Feb. Foreign Institutions were sellers in the fixed income market, to the tune of around ₹6000 cr. Spreads of corporate bonds over the 10 year G-Sec widened further, from 104 bps to 111 bps, due to a relatively weaker appetite for corporate debt.
Outlook for Markets
Equity Market
The corporate earnings in the recent quarter have been in line with market expectations, but the ratio of downgrades to upgrades continues to remain worrisome at the overall index level, as well as at individual stock levels. Domestic inflows have slowed in the recent past, and need to be a factor to be watched. Over the past year, strong domestic inflows have helped absorb the relentless selling by foreign investors, and helped maintain the levels of the large-cap indices.
Over the next few months, the geopolitical tensions, or the easing thereof, would be one of the influencing factors for the equity market. Political news flow which could influence the outcome of the forthcoming elections, will be an added factor. Further, considering the lower inflation and slower GDP growth, investors would keenly track the monetary policy, and the actions which RBI could take to maintain system liquidity. On the global front, markets will look for the actions taken by the US Federal Reserve with regard to interest rates for 2019 as well as the much awaited trade-related agreement between USA and China. We would continue to look at opportunities in stocks where business fundamentals remain intact, and valuations have corrected.
Monthly Review (As on 28th February 2019)
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 ₹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 Interim Union Budget mentions a higher gross borrowing number FY2019 and FY2020. The Monetary Policy Committee reduced the Repo rate by 25 bps to 6.25%, citing benign inflation and risks to the growth trajectory, and changed its stance to neutral. Consumer inflation continued to surprise on the downside, falling to 2.05% driven by a sharper than expected fall in the ‘fuel & lighting’ component. Core inflation moderated to 5.4% and food price deflation continued. The GDP growth for Q3 FY2019 was a slightly lower than expected figure of 6.6% YoY, caused by a slowdown in agriculture and services. On an annual basis, the GDP growth has been revised slightly lower to 7.0% YoY, from the earlier estimate of 7.2% YoY. Geopolitical tension resulted in some volatility in the fixed income market as well.
The lower inflation & slowing growth leads to expectations of a further cut in interest rates. However, the higher supply of bonds and the uncertainty about the amount of Open Market Operations by RBI may limit the fall in yields. The above factors, coupled with the forthcoming Lok Sabha elections, could result in a rangebound fixed income market, with the 10 year Govt Security trading in the 7.25-7.50% range in the near term. We may look to tactically add duration at the higher range of the yield.
