Monthly Review (As on 31st August 2022)
Equity Market review
Monthly Review
The Nifty-50 index continued to rally in August, rising by 3.5% on top of the 8.7% surge witnessed in July. Foreign Institutional Investors, who had turned buyers in July, continued to be buyers in August as well, investing USD 6 bn during the month. Sectors which did well during August were Banks, Auto and Infra, while the laggards were IT and Pharma which delivered negative returns in the month.
Some of the other key newsflows included the 13.5% growth in real GDP for the first quarter of FY 2022-23, increase in repo rate by the Monetary Policy Committee by a further 50 bps (repo rate is now at 5.4%, higher than the pre-Covid level), a moderation of Consumer Price Inflation to 6.71%, continued buoyancy in GST collections (above ₹ 1.4 lakh crore mark for six months now), and 5G spectrum auction proceeds of ₹ 1.5 lakh crore for the Government. While on a cumulative basis, rainfall has been above long-term averages, the spatial distribution of the same has been concerning, being much weaker in North-West, East and North-East India; Kharif sowing too has been weak (down by 1.6% year-on-year).
The yield curve flattened during August with bond yields falling by an average of 0-5 bps in the 3-5year segment, 13-16 bps in the 6-12 year segment and 18-20bps in the 13 year+ maturity. The 10-year benchmark Government Security yield fell by 14 bps and closed at 7.18% vs 7.32% in July.
The spread of the 10-year AAA PSU corporate bonds to the benchmark G-Sec has increased from 18-23 bps in July to 20-30 bps in Aug 2022.
Outlook for Markets
Equity Market
In India, there has been a concerted effort over the past few months to rein in inflation, from the RBI (in terms of managing liquidity and interest rates) and the Government (with large excise duty cuts in petrol and diesel, imposition of a high export duty on steel, and a curb in wheat exports). Historically, Indian corporates have been able to pass on the input cost inflation to consumers if the demand holds up. However, this is a challenge in the current environment, as retail demand could be impacted by rising interest rates on disposable income, with rising outgoes on housing and personal loans. Corporates have passed on only a part of the input cost inflation in terms of price increases on their products. Industrial demand could be impacted by slowing global growth as well. Therefore the companies could witness some challenges on the margin front in various sectors.
With the gap between inflation and interest rates being much lower in India as compared to the US, along with better growth prospects, we have already witnessed a substantial outperformance by the Indian equity market relative to the US market in August. While we remain positive on the Indian equity market’s longer term prospects, we are cautious at current levels as valuations are adequately factoring in the earnings growth over the next 2 years; performance could therefore be increasingly stock-specific over this period.
Monthly Review (As on 31st August 2022)
Debt Market review
Monthly Review
The Nifty-50 index continued to rally in August, rising by 3.5% on top of the 8.7% surge witnessed in July. Foreign Institutional Investors, who had turned buyers in July, continued to be buyers in August as well, investing USD 6 bn during the month. Sectors which did well during August were Banks, Auto and Infra, while the laggards were IT and Pharma which delivered negative returns in the month.
Some of the other key newsflows included the 13.5% growth in real GDP for the first quarter of FY 2022-23, increase in repo rate by the Monetary Policy Committee by a further 50 bps (repo rate is now at 5.4%, higher than the pre-Covid level), a moderation of Consumer Price Inflation to 6.71%, continued buoyancy in GST collections (above ₹ 1.4 lakh crore mark for six months now), and 5G spectrum auction proceeds of ₹ 1.5 lakh crore for the Government. While on a cumulative basis, rainfall has been above long-term averages, the spatial distribution of the same has been concerning, being much weaker in North-West, East and North-East India; Kharif sowing too has been weak (down by 1.6% year-on-year).
The yield curve flattened during August with bond yields falling by an average of 0-5 bps in the 3-5year segment, 13-16 bps in the 6-12 year segment and 18-20bps in the 13 year+ maturity. The 10-year benchmark Government Security yield fell by 14 bps and closed at 7.18% vs 7.32% in July.
The spread of the 10-year AAA PSU corporate bonds to the benchmark G-Sec has increased from 18-23 bps in July to 20-30 bps in Aug 2022.
Outlook for Markets
Fixed Income Market
The Monetary Policy Committee increased the repo rate by 50 bps in August, and reiterated its firm commitment to bring down inflation to within its target range over the medium term. Consumer Inflation in India appears to have peaked at the 7.8% level reported in April, with the level easing to 7.0% in May & June and 6.71% in July. The number eased in July largely due to the fall in vegetable and oil prices. However, core inflation continued to remain at 6.04%. The minutes of the MPC’s August meeting indicate that members remain uncomfortable with elevated and broad-based price pressures, while recognising that inflation has peaked. Our GDP growth for the first quarter of the current financial year was reported as 13.5% yoy. Although the headline growth appears strong, the expansion is exaggerated by a favourable base effect, and therefore the figure is disappointing(a growth of just 1.3% p.a. on a 3-year CAGR basis). The fiscal deficit in the Q1 of FY 2022-23 has been controlled, however much of it has been achieved with expenditure being kept in check. Income tax and GST collections have been key supports on the revenue front.
Meanwhile, US growth in Q2CY22 stood at -0.6% (-1.6% in Q1CY22) and Consumer Price Inflation in the US softened from 9.1% in June to 8.5% in July. The US yield curve continues to remain inverted, indicating recessionary conditions going forward. At the Jackson Hole Economic Policy Symposium 2022, inflation remained an overwhelming factor with the Federal Reserve Chairman stressing on focusing to bring inflation back to the goal of 2%, a distant figure from the present 8.5% level.
We expect inflation figures in India to remain elevated around 7% in the near-term, with a gradual move likely towards the MPC’s upper threshold of 6% towards the end of this financial year. We are maintaining a neutral stance in our fixed income ULIP portfolios, as we expect the global rate hike cycle to continue across all the major economies till the decadal high inflation is brought under control, though the extent of further rate hikes in India could be limited.