Monthly Review (As on 31st December 2020)
Equity Market review
Monthly Review
The equity market continued its uptrend with continuing large purchases by foreign institutional investors, with a decisive Presidential election verdict in the US and the commencement of a roll-out of vaccines in some of the developed economies. The US Government finally announced a follow-on ~$900bn stimulus package in December. The expected economic recovery, coupled with these factors, could continue to support equity markets in the near-term, despite expensive valuations.
Bond prices rose slightly during the month; and the 10-year Government Security yield fell by 4 basis points to 5.87%. The fall in bond yields could be attributed largely to a moderation in the Consumer Inflation and a rise in the banking system liquidity, though there was an increase internationally, in US treasury yields & crude oil prices. Foreign institutions were buyers of around ₹6500 cr of debt securities during the month. The spread of 10 year AAA PSU corporate bonds to the benchmark Central Govt security, widened from 58 bps to 63 bps due to higher supply.
Outlook for Markets
Equity Market
The Nifty-50 rose sharply by almost another 8% in December, on the back of strong FII flows ($7.3bn for the month and $ 23bn for the calendar year 2020!), while domestic funds continued to remain large sellers. For calendar 2020, the Nifty 50 rose by an unexpectedly high 14.9%. The market-breadth has been reasonably good as well. In December, stocks from the real-estate sector performed strongly driven by a revival in demand with low interest rates and tax concessions along with metal stocks due to sharply higher international prices as well as a weak dollar and stocks from the consumer durables sector where the demand outlook is positive. Daily Covid-19 infections in India have dropped considerably, with a reduction in active cases too. With the gradual normalization of economic activity, the Government announced another set of measures to boost the growth momentum, but an effective implementation of the same would be required to revive the investment cycle.
After the sustained up-move in this financial year we would need to see earnings growth in excess of the present expectations in the next 2 years, we therefore continue to be cautious on markets from the near-term perspective on the valuation front. We would continue to prefer select stocks that provide longer-term growth visibility, which could justify their higher valuations. We have also been adding to stocks with reasonable valuations, though with a modest growth outlook. Some of these “value” stocks have started to do well in the past couple of months and there are expectations that we could see a continuing sectoral shift towards some of the “old-economy” sectors, if the liquidity continues to drive markets and if the global economy recovery is on track
Monthly Review (As on 31st December 2020)
Debt Market review
Monthly Review
The equity market continued its uptrend with continuing large purchases by foreign institutional investors, with a decisive Presidential election verdict in the US and the commencement of a roll-out of vaccines in some of the developed economies. The US Government finally announced a follow-on ~$900bn stimulus package in December. The expected economic recovery, coupled with these factors, could continue to support equity markets in the near-term, despite expensive valuations.
Bond prices rose slightly during the month; and the 10-year Government Security yield fell by 4 basis points to 5.87%. The fall in bond yields could be attributed largely to a moderation in the Consumer Inflation and a rise in the banking system liquidity, though there was an increase internationally, in US treasury yields & crude oil prices. Foreign institutions were buyers of around ₹6500 cr of debt securities during the month. The spread of 10 year AAA PSU corporate bonds to the benchmark Central Govt. security, widened from 58 bps to 63 bps due to higher supply.
Outlook for Markets
Fixed Income Market
The Monetary Policy Committee maintained a pause on policy rates as expected and remains supportive of growth. GDP expectations are now at -7.5% for the current year, better than the earlier expectations. Industrial production was better than expected in October growing at 3.6% YoY as compared to 0.5% in October. Headline inflation for November fell from 7.6% to 6.9% YoY, with softening food inflation, even while core inflation remained flat at 5.8%. The trade deficit widened in November due to contraction in exports and the current account surplus reduced from a record high. The GST collections in November were at an all-time high of Rs 1.1 lakh crore, which could be attributed to a normalisation of economic activity, festive demand and increased compliance.
Global crude oil prices rose sharply and have now crossed the March 2020 levels, as supply-demand balances have narrowed. Prices of many other commodities have also risen and this could result in inflation remaining on the higher side. It is expected that RBI would maintain surplus liquidity in the coming quarter and continue to conduct Open Market Operations & Operation Twists in order to prevent yields rising due to higher borrowings by the Government. A sticky Core inflation could also ensure a “floor” on the G-Sec yields. Union Budget would be good event to watch for further cues. The 10 year G-Sec is expected to remain in a tight range of 5.80% – 5.95% in the very near-term, and the market could await the borrowing figures and other measures to be announced in the Union Budget next month.