Monthly Review
Equity markets continued their strong run in May, with the Nifty-50 index gaining another 3.4%. However the broader markets saw some profit-booking with Nifty Free Float Midcap-100 Index correcting by over 3% during the month. Foreign institutions were large buyers in equities and fixed income; domestic institutions continued to be buyers. The recently concluded earnings season was better than expectations; mainly led by metals, banking and auto sectors, while IT and Pharma sectors disappointed.
Bond prices rose in May, with bond yields falling 17 basis points on sharply lower inflation, cooling crude, fall in US treasury yields & huge FII buying. Consumer price inflation moderated to 3.0% YOY in April from 3.9% YOY in March. A new 10-year Government Security was issued at 6.79% during the month, which rallied subsequently resulting in the yield falling to 6.66% by end May.
Market Outlook
We now have macroeconomic stability with controlled inflation, lower fiscal and current account deficit and stable currency. Corporate earnings, which have remained flat for over 3 years, are expected to be strong over the next 2 years, though there could be a couple of quarters during GST implementation, which could slightly prolong the wait. With the ability to claim input tax credit, actual incidence of tax is expected to be lower and therefore overall impact could be disinflationary in the longer-term, though we could see a near-term rise in prices in some of the sectors. There could be some squeeze in business and profitability in the unorganized sector as it adjusts itself into the new system.
The Nifty-50 has rallied over 16% in the last six months; valuations are now at an estimated 16x Fy19 earnings, higher than long-term averages. However, returns are likely to be healthy over the next 3 years, though there could be intermittent corrections. Stock-specific returns would continue to be more relevant than the returns in the large-cap indices.
India’s Q4FY17 GDP slowed sharply to 6.1% YOY compared to 7.1% in Q4FY16, reflecting the full impact of demonetization. As per the current estimates, we are expected to have a near-normal monsoon this year, and crude oil prices are expected to be in the 50-55$ band, per barrel, which would ease concerns on the inflation front. Going ahead, inflation could remain more benign than RBI's expectation due to a fall in vegetable prices, stable commodity prices and a base effect. We expect RBI’s tone to be less hawkish in the June policy, though we do not expect a cut in rates in this policy. Bond yields are eventually expected to inch lower through the year.
Monthly Review
Equity markets continued their strong run in May, with the Nifty-50 index gaining another 3.4%. However the broader markets saw some profit-booking with Nifty Free Float Midcap-100 Index correcting by over 3% during the month. Foreign institutions were large buyers in equities and fixed income; domestic institutions continued to be buyers. The recently concluded earnings season was better than expectations; mainly led by metals, banking and auto sectors, while IT and Pharma sectors disappointed.
Bond prices rose in May, with bond yields falling 17 basis points on sharply lower inflation, cooling crude, fall in US treasury yields & huge FII buying. Consumer price inflation moderated to 3.0% YOY in April from 3.9% YOY in March. A new 10-year Government Security was issued at 6.79% during the month, which rallied subsequently resulting in the yield falling to 6.66% by end May.
Market Outlook
We now have macroeconomic stability with controlled inflation, lower fiscal and current account deficit and stable currency. Corporate earnings, which have remained flat for over 3 years, are expected to be strong over the next 2 years, though there could be a couple of quarters during GST implementation, which could slightly prolong the wait. With the ability to claim input tax credit, actual incidence of tax is expected to be lower and therefore overall impact could be disinflationary in the longer-term, though we could see a near-term rise in prices in some of the sectors. There could be some squeeze in business and profitability in the unorganized sector as it adjusts itself into the new system.
The Nifty-50 has rallied over 16% in the last six months; valuations are now at an estimated 16x Fy19 earnings, higher than long-term averages. However, returns are likely to be healthy over the next 3 years, though there could be intermittent corrections. Stock-specific returns would continue to be more relevant than the returns in the large-cap indices.
India’s Q4FY17 GDP slowed sharply to 6.1% YOY compared to 7.1% in Q4FY16, reflecting the full impact of demonetization. As per the current estimates, we are expected to have a near-normal monsoon this year, and crude oil prices are expected to be in the 50-55$ band, per barrel, which would ease concerns on the inflation front. Going ahead, inflation could remain more benign than RBI's expectation due to a fall in vegetable prices, stable commodity prices and a base effect. We expect RBI’s tone to be less hawkish in the June policy, though we do not expect a cut in rates in this policy. Bond yields are eventually expected to inch lower through the year.