Monthly Review (As on 31st October 2018)
Equity Market review
Monthly Review
The Nifty-50 index continued its downfall in October with the index closing sharply down by another 5% in this month. However, the broader market managed to remain flattish, thereby outperforming large-cap indices after many months of underperformance. The key factors causing this sharp drop in the Nifty-50 was the continued tightness in liquidity in the bond markets in the aftermath of the IL&FS default, rupee depreciation and some global geopolitical tensions. The RBI maintained a status quo as regards the repo rate, in contrast with the market expectation of another rate hike. Foreign funds continued to be large sellers (US$ 3.7 billion), and domestic institutions continued to be large buyers (US$ 3.5 billion) in equities.
Bond prices rebounded sharply from their lows in October, with the 10-year G-Sec yields falling by 17 bps to 7.85%. The cooling off in fuel prices & Open Market Operations by way of purchases by RBI led to this fall in bond yields despite a rise in US treasury yields, rupee depreciation & selling by foreign funds, who sold around INR 10,000 crore worth of debt securities in October. The spreads of corporate bonds over the 10 year G-Sec widened from 65 bps to 71 bps.
Outlook for Markets
Equity Market
The ongoing corporate earnings season is presenting a mixed picture so far, with most of the companies meeting/beating expectations on the revenue front but some of them slipping (as compared to expectations) as regards profit margins. Among sectors, the IT sector continues to do well on most parameters. Corporate-oriented banks have finally performed better on the asset quality front. Consumer and Auto companies did well vs expectations in terms of the volume growth, but disappointed in terms of profit margins. We expect to see some downgrade of the overall earnings expectation for the current year, post this quarterly result season.
In the near-term, the equity market is likely to take cues from the ongoing earnings season, international crude prices, stabilisation in the Rupee, and the measures taken by the regulator to resolve the recent liquidity concerns in the NBFC space. The equity market movement is also likely to be influenced by the resolution or otherwise, of global geopolitical issues, as well as the domestic election scenario which is about to commence with the State elections in Rajasthan, Madhya Pradesh and Chhattisgarh. The broad market appears to have stabilised, and this is an encouraging sign. We would continue to look at opportunities in those companies where the stock prices have sharply corrected despite their business fundamentals having remained intact.
Monthly Review (As on 31st October 2018)
Debt Market review
Monthly Review
The Nifty-50 index continued its downfall in October with the index closing sharply down by another 5% in this month. However, the broader market managed to remain flattish, thereby outperforming large-cap indices after many months of underperformance. The key factors causing this sharp drop in the Nifty-50 was the continued tightness in liquidity in the bond markets in the aftermath of the IL&FS default, rupee depreciation and some global geopolitical tensions. The RBI maintained a status quo as regards the repo rate, in contrast with the market expectation of another rate hike. Foreign funds continued to be large sellers (US$ 3.7 billion), and domestic institutions continued to be large buyers (US$ 3.5 billion) in equities.
Bond prices rebounded sharply from their lows in October, with the 10-year G-Sec yields falling by 17 bps to 7.85%. The cooling off in fuel prices & Open Market Operations by way of purchases by RBI led to this fall in bond yields despite a rise in US treasury yields, rupee depreciation & selling by foreign funds, who sold around INR 10,000 crore worth of debt securities in October. The spreads of corporate bonds over the 10 year G-Sec widened from 65 bps to 71 bps.
Outlook for Markets
Fixed Income Market
India’s fiscal deficit rose by 19% year-on-year to INR 5.9 lakh crore in the first half of the current financial year, and now stands at 95% of the Budget estimate for the full year. The Consumer Price Inflation in September was 3.8%, only marginally higher than the August figure of 3.7%. The price of Brent crude oil tumbled by more than 13% from its Oct 3 high of 86.5$ per barrel, a major relief for countries like India. The Indian Rupee touched an all-time closing low of INR 74.4 to the US Dollar in October, before closing the month at INR 74, losing 2% during the month. The Monetary Policy Committee voted for a pause and maintained the repo rate at 6.50%, though it changed its stance from “neutral” to “calibrated tightening” in its Monetary Policy Review on 5th October.
A volatile rupee, volatile crude oil price along with other global uncertainties may force the RBI to remain guarded, and a rate hike later in this financial year cannot be ruled out. However, since RBI has become more aggressive on its Open Market Operations (OMOs) having conducted INR 36,000 crore of OMO in October, with another INR 40,000 crore announced for November, the demand-supply dynamics are favourable for a further softening in G-Sec yields. But we do not expect a further sharp fall in yields (after the recent fall) due to local macro uncertainties.
Our strategy of being overweight in Government Securities has played out so far as the spreads have widened across for corporate bonds. However we continue to remain flexible to react to market developments and actively positioned to take advantage of any opportunity across the curve.
