Monthly Review (As on 30th June 2021)
Equity Market review
Monthly Review
Equity markets were buoyed by a steady decline in Covid cases, an increased supply of vaccines and the easing of lockdown-like restrictions in many of the states. However, rising inflation and the delta-plus Covid variant continues to partly weigh on investor sentiment apart from the higher valuations. The Nifty index rose by a modest 1% in June compared to a sharp upmove 4.6% in the NSE Midcap-100 index. Large global markets like the US too, posted a modest rise in June. Among other key developments the all-India rainfall till the end of June has been 13% higher than the long period average which is encouraging; and the price of Brent crude oil has doubled in 8 months to around 75$ a barrel a 2-year high, which is concerning.
Bond prices fell during the month with the 10-year Government Security yield rising by four basis points to 6.05%. This flattish trend could be attributed to mixed global cues with US Treasury yields easing but high crude oil prices and domestic inflation. RBI kept the market supported through G-SAP (Govt. Securities Acquisition Program) operations. FIIs were net sellers in debt by approx. ₹ 4000 cr. The spread of the 10-year AAA PSU corporate bonds to the benchmark G-Sec, widened from 69 bps to 75 bps primarily due to the 10 year G-Sec being supported by RBI.
Outlook for Markets
Equity Market
Corporate earnings ended FY 2020-21 on a positive note with a continuing recovery in demand and a partial base effect in the 4th quarter. Strong numbers from the commodity space (metals sector aided by record prices and reduction in debt and the Oil Marketing companies aided by inventory gains) healthy numbers from some of the banks and NBFCs aided by a moderation in slippages and improved collection efficiencies reasonable numbers from the IT sector aided by a robust demand and continued deal wins. Consensus estimates indicate an earnings CAGR of 20%+ for the FY 2020-2023 period driven by financials, metals, oil, IT and automobile sectors.
Institutions, both foreign and domestic, were net buyers in June, with FIIs purchasing equities worth USD 1.5 bn & domestic institutions purchasing equities worth USD 0.9 bn. For the first half of this calendar year 2021, FIIs have been net buyers of USD 8.1 bn of equities. The Govt. has announced another set of relief measures (0.7% of GDP) including credit guarantee schemes for impacted sectors / microfinance borrowers and an extra allocation towards emergency credit lines for the MSME sector.
Despite the partial lockdown-like restrictions in major states in April and May, the low base of the corresponding quarter last year could nevertheless result in an “optically” strong 1st quarter of FY 2021-22 for many of the sectors. Going forward, a strong global recovery, low interest rates, a normal monsoon and Govt. measures, could aid economic growth and corporate profitability in the remaining 3 quarters of FY 2021-22. This could be despite some near-term challenges due to restrictions in some of the states and concerns over a potential third wave but there are indications of an accelerated vaccine availability in the July-December period. Higher commodity prices and the impact of the second wave on consumer sentiment would be closely watched. We could continue to witness a consolidation or possibly a minor correction in the indices accompanied by sectoral rotation based on respective valuations relative to the market levels. We continue to have a positive longer-term outlook on select stocks/sectors.
Monthly Review (As on 30th June 2021)
Debt Market review
Monthly Review
Equity markets were buoyed by a steady decline in Covid cases, an increased supply of vaccines and the easing of lockdown-like restrictions in many of the states. However, rising inflation and the delta-plus Covid variant continues to partly weigh on investor sentiment apart from the higher valuations. The Nifty index rose by a modest 1% in June compared to a sharp upmove 4.6% in the NSE Midcap-100 index. Large global markets like the US too, posted a modest rise in June. Among other key developments the all-India rainfall till the end of June has been 13% higher than the long period average which is encouraging; and the price of Brent crude oil has doubled in 8 months to around 75$ a barrel a 2-year high, which is concerning.
Bond prices fell during the month with the 10-year Government Security yield rising by four basis points to 6.05%. This flattish trend could be attributed to mixed global cues with US Treasury yields easing but high crude oil prices and domestic inflation. RBI kept the market supported through G-SAP (Govt. Securities Acquisition Program) operations. FIIs were net sellers in debt by approx. ₹ 4000 cr. The spread of the 10-year AAA PSU corporate bonds to the benchmark G-Sec, widened from 69 bps to 75 bps primarily due to the 10 year G-Sec being supported by RBI.
Outlook for Markets
Fixed Income Market
The Federal Reserve Open Market Committee (FOMC) maintained a status quo; however, the medium-term guidance appeared hawkish, with the possibility of an increase in rates by 50 bps rates in 2023. The European Central Bank (ECB) maintained status quo. Domestically, the Monetary Policy Committee (MPC) too maintained a status quo on policy rates and retained its state-based accommodative forward guidance, despite a marginal increase in its projection for inflation in FY 2021-22.
The GDP for the 4th quarter of FY 2020-21 was good at +1.6% YoY in Q4 FY 2020-21 aided by the low base and high Government spending. Industrial production for April declined sharply on a sequential basis due to the lockdown restrictions. Headline consumer inflation for May rose sharply to 6.30% from 4.23% in April, led by a broad-based rise across all segments. Core inflation too, rose to 6.55%. Subsequent to the gradual unlocking, high frequency indicators show that economic activity is back to 85% of its pre-second wave levels.
Given the above economic backdrop, we expect the G-Sec curve to remain steep, with the 5-10 year G-Secs anchored with RBI support. The 10-year G-Sec may trade in the range 6% to 6.2% in the near term.