Monthly Review (As on 30th September 2021)
Equity Market review
Monthly Review
The Indian equity market continued its outperformance to its emerging market peers with the Nifty-50 index rising by another 2.8% in September. The Nifty-50 touched a lifetime high of close to 18,000 levels during the month before slightly cooling off due to fears of contagion from a Chinese property giant and a potential slowdown of Chinese economy. Broader markets fared significantly better, with the Nifty Midcap 100 index gaining 6.9% during the month. September also witnessed some important announcements by the Government, such as the formalization of the “bad bank” and a relief package for the telecom sector. Global markets however remained under pressure, partly due to rising crude prices and rising bond yields.
Indian Govt. Security yields fell during the month for the curve above 10 year, but the 10-year G-Sec yield remained flat at 6.22%. This fall in yields in longer-dated securities was in spite of rising US treasury yields & rising crude oil prices and could be attributed to easing inflation, high systemic liquidity, strong Foreign Institutional Investor (FII) buying in debt (more than Rs 13,000 cr), and comfort from better fiscal management. The spread of the 10-year AAA PSU corporate bonds to the benchmark G-Sec, compressed from 57 bps to 50 bps.
Outlook for Markets
Equity Market
India’s economic recovery continues to surprise on the upside, with most of the economic activity indicators reaching the pre-Covid levels except the mobility index. Urban indicators, including property registrations continue to inch upwards. In addition, the number of Covid cases and vaccination numbers continue to improve, with over two-thirds of the adult population vaccinated with at least one dose. In addition, the Indian Govt. continues to announce policy reforms thereby further improving sentiments, with some long pending measures such as the formation of the “bad bank” and a relief package for the telecom sectors that could help address some of the legacy NPAs of banks and encourage the business environment and bank credit. The Govt. has also been announcing Production Linked Incentives for various sectors, which would enable Indian companies to be competitive globally besides reducing dependence on imports. The impending “tapering” by the US Federal Reserve would reduce the excess liquidity that has been a key factor for boosting equity markets globally and an eventual rise in interest rates. Inflation concerns are rising, with crude oil prices at a 3-year high. Debt repayment issues in the real-estate sector in China and a slowdown in growth in the second half of the year in China are other factors to watch out for.
The Indian equity market has significantly outperformed most emerging markets and global markets this year and valuation premium is significantly higher than in the past. While the strong earnings growth over the FY 2021-23 period lends comfort, there is a possibility of a shift of FII allocation partially out of India after this outperformance. Rotation into sectors and in particular stocks, where there is some downside support in terms of valuations may be witnessed from current levels in the near-term, rather than a continuation of the unidirectional rally in the benchmark indices witnessed over the past 6 quarters. Demand in the upcoming festive season, any potential spike in Covid-19 cases, inflation trends and FII flows could influence in the near-term trend and our stance is reflected in the asset allocation in our hybrid funds, where we have cut back on our significant equity exposure even though we continue to remain modestly overweight equities given our positive longer-term outlook.
Monthly Review (As on 30th September 2021)
Debt Market review
Monthly Review
The Indian equity market continued its outperformance to its emerging market peers with the Nifty-50 index rising by another 2.8% in September. The Nifty-50 touched a lifetime high of close to 18,000 levels during the month before slightly cooling off due to fears of contagion from a Chinese property giant and a potential slowdown of Chinese economy. Broader markets fared significantly better, with the Nifty Midcap 100 index gaining 6.9% during the month. September also witnessed some important announcements by the Government, such as the formalization of the “bad bank” and a relief package for the telecom sector. Global markets however remained under pressure, partly due to rising crude prices and rising bond yields.
Indian Govt. Security yields fell during the month for the curve above 10 year, but the 10-year G-Sec yield remained flat at 6.22%. This fall in yields in longer-dated securities was in spite of rising US treasury yields & rising crude oil prices and could be attributed to easing inflation, high systemic liquidity, strong Foreign Institutional Investor (FII) buying in debt (more than Rs 13,000 cr), and comfort from better fiscal management. The spread of the 10-year AAA PSU corporate bonds to the benchmark G-Sec, compressed from 57 bps to 50 bps.
Outlook for Markets
Fixed Income Market
India’s GDP and GVA (Gross Value Added) were reported in line with market expectations at +20.1% YoY and 18.8% respectively in Q1 FY2022. Agriculture, construction and manufacturing sectors were the prime drivers of GVA growth during the quarter. Headline Consumer inflation for August surprised positively as it eased to 5.30% YoY from 5.59% YoY in July. This was primarily driven by moderation in food prices and a favourable base effect. Core inflation too, eased to 5.77% YoY. Industrial production rose by 11.5% YoY in July 2021 from 13.6% YoY in June, due to the low base of last year along with improving demand conditions and investment outlook.
In the US, the Federal Reserve Open Market Committee (FOMC) maintained a status quo but indicated that the QE tapering could commence as early as November and conclude by mid-2022, however emphasising that the policy is not on a pre-set course. Interest rate hikes could be more than a year away.
Domestically, we expect the Monetary Policy Committee to tweak its forward guidance and acknowledge a growth revival in its October meeting and eventually set the course for normalising the liquidity. The 10-year G-Sec may trade in a range of 6.15% to 6.40% in the near term. Rising crude oil prices and an impending inclusion of Indian bonds in some of the global bond indices could influence this range.