Monthly Review (As on 31st Jan 2020)
Equity Market review
Monthly Review
Global equity markets had a volatile start to calendar 2020, with several developments such as geopolitical issues in the Middle-East, phase-1 of the US-China trade deal and the reports relating to the Coronavirus in China.
In India, we had earnings disappointments in some of the Nifty-50 heavyweights along with the elevated valuations, which led to a 1.7% fall in the Nifty-50. However we saw a rally in the broad market, with a 5.3% rise in the Nifty Midcap 100 index, and it is heartening to see a reduction in the extreme polarization towards some select large-caps that we have been witnessing over the past couple of years.
Foreign institutions were larger net buyers to the tune of $1.4bn in January, while domestic institutions were small buyers. As we enter February, there are international concerns on the possibility of the Coronavirus spreading to other countries.
Bond prices fell in January, with the 10-year G-Sec yield rising slightly by 4 bps to 6.60% for the month, though US yields and crude prices fell. The fall in Indian bond prices was largely due to the spike in consumer inflation figures to 7.35% and the possibility of additional Government borrowing this year. Foreign investors were sellers in the debt market to the tune of Rs 11000 cr. Corporate bond spreads were stable in the 87-88 bps range.
Outlook for Markets
Equity Market
The Union Budget for FY20-21 was presented on February 1st, in the backdrop of a slowdown in economic growth and sluggish revenue collections. A fiscal deficit deviation of 50 bps for the current year and for FY20-21 has been indicated due to these challenges.
However, there has been no substantial incremental outlay for infrastructure spending beyond the pipeline announced earlier, and is therefore a disappointment, though the tax exemption announced for Sovereign Wealth Funds for investments in Infrastructure is a welcome step.
Since the optional lower income tax slabs which have been announced are applicable only if assessees were to let go of a host of deductions available under the existing regime, there is a possibility that only a small section of the taxpayers could shift to the new regime (implying therefore effectively no reduction in personal income tax for most of the taxpayers).
A growth in personal consumption by this means, therefore, may only be modest. The 3.5% fiscal deficit target for the next financial year is after assuming disinvestment proceeds of a whopping Rs 2.1 lakh crore, which would be very difficult to achieve unless the privatisation of BPCL, Concor, IDBI Bank and the IPO of LIC are all completed in FY20-21.
The status-quo on long-term capital gains tax on equities is indeed a disappointment, as a relaxation in the same would have helped boost sentiment and the disinvestment process, without significantly impacting the revenues or fiscal deficit.
The initial few days post the Budget have seen a sharp movement in both directions in the equity market, which is heading higher after the initial losses. However, for sustenance of the higher levels, a recovery in the GDP growth, corporate earnings, as well as an early containment of the Coronavirus, may be essential.
We are cautious in the near-term, and would look to add to the equity exposure either at lower levels, or depending upon the trend in the above-mentioned factors.
Monthly Review (As on 31st Jan 2020)
Debt Market review
Monthly Review
Global equity markets had a volatile start to calendar 2020, with several developments such as geopolitical issues in the Middle-East, phase-1 of the US-China trade deal and the reports relating to the Coronavirus in China.
In India, we had earnings disappointments in some of the Nifty-50 heavyweights along with the elevated valuations, which led to a 1.7% fall in the Nifty-50. However we saw a rally in the broad market, with a 5.3% rise in the Nifty Midcap 100 index, and it is heartening to see a reduction in the extreme polarization towards some select large-caps that we have been witnessing over the past couple of years.
Foreign institutions were larger net buyers to the tune of $1.4bn in January, while domestic institutions were small buyers. As we enter February, there are international concerns on the possibility of the Coronavirus spreading to other countries.
Bond prices fell in January, with the 10-year G-Sec yield rising slightly by 4 bps to 6.60% for the month, though US yields and crude prices fell. The fall in Indian bond prices was largely due to the spike in consumer inflation figures to 7.35% and the possibility of additional Government borrowing this year. Foreign investors were sellers in the debt market to the tune of Rs 11000 cr. Corporate bond spreads were stable in the 87-88 bps range.
Outlook for Markets
Fixed Income Market
Just as global markets were absorbing the signing of the Phase-1 of the US-China deal which could lead to a revival in growth, we have seen a setback due to the impact of the Coronavirus in China.
Domestically, Consumer Price Inflation came in higher than expected, at 7.35% vs. 5.54% last month, driven primarily by a sharp spike in food inflation and higher telecom tariffs, among others. Core inflation at 3.73% is still contained at below 4%.
Government estimates have pegged GDP growth at 5.0% yoy for the current financial year, well below even the 6.1% yoy witnessed in the previous year.
The Budget has pegged the fiscal deficit to GDP ratio at 3.5% for FY2020-21, from an upwardly revised 3.8% for the current year; both these figures are on expected lines. However gross borrowing for the current year has been surprisingly left unchanged at Rs 7.1 lakh crore, with a projected figure of Rs 7.8 lakh crore of gross market borrowing for FY2020-21.
Bond prices have risen (and yields have fallen) post the Budget, as the borrowing figure for the current year is lower than was being feared.
Consumer inflation could have peaked, or could be near to peaking. Crude oil prices have fallen, and fears of a further delay in the recovery in global growth due to the Coronavirus, could lead to crude oil prices remaining at these lower levels.
Bond yields have further fallen in the US during January. Measures from RBI, such as the Operation Twist witnessed in the past couple of months, could keep bond yields in India at lower levels. Corporate spread-compression would need to be watched going forward, along with the progress in terms of timelines for Indian bonds to be a part of some of the global bond indices. The 10 year G-Sec could trade towards the lower end of the 6.45% - 6.70% range in the near term.
