Monthly Review (As on 30th April 2022)
Equity Market review
Monthly Review
The Nifty-50 index ended on a negative note in April, declining by 2.1%, largely due to the uncertainty around Russia-Ukraine war, expectation of aggressive rate hikes by the US Federal Reserve, concerns on inflation globally, the ongoing earnings season, and rising Covid cases in China. We saw sharp declines in the IT sector while Energy, FMCG and Auto sector stocks delivered positive returns for the month. Foreign Institutional Investor outflows continued in April to the tune of approximately USD 4.2 Bn for the month, while domestic inflows continued to remain strong. Some of the other key developments in April were a reduction in India’s GDP forecasts by the IMF and the World Bank, an indication of a shift in focus of the RBI/Monetary Policy Committee from growth to inflation management, and an increase in the nutrient-based fertilizer subsidy for the Kharif season.
Bond yields rose during the month across the curve by an average of 35-38 basis points, with the 5-year G-Sec rising by 58 bps and the 15-year G-Sec by 19 bps, thus flattening the curve. The 10-year benchmark G-Sec yield rose by 30 bps and closed at 7.14% vs 6.84%. The shift in the yield curve across various tenors can be attributed to the ongoing geopolitical tensions (resulting in a rise in the price of crude oil as well as of some other commodities and causing a higher inflation globally as well as in India) and the likely action from Central Banks of major economies. The spread of the 10-year AAA PSU corporate bonds to the benchmark G-Sec continues to remain compressed, at just 7-8 bps, primarily due to a lack of supply in long tenor corporate bonds.
Outlook for Markets
Equity Market
For Q4 FY 2021-22, there is an expectation of a strong 20%+ earnings growth (year-on-year) in the BSE Sensex/NSE Nifty 50 universe. But, this would be predominantly driven by the financial sector, and oil & gas. Excluding these two sectors, the earnings growth could be much lower (in single digits) pulled down by sectors such as automobiles, cement and FMCG. We have seen an overall good set of numbers from the financial sector thus far and some disappointments in the IT sector. The IT sector is immune from higher commodity prices, but is facing challenges on the margins front due to wage inflation and attrition, which may be partly offset by the strengthening of the US dollar. Sectors which depend upon commodity inputs, will continue to feel the pressure of rising input costs in subsequent quarters. Their ability to pass on this inflation in forthcoming quarters will be a function of the demand environment.
The IMF, in its latest World Economic Outlook report, has reduced its forecast for India’s FY 2022-23 GDP growth to 8.2% from 9%, saying that higher commodity prices will weigh on private consumption and investment. The Government has approved the nutrient based subsidy rate on phosphatic and potassic fertilizers for the first half of FY 2022-23, which would cost the exchequer Rs 61,000 crores.India’s fertilizer subsidy bill for the full year is expected to be significantly (possibly more than 60%) higher than the Rs 1.05 Lakh crores projected in the Budget, due to the higher cost of raw materials and fertilizers globally, following the Russia-Ukraine conflict.
With multiple headwinds such as a stubbornly high inflation, reduction in liquidity and rising interest rates globally (and imminent domestically as well), and the risk of earnings downgrades we remain cautious at present market levels in the near-term. The Indian equity market has been very resilient relative to global markets over various periods in the past 1 year, and could therefore impact future performance. There are a few sectors/individual stocks, however, which could deliver better returns than the indices this year. We also continue to remain positive from the long-term perspective with a relatively higher GDP growth as compared to most other large economies, reasonably high forex reserves and an increasing domestic participation in the equity market.
Monthly Review (As on 30th April 2022)
Debt Market review
Monthly Review
The Nifty-50 index ended on a negative note in April, declining by 2.1%, largely due to the uncertainty around Russia-Ukraine war, expectation of aggressive rate hikes by the US Federal Reserve, concerns on inflation globally, the ongoing earnings season, and rising Covid cases in China. We saw sharp declines in the IT sector while Energy, FMCG and Auto sector stocks delivered positive returns for the month. Foreign Institutional Investor outflows continued in April to the tune of approximately USD 4.2 Bn for the month, while domestic inflows continued to remain strong. Some of the other key developments in April were a reduction in India’s GDP forecasts by the IMF and the World Bank, an indication of a shift in focus of the RBI/Monetary Policy Committee from growth to inflation management, and an increase in the nutrient-based fertilizer subsidy for the Kharif season
Bond yields rose during the month across the curve by an average of 35-38 basis points, with the 5-year G-Sec rising by 58 bps and the 15-year G-Sec by 19 bps, thus flattening the curve. The 10-year benchmark G-Sec yield rose by 30 bps and closed at 7.14% vs 6.84%. The shift in the yield curve across various tenors can be attributed to the ongoing geopolitical tensions (resulting in a rise in the price of crude oil as well as of some other commodities and causing a higher inflation globally as well as in India) and the likely action from Central Banks of major economies. The spread of the 10-year AAA PSU corporate bonds to the benchmark G-Sec continues to remain compressed, at just 7-8 bps, primarily due to a lack of supply in long tenor corporate bonds.
Outlook for Markets
Fixed Income Market
RBI kept the repo rate unchanged at 4% in April, and guided for a gradual and calibrated withdrawal of liquidity over a multi-year time frame. However, in the April policy, it raised the lower end of the LAF corridor by 40 basis points with the introduction of the Standing Deposit Facility (SDF) at 3.75%. Further with a view to enable banks to better manage their investment portfolio during FY 2022-23, the Reserve Bank decided to enhance the present limit under Held to Maturity (HTM) category from 22 per cent to 23 per cent of NDTL till March 31st, 2023.
Inflation continued to rise globally. Among the advanced economies, US inflation rose to a high of 8.5% in March, from 7.9% in February. In UK, inflation rose to a record 7% due to rising energy, food and metal prices. In India, Consumer Price Inflation in March surged to a 17-month high of 7%, from 6.1% in February, with the Wholesale Price Inflation rising to 14.5% from 13.1%. Core inflation, too, inched up 6.3% vs. 6.0%. Core sector growth moderated to 4.3% Y-o-Y in March 2022 compared with 5.8% Y-o-Y in the previous month.
Bond markets remained volatile in April on the back of geopolitical tensions, high-energy prices, and hawkish global Central Banks. Similarly, in India too, the spike in inflation numbers and with markets expecting a possible repo rate hike in the next meeting, we saw a spike in yields across the curve, in April. We expect yields to continue to trend higher in the near-term.