Monthly Review (As on 31st Aug 2019)
Equity Market review
Monthly Review
Equity Markets witnessed another month of negative returns with the Nifty-50 Index declining by 0.9%. The pain continued to be higher in the broader market, as reflected in a higher fall of 1.7% in the Midcap-100 index.
However, Indian equities fared better than some of their global counterparts. Prior to this, we also had a 35 bps cut in the repo rate in the monetary policy, with a cumulative rate-cut of 110 bps in the present cycle.
However, FIIs continued to be sellers, selling equities worth USD 2.2 bn in August while domestic institutions bought USD 2.8 bn worth of equities. RBI accepted all the recommendations of the Bimal Jalan Committee Report and decided to transfer INR 1, 76,000 crore to the Government of India.
On the global front, the US-China trade war has continued to escalate with more tariffs announced by both the countries, though the possibility of a resolution continues to exist
Bond prices fell sharply in August, with the 10-year G-Sec yield rising by 19 bps to 6.56% during the month. Fiscal worries due to a potential shortfall in the revenues as per present trends, and a sharp depreciation in the Indian Rupee could have caused a rise in bond yields in August despite the falling US treasury yields and low crude oil prices. Spreads of AAA-rated Corporate Bonds over the 10 year G-Sec compressed, from 102 bps to 83 bps.
Outlook for Markets
Equity Market
The Corporate earnings for the first quarter of current financial year disappointed market participants, as the positive momentum was restricted to some of the banks, while corporates from most of the other sectors either disappointed in their earnings numbers, or were concerned about the outlook for the coming quarters.
Rising inventory levels in real estate, automobiles and some of the consumer sectors have caused concerns. The macroeconomic data continued to disappoint, with the real GDP growth for this quarter being reported at just 5%.
The multi-year low in nominal GDP growth of 8%, has reflected in corporate numbers as well.
We have also seen announcements from the Government on:
- Rollback of the tax surcharge, which was announced in the Budget, and was impacting the Foreign Investors, accelerating the capital infusion of Rs 70,000 crore in PSU banks, and
- Consolidation of PSU banks in terms of proposed mergers.
However, the ongoing slowdown requires an upliftment of general consumer sentiment as well as renewed spending by the Government to spur economic activity.
There is a possibility of a fiscal stimulus of up to 0.3% of the GDP with approximately INR 53,000 crore, which is the additional transfer of surplus scheduled to take place from the RBI to the Government, after adjusting for the figure which is already budgeted / received.
The equity market could find support post the recent announcements by the Government and the RBI, but there could be some “waiting period” before we witness a reasonable upside, as equity markets would look for fiscal measures to revive industrial growth and some taxation measures to revive consumer demand.
While the Nifty-50 itself quotes at slightly over 16x one-year forward earnings, there have been significant price corrections in individual stocks, both within and outside of the Nifty-50, and we would continue to add selectively on a stock-specific basis during this “waiting period”. The long-term outlook continues to remain positive.
Monthly Review (As on 31st Aug 2019)
Debt Market review
Monthly Review
Equity Markets witnessed another month of negative returns with the Nifty-50 Index declining by 0.9%. The pain continued to be higher in the broader market, as reflected in a higher fall of 1.7% in the Midcap-100 index.
However, Indian equities fared better than some of their global counterparts. Prior to this, we also had a 35 bps cut in the repo rate in the monetary policy, with a cumulative rate-cut of 110 bps in the present cycle.
However, FIIs continued to be sellers, selling equities worth USD 2.2 bn in August while domestic institutions bought USD 2.8 bn worth of equities. RBI accepted all the recommendations of the Bimal Jalan Committee Report and decided to transfer INR 1, 76,000 crore to the Government of India.
On the global front, the US-China trade war has continued to escalate with more tariffs announced by both the countries, though the possibility of a resolution continues to exist
Bond prices fell sharply in August, with the 10-year G-Sec yield rising by 19 bps to 6.56% during the month. Fiscal worries due to a potential shortfall in the revenues as per present trends, and a sharp depreciation in the Indian Rupee could have caused a rise in bond yields in August despite the falling US treasury yields and low crude oil prices. Spreads of AAA-rated Corporate Bonds over the 10 year G-Sec compressed, from 102 bps to 83 bps.
Outlook for Markets
Fixed Income Market
The Federal Reserve met market expectations in the US by cutting the policy rate by 25 bps, and in India, the Monetary Policy Committee cut the Repo rate by 35 bps.
Headline Industrial Production growth moderated to 2% YoY in June 2019 from a revised figure of 4.6% YoY in May 2019.
Consumer inflation was steady at 3.15% in July. GDP growth for Q1 FY2020 fell sharply to 5% YoY led by a higher-than-expected moderation in the manufacturing sector, and a disappointment in the growth in the construction and real estate sectors.
Recent announcements on better transmission of monetary policy (linking floating retail-loan rates with the repo rate), and recapitalization of PSU banks, which could respectively lead to an increase in demand and better availability of credit to the stressed sectors of the economy.
The present trend in growth and inflation indicate that there is a possibility of one or two further rate cuts in the ongoing cycle, leading to a further decline in benchmark 10 year yields.
The combination of fiscal and monetary policy measures, to revive growth, are the key monitorables.
Persistently low inflation and low interest rates globally indicate that interest rates in India could remain low, or trend lower, in the near-term. Further escalation in trade-tensions, a sharp rise in crude oil due to geopolitical reasons, large capital outflows from emerging markets, or an increase in our fiscal deficit, are some of the factors which could prevent a sharper fall in yields, but we see a lesser probability of these factors.
We therefore expect yields to trend lower, with the 10 year Gsec yields likely to trade in the range 6.25% – 6.50% in the near term.
