Monthly Review (As on 31st July 2020)
Equity Market review
Monthly Review
Equity markets globally continued their upmove for the third consecutive month, and Indian markets moved in tandem with the global indices. The Nifty-50 gained over 7.5% during the month led by better-than-expected, June quarter corporate results so far, rising hopes of earlier launch of vaccine for COVID-19 and a good monsoon rather than due to an economic recovery in India. The Nifty-50 is now only approximately 10% below the earlier highs. Analysts had significantly lowered their expectations for this quarter’s results, due to the lockdown and therefore the comparison of the actual results has to be viewed in this perspective; and not in terms of the absolute numbers.
Globally economies have also reopened faster than expected and global central bankers continue to provide huge liquidity support to their respective economies. This high liquidity continues to find their way into Indian markets with net purchases of over $1.1bn by foreign investors; however domestic investors have turned net sellers to the tune of $1.4bn in the month of July.
The 10-year Government-Security yields fell by 4 bps and 30-40 year G-Sec yields fell by 12 bps during the month. A new 10-year G-Sec was issued at 5.77%. The fall in G-Sec yields was mostly on account of fall in US Treasury yields, fragile economic recovery due to local lockdowns and surplus liquidity in the system which led to a relatively increased demand for G-Secs, State Government bonds and quality corporate bonds. Foreign institutions were sellers of debt securities during the month. Corporate bond spreads compressed further from 59 bps to 55 bps, relative to G-Secs.
Outlook for Markets
Equity Market
We are midway through the Q1 FY 2020-21 results season, and we observe that while revenues did get impacted on account of COVID-19 and the lockdowns, the impact on margins was lesser than feared, thanks to stringent cost control by corporates. The profitability numbers were therefore better than the expectations of analysts. This, coupled with a relatively optimistic commentary from some of the corporates, led to the uptick in stock prices continuing. While the Covid-19 epidemic appears to be now under control in some of the larger cities, a new concern is the spread in Tier 2/3 towns. The spread of the virus and new highs in incremental daily Covid cases at the national level remain a concern and the extended lockdowns by various State Governments are causing a delay in further economic recovery to pre-Covid levels.
Going forward, equity markets will keenly watch the demand trajectory in the upcoming festive season, now that the phase of the initial pent-up demand is behind us. Commercialization of one or more of the various vaccines to address the Covid pandemic, economic recovery, GDP numbers and global trade issues are other factors which would influence the market. The RBI’s stance on moratorium vs restructuring will also impact markets, depending upon the guidelines pertaining to the same.
We continue to remain cautious on the equity market in the near-term particularly, due to the valuations and would prefer to remain underweight equities in our hybrid funds at present levels. The longer-term (5-year+) outlook continues to be positive.
Monthly Review (As on 31st July 2020)
Debt Market review
Monthly Review
Equity markets globally continued their upmove for the third consecutive month, and Indian markets moved in tandem with the global indices. The Nifty-50 gained over 7.5% during the month led by better-than-expected, June quarter corporate results so far, rising hopes of earlier launch of vaccine for COVID-19 and a good monsoon rather than due to an economic recovery in India. The Nifty-50 is now only approximately 10% below the earlier highs. Analysts had significantly lowered their expectations for this quarter’s results, due to the lockdown and therefore the comparison of the actual results has to be viewed in this perspective; and not in terms of the absolute numbers.
Globally economies have also reopened faster than expected and global central bankers continue to provide huge liquidity support to their respective economies. This high liquidity continues to find their way into Indian markets with net purchases of over $1.1bn by foreign investors; however domestic investors have turned net sellers to the tune of $1.4bn in the month of July.
The 10-year Government-Security yields fell by 4 bps and 30-40 year G-Sec yields fell by 12 bps during the month. A new 10-year G-Sec was issued at 5.77%. The fall in G-Sec yields was mostly on account of fall in US Treasury yields, fragile economic recovery due to local lockdowns and surplus liquidity in the system which led to a relatively increased demand for G-Secs, State Government bonds and quality corporate bonds. Foreign institutions were sellers of debt securities during the month. Corporate bond spreads compressed further from 59 bps to 55 bps, relative to G-Secs.
Outlook for Markets
Fixed Income Market
Headline inflation for June was much higher than expectations at 6.09% led by a sharp increase in core inflation at 5.15%, even though food inflation saw a downward trajectory. India's fiscal deficit in the first quarter has touched ₹ 6.5 lakh crore, 83% of the full-year’s target reflective of weak tax collections and Govt. spending to address the impact of the pandemic-related lockdowns.
In the near-term we expect that the Monetary Policy Committee would pause on rates in the policy announcements in August, primarily due to the recent readings of the Consumer Price Inflation. We expect that, we could also see RBI announcing unconventional measures like Open Market Operations (OMO) “twists” in order to prevent any increase in bond yields. State finances remain a concern and we expect a large increase in State Govt. debt over the next 2 quarters. In the near term we expect, the new 10 year G-Sec to trade in the range 5.6%-6.0%.