Market Update
Macro Economic Review
The macro environment of the country remains largely stable, with there being visible improvement in some macro-economic parameters even as some others have somewhat deteriorated. Nevertheless, the RBI is beginning to show some comfort on the revival of global growth even as the improvement of domestic growth remains shrouded with some degree of uncertainty. The headline inflation is beginning to moderate in the wake of improvements in some other components within the inflation basket.
The Index of Industrial Production (IIP) data for the month of Feb ’18 (released in April’18), was at 7.1% slightly lower than the previous months 7.50% but higher than the estimate of 6.80%.
The further drop in the headline CPI to 4.28% (in March’18) from 4.44% (in Feb’18) was aided by softening vegetable prices. The drop-in prices were significant enough to bring down the inflation despite the upward pressures exerted by the HRA to central government employees and the effect of GST on services sector. The headline inflation seems to have already peaked about couple of months back, at least for the time being.
The April Monetary Policy Committee (MPC) meeting held the rates unchanged at 6% and the committee sounded largely dovish on inflation. Ironically, however, the minutes of the meeting, later during the month sounded markedly different from the policy document with hawkish tones from several members. Few members continued to express inflation worries within the economy, especially due to rising oil prices. The rising oil prices can start affecting the current account deficit in case oil prices hover around these levels for a few more quarters. However, we do not expect it to have any material impact on the inflation in the near term due to its limited weight in the basket.
The trade deficit in March widened to $ 13.69 bn from $ 11.98 bn previous month. The widening has been due to falling exports and rising imports. The pickup in the domestic growth conditions have increased the import requirement and the overall import bill has been higher due to appreciating metal and oil prices globally. We do not expect any quick improvement in the trade deficit as long as the international prices of metals and oil continue to hover around the present levels or move higher.
Equity Market
The Indian equities (+6.2%) logged some recovery last month, after consecutive corrections since past two months with early earnings trends across sectors being broadly supportive. The cooling of the debt markets and the moderation in the 10-yr G-sec yields too played its part in the recovery of equity markets. Sector-wise, technology sector continued to outperform on the back of rupee depreciation and a disappointing Current Accounts Deficit (CAD) data even as earnings trends, despite being mixed, were largely supportive. Besides, the Banks too had had a better month supported by overall decent earnings across sector, barring Axis Bank that reported a big cleanup quarter, that throws mixed signals on corporate banks in general. On the other hand, Oil & Gas and Telecom sectors turned out to be rather subdued.
As far as fund flows are concerned, the Foreign Institutional Investors (FIIs) were net sellers last month while the Domestic Institutional Investors (DIIs) continued to be net buyers led by domestic Mutual Funds (MFs). In the near-term, investors are expected to keenly monitor the impact of rebalancing of India’s weight in the MSCI indices alongside the outcome of the corporate earnings’ results.
We continue to maintain that the market will likely remain in the mode of re-calibrating recent gains in economic and earnings growth momentum against emergent risks of inflation and higher interest rates for some time and this is expected to induce volatility in the market for some time.
Our Portfolio approach continues to remain balanced with bottom-up stock selection and sector selection playing equal roles. We believe evidence is emerging on strengthening a pro-cyclical stance and some portfolio shifts to capture a potential industrial/manufacturing recovery are being undertaken. Cyclicals with comfortable balance sheets and attractive valuations and companies with strong franchise value but presently facing growth headwinds do attract our attention.
Fixed Income Market
The bond market this month witnessed rising volatility and swinging prices. The bond prices at the longer end moved up and down by about 3-4% in the last one month. While there has been some recent drop in volatility the bond yields are still elevated.
The sharp drop in the headline CPI from 5.21% in Dec ’17, to 4.28% in April’18 led to some buildup of expectation. The drop-in headline inflation was led largely by a decline in vegetable prices. In the meanwhile with inflation moderating, it appeared that the speculation about a possible rate hike in the immediate future have also been put to rest for the time-being. Besides, any near-term rate hike decision, i.e. in the next policy review in June ’18, (although a low probability) would be mainly influenced by the onset and the progress of the monsoon. All the same, the CPI inflation post June ’18 is expected to continue to tread lower, given the low base effect, and is likely to stay at under 4.0% until Dec ’18. Albeit the rising oil prices in the international market and its effect on the domestic inflation will be mostly limited.
The 10-year benchmark yield started dropping from a high of 7.80% in March’ 18 and moved lower to around 7.12% in the first half of April ‘18. The big drop in yields was led by -
- Lowering of the 1st half CY18 government borrowing and reduced borrowing at the longer
- end Dovish credit policy document review in April’18
Thereafter the bond yields started to concede gains quickly and the yields retraced to around 7.77% in the last week of April due to -
- Rising oil prices in the international market
- Selling by foreign investors of Indian debt and volatile domestic currency
- Hawkish credit policy meeting minutes. The minutes of the meeting were hawkish as compared to the actual policy document
The market is gradually beginning to factor that the onset of monsoons, lower food prices and last few months’ effect of HRA payout to central government employees will keep the headline inflation in check over the next few months. However, the sharp difference in opinion about inflation amongst the MPC members are a cause of worry for the market and the resultant selling and volatility in the bond prices have gone up to levels last seen in 2013.
In fact, by lowering its borrowing program, the government had suitably addressed the mismatch in the demand and supply of G-Secs (gilts), but few auctions devolved due to lack of appetite amidst weak market sentiments.
Through the year 2017, the sell-off in the bond market was largely led by jitteriness and fears of potential rate hikes. These fears have somewhat been allayed for the time being, and are unlikely to create furor until June ’18 when monsoons could guide the RBI’s course on interest rates. Also, since the RBI has not already hiked the repo rate despite highlighting the risks to inflation in its last policy, we do not expect a rate hike from RBI unless the headline CPI goes beyond the forecast 5.60% in the first 6 months of FY19.
In the given market conditions, we urge investors to be cautious and pick fund duration aligned to their investment horizons. We do not expect any rate reductions soon but we do hold on to our stance for a need for tighter real rates and endorse efficient allocation of capital and savings/ investment. Currently we are at an interesting juncture where there is also an outside chance of RBI turning less hawkish in the coming months. In fact, in the event of some softening in repo rates (as RBI acknowledges lower CPI in the second half of the calendar year and feels the need to contract the real rates), there will be newer opportunities for investors on long duration and investors may then initiate some strategic investments. The market, in due course, is expected to move in sync with the Monetary Policy Committee (MPC’s) rate decision, which is expected to take cognizance of developing inflation and growth dynamics.
Last Updated: 15th May 2018
Next Update On: 15th June 2018
Update Frequency: Once Every Month
