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Monthly Equity and Debt Strategy - November 2018

Equity Strategy:

 

  • World equity markets have remained subdued: Weak global sentiment due to higher probability of slowdown in global growth prospects on back of risk emanating from rise in US interest rates, expected contraction in central bank balance sheet, intensifying trade war & rise in geopolitical tensions has led to correction in global equity markets. Indian markets too have witnessed correction and has fallen in line with world markets. However, EM equities have underperformed primarily led by steep correction in Chinese equities.
  • Mid-term earnings review Q1FY19: NIFTY 50 Index consensus earnings have been downgraded by ~1.6% so far during Q2FY19 earnings season as downgrades outpaces upgrades. Major drivers of disappointing earnings have been: rising price of oil along with depreciating rupee, rise in bond yields impact of MTM losses on financial assets, IL&FS default impact on Banks & Financials, increasing competitive intensity in discretionary consumption, and Kerala floods impact on overall discretionary consumption and general insurance sector. Positives from Q1FY19 earnings include robust FMCG growth, continued up-tick in rural demand, in-line software exports, stable realizations for metals, pick up in bank credit growth & declining trend in NPA additions, indicating probable turnaround in corporate financials.
  • Equity Strategy: Given that valuations are moving forward to long term averages; Indian equities offer relatively better margin of safety from a long term perspective. Indian Equities are moving closer to a zone where one can be more confident of outperformance vs. bond funds over longer term (its noteworthy that Equity Indices have underperformed Bond Funds in last two to three years). Global volatility induced by probable slowdown in world economic outlook may thereby lead to sharp correction, providing opportunity. Hence, each dip in the market should be used as an opportunity to build positions towards equal weight asset allocation. NIFTY below 9,600 might presents a potential opportunity to go overweight.

Fixed Income Strategy:

  • Over the last one month bond yields have come down by around 20 bps. Please find below update on fixed income markets and strategy going forward:
  • RBI in its October policy, shifted its stance to 'Calibrated Tightening' despite lowering its H2 inflation projections, thereby indicating that RBI is cognizant of inflation risks emanating from weaker INR and elevated crude prices.
  • At the same time, keeping interest rates unchanged means that RBI is likely act only if risks to inflation materialize and it doesn't want to use interest rates to manage the currency.
  • MPC minutes also highlighted that MPC members remain committed to their legislative target of 4% +/- 2% on headline CPI and interest rate defence to tame INR weakness remains off the table at current juncture.
  • The decision in December MPC meeting would depend upon upcoming inflation data and increase in inflation owing of INR weakness, Crude price movement.
  • Headline CPI prints from June onwards have been benign due to base effect and contained food inflation.
  • RBI on Friday announced further OMOs buybacks of Rs. 40 billion, taking the over-all amount of OMO buybacks for FYTD to 1.26 trillion (0.86 trillion done till October 29, and further 400 billion to be done in November). The OMO buybacks by RBI are along expected lines, given the liquidity deficit.
  • Given the high quantum of OMO, we don’t expect significant upside in long term yields, however increasing oil prices, tightening liquidity both globally and domestically, rising global yields and worsening current and fiscal deficit is likely to keep bond yields a at elevated levels.
  • As a strategy, we have stayed away from duration centric (longer maturity bond portfolios) for quite some time and instead preferred accrual strategy (AA & above) short to medium.