Market Review
• Indian equity markets stayed strong in March which was led by robust foreign inflows and sentiment boost from BJP's sweep in the Uttar Pradesh state elections.
• Nifty and Sensex rose by 3.3% and 3.1% respectively; whereas BSE100 index jumped by 3.3% in March 2017.
• FII's were net buyers in equities to the tune of INR 334 billion, whereas mutual funds were net buyers to the tune of INR 23 billion.
• Sectors that outperformed were Capital Goods, Realty, FMCG, Banking and Utilities. Sectors that underperformed were Metals, Healthcare, IT, Oil & Gas and the Auto sector.
Outlook
• The month started on a negative note as there were concerns over a rate hike by the US Federal Reserve Bank.
• However, FPI inflows came back on a strong note as concerns of a faster trajectory of rate hike. The BJP performed well in the state elections, especially in the largest state of Uttar Pradesh and the adoption of the GST in July 2017 seemed to be on track after a passage of four key GST bills in the Parliament.
• We expect government expenditure to accelerate as the financial year progresses. We believe that reviving the investment cycle will be critical for recovery in GDP growth and market earnings growth.
• Accelerating reforms and growth built upon a platform of stable macro-economic signifies that India will continue to remain a standout amongst emerging market peers, even while domestic flows remain supportive.
• Sensex trades at 17.3x FY18 estimated earnings. A positive outlook post the recent state election results (4QFY17 return of 12% in Nifty is best since 1QFY15) and the government's push on reforms (GST implementation gathering pace) have already been factored in which means that room for further expansion of price-earnings (P/E) multiple is now limited.
• Realisation of anticipated earnings recovery, management commentary in the forthcoming 4QFY17 results, progress of monsoon and GST implementation will be the key catalysts, in our view. We continue to remain optimistic from a medium to long term point of view.
Fixed Income Market Update
Market Review
• After a torrid February, where yields hardened significantly, March proved to be relatively good.
• March is seasonally positive from the demand-supply aspect for the bond markets. The government's scheduled borrowing winds up in February and there is only limited supply of State Government bonds. Meanwhile, demand from long term investors like Pension funds and Insurance companies are quite strong.
• Secondly, the outcome of the US Federal Open Market Committee meeting in the middle of the month was perceived to be more dovish than expected. US bond yields softened on the back of these developments, leading to a softening of bond yields across most markets.
• Backed by a more benign inflation view and a measured rate hike pace from the Federal meeting, global capital flows to emerging market risk assets picked up.
• India, too, received a fair share of the incremental capital flows. Capital inflows in India were further boosted on account of the results of the State elections in key states.
• The pickup in FPI flows added to the favourable demand-supply balance during the month, leading to lower yields. The pick-up in capital flows also led to a sharp appreciation of the domestic currency, easing some of the inflation concerns due to higher commodity prices.
• The benchmark 10-year government bond ended (March end) at 6.68% against the 6.87% at the end of the previous month.
Market Outlook
• The markets have already priced out any near term rate cut expectations after the RBI's monetary policy. In the absence of domestic expectations, the key drivers for the markets will be global developments and changes to domestic system liquidity.
• Globally, most large developed economies are seeing an uptick in inflation on the back of reflationary fiscal policies. As a result, bonds across different markets have seen a rise in yields.
• Domestic liquidity is quite abundant even as a significant portion of the cash deposited with banks post the demonetisation is still with the banks. RBI's measures to absorb this liquidity will be keenly watched for cues on the future of short term interest rates.
• A big factor for the markets is the demand - supply equation for government bonds. Though the expected supply of Central government securities is in line with last year's levels, the issuance of State Government bonds is expected to rise significantly.
• Moreover, on the demand side, RBI's Open Market Operations (OMO) purchases of bonds, which forms a large proportion of the total demand, is expected to be absent this year, due to abundant liquidity in the system. This is expected to provide an upward favourability to bond yields over the course of the year, though liquidity as well as global bond yield movements are expected to increase market volatility.
Source: Bloomberg
• Indian equity markets stayed strong in March which was led by robust foreign inflows and sentiment boost from BJP's sweep in the Uttar Pradesh state elections.
• Nifty and Sensex rose by 3.3% and 3.1% respectively; whereas BSE100 index jumped by 3.3% in March 2017.
• FII's were net buyers in equities to the tune of INR 334 billion, whereas mutual funds were net buyers to the tune of INR 23 billion.
• Sectors that outperformed were Capital Goods, Realty, FMCG, Banking and Utilities. Sectors that underperformed were Metals, Healthcare, IT, Oil & Gas and the Auto sector.
Outlook
• The month started on a negative note as there were concerns over a rate hike by the US Federal Reserve Bank.
• However, FPI inflows came back on a strong note as concerns of a faster trajectory of rate hike. The BJP performed well in the state elections, especially in the largest state of Uttar Pradesh and the adoption of the GST in July 2017 seemed to be on track after a passage of four key GST bills in the Parliament.
• We expect government expenditure to accelerate as the financial year progresses. We believe that reviving the investment cycle will be critical for recovery in GDP growth and market earnings growth.
• Accelerating reforms and growth built upon a platform of stable macro-economic signifies that India will continue to remain a standout amongst emerging market peers, even while domestic flows remain supportive.
• Sensex trades at 17.3x FY18 estimated earnings. A positive outlook post the recent state election results (4QFY17 return of 12% in Nifty is best since 1QFY15) and the government's push on reforms (GST implementation gathering pace) have already been factored in which means that room for further expansion of price-earnings (P/E) multiple is now limited.
• Realisation of anticipated earnings recovery, management commentary in the forthcoming 4QFY17 results, progress of monsoon and GST implementation will be the key catalysts, in our view. We continue to remain optimistic from a medium to long term point of view.
Fixed Income Market Update
Market Review
• After a torrid February, where yields hardened significantly, March proved to be relatively good.
• March is seasonally positive from the demand-supply aspect for the bond markets. The government's scheduled borrowing winds up in February and there is only limited supply of State Government bonds. Meanwhile, demand from long term investors like Pension funds and Insurance companies are quite strong.
• Secondly, the outcome of the US Federal Open Market Committee meeting in the middle of the month was perceived to be more dovish than expected. US bond yields softened on the back of these developments, leading to a softening of bond yields across most markets.
• Backed by a more benign inflation view and a measured rate hike pace from the Federal meeting, global capital flows to emerging market risk assets picked up.
• India, too, received a fair share of the incremental capital flows. Capital inflows in India were further boosted on account of the results of the State elections in key states.
• The pickup in FPI flows added to the favourable demand-supply balance during the month, leading to lower yields. The pick-up in capital flows also led to a sharp appreciation of the domestic currency, easing some of the inflation concerns due to higher commodity prices.
• The benchmark 10-year government bond ended (March end) at 6.68% against the 6.87% at the end of the previous month.
Market Outlook
• The markets have already priced out any near term rate cut expectations after the RBI's monetary policy. In the absence of domestic expectations, the key drivers for the markets will be global developments and changes to domestic system liquidity.
• Globally, most large developed economies are seeing an uptick in inflation on the back of reflationary fiscal policies. As a result, bonds across different markets have seen a rise in yields.
• Domestic liquidity is quite abundant even as a significant portion of the cash deposited with banks post the demonetisation is still with the banks. RBI's measures to absorb this liquidity will be keenly watched for cues on the future of short term interest rates.
• A big factor for the markets is the demand - supply equation for government bonds. Though the expected supply of Central government securities is in line with last year's levels, the issuance of State Government bonds is expected to rise significantly.
• Moreover, on the demand side, RBI's Open Market Operations (OMO) purchases of bonds, which forms a large proportion of the total demand, is expected to be absent this year, due to abundant liquidity in the system. This is expected to provide an upward favourability to bond yields over the course of the year, though liquidity as well as global bond yield movements are expected to increase market volatility.
Source: Bloomberg
