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Fund Manager Commentary

Read the latest market analysis and commentary on the Equity & Debt market from our Investment Desk as they share their views on market trends, market outlook and how to capitalize on investment opportunities.

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Fixed Income Market Update: March 2018

  • During the month of March 2018, rates fell across the board on liquidity easing measures announced by RBI, reduction and spacing out in borrowing programme of gilts by govt and decline in inflation leading to receding of rate hike fears.
  • The ten year gilt benchmark closed the month at 7.40%, 32 bps lower from previous month. The ten year AAA Corporate bond benchmark closed at 8.17%, 11 bps lower than previous month. The five year AAA corporate bond benchmark closed at 7.96%, 5 bps lower as compared to previous month. Ten year SDL spreads contracted in a range of 50-55 bps to the ten year gilt benchmark.
  • 1 year CD rates closed at 7.36%, 17 bps lower than previous month. 1 year T bill yield closed 21 bps lower at 6.41%. 3 month CD rates closed at 7.07% (18 bps lower) and 3 month T bill yields fell 17 bps to 6.10%. RBI announced variable term repos totaling Rs 1 lakh crores crossing March which were almost fully subscribed at rates close to 6%.
  • Brent Crude oil prices rose during the month to USD 68.83 per barrel. INR was stable during the month at 65.17. For the month of March, FIIs were net sellers in the debt market to the tune of Rs 2410 cr. India’s Feb trade deficit fell to USD 11.98 bn, higher than previous month.
  • The ten year benchmark US treasury yield fell by 8 bps to close the month at 2.78. The FOMC delivered a rate hike of 25 bps as expected. Tariff announcements by Trump led to expectations of trade wars and safe haven buying of US treasuries.
  • February WPI data release came at 2.48% as compared to 2.84% in previous month. CPI for February came at 4.44% compared to 5.07% in previous month.
  • Jan Industrial production (IIP) growth came at 7.5% compared to 7.1% for previous month.
  • For the month banks net borrowed on an average Rs 37232 Cr at various RBI liquidity facilities put together reflecting neutral to deficit liquidity conditions.
  • The Centre’s fiscal deficit rose to Rs 7.15 lakh crore or 120 per cent of the Budget target between April 2017 and February 2018.
  • Government announced a revised gross borrowing programme of Rs 5.55 lakh crores increasing the target for small savings collections by 25000 cr and reducing the buyback programme by Rs 25000 cr. Govt also introduced a maturity bucket of 1-4 years and increased the borrowing amount in the 15-20 yr and greater than 20 year buckets thereby reducing the amount to be borrowed in the 10-14 year segment.

Fixed income market outlook:

  • Banking system liquidity may swing back to a surplus position in excess of Rs 1 lakh crores with higher government spending and gilt maturities during the month. This is expected to keep money market rates benign.
  • After recent announcements on borrowing and with a negative gilt supply during the month, we expect gilt yields to remain range bound with a downward bias.
  • As expected RBI kept key rates unchanged at its Monetary policy review meeting on 5th April and to continue to sound caution on inflation. RBI has also increase the FPI limits in consultation with government from existing 5% of outstanding government securities to 5.5% which may also boost market sentiment.

Equity Markets Round Up:

The global markets were volatile with a downward bias during the month. The MSCI World Index, which covers developed markets was down 2.4% during the month, while the MSCI EM index (USD) was down 2.2%. The Trump administration’s protectionist measures and the US Fed raising rates accompanied by a more hawkish forecast impacted the markets. The Trump administration has taken a hard line on trade relations with China, and besides announcing its intention to impose a 25% duty on at least USD 50 Billion of imports from China, will file a case against Chinese technology licensing practices.

China has announced a more moderate list of US imports worth USD 3 Billion which will attract higher tariffs. It could be that neither side wants a trade war and both are playing to their domestic constituency, but the news flow will keep markets edgy. Metals were the hardest hit sector as a result of the global worries on trade.

The cyclical recovery remains strong, and consumption indicators have improved in Q4, as evidenced primarily by good growth in two-wheeler and tractor sales, and mirrored by momentum in diesel consumption. The rural demand is strong, likely as a consequence of increased credit penetration and increased government spending in rural development and social sectors. While investment remains robust, there has been a moderation in the external sector, likely due to working capital constraints for exporters (delayed GST refunds).

The industrial capex has been subdued for the past few years, but even outside of infrastructure (roads, ports and railways and renewable energy, there is a capex recovery likely in steel, cement (brownfields mostly and for waste heat recovery boilers), oil refining (BS-VI) and in fertiliser space.

Data Item

1 Month

1 year

 

(%)

(%)

MSCI EM Index (USD)

-2.17

22.01

MSCI EM Index Local

-2.18

19.16

MSCI World Index (USD)

-2.42

11.50

Indian Rupee

0.00

-0.51

Dollar Index (DXY)

-0.78

-10.41

Crude Oil- Brent

6.83

33.01

CRB Index

-1.58

1.37

Gold

0.54

6.11

Copper

-3.13

15.01

Iron Ore

-19.50

-21.95

Cotton (Cotlook A Index)

-2.17

4.65

Data as on 28th March 2018. Source Bloomberg

 

Indicators

 

 

 

Feb-18

Mar-18

FII net flows (Rs. Crs)

(11,037.00)

11,654.00

Mutual Fund net flows (Rs. Crs)

13,260.56

7,538.00

Exports (USD Billion)

24.38

25.83

Imports (USD Billion)

40.68

37.81

CPI

5.07

4.44

IIP

7.07

7.47

Data as on 28th March 2018. Source Bloomberg

Equity Market Outlook

The Indian economy has been seeing a weakening macroeconomic environment as a result of higher current account deficit, likely stress on the fiscal deficit number for FY 19, and rising, though still moderate inflation. Rising crude prices, continuing problems with NPAs at banks especially the public sector banks and a busy election season are other challenges at the macro level. However, at the ground level, we are seeing strong consumption demand especially in the rural areas. There is a broadening capex cycle outside of the infrastructure sector and a bottoming out of corporate earnings which are positives. In this situation the market movement will be a factor of fund flows. We expect global fund flows into EMs to be choppy and while domestic investors have continued to invest in equity, further volatility could have an impact on these flows. In terms of valuations, the markets are trading at a slight premium to historical numbers. Overall, we expect the markets to move sideways during the year with substantial volatility in between.

 

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