Markets- Indian markets continued to scale newer highs in May with FIIs (foreign institutional investors) inflows continuing, especially after the decisive election verdict. Mid cap and small cap stocks fared better than the broader market with the mid cap index gaining 15.5% in the month. BSE100 index gained 9.4% in May. FIIs continued their buying streak and were net buyers to the tune of Rs.172 bn, also mutual funds turned net buyers after 8 months to the tune of Rs.1bn. Sectors that outperformed were realty, utilities, metals, capital goods, banking and oil & gas. Sectors that underperformed were pharmaceuticals, IT, FMCG and auto.
India’s FY14 GDP growth was recorded at 4.7%. This marks a second straight year of sub 5% growth. The agricultural sector grew at 4.7% vs 1.4% YoY, the manufacturing sector grew at -0.7% vs 1.1% YoY, and services sector grew by 6.4% vs 7.0% YoY. India’s FY14 fiscal deficit came in at 4.5% of GDP which is lower than the downwardly revised estimate of 4.6 percent provided by the government in the federal budget.
India's current account deficit plunged to low of 0.2% of the GDP in the March quarter, from 3.6% a year ago as imports crashed due to curbs on gold imports.
Trends in industrial production remained lacklustre with Mar IIP at -0.5% vs -1.9% in Feb. Cumulatively, FY14 IIP ended in the red with growth at -0.2% vs. 1.1% last year - the first annual negative reading since the re-basing of the index in 2004. Use-based classification also indicates a continuation of lackluster trends in both capital and consumer goods, down -12.5% and -0.9% respectively.
The wholesale price index (WPI) slowed down to 5.2% in April against 5.7% previous month. This difference was primarily due to vegetable prices and the currency which has a greater impact on the WPI vs the CPI. However, CPI increased to 8.59% in April against 8.31% in the previous month driven yet again by higher food prices.
The trade deficit decreased to $10.1 billion in April compared with $10.5 billion in March 2014 due to fall in gold imports. Forex reserves increased by ~3bn at US$ 312.6bn in May.
Overweight Sectors-Banking, Cement, Pharma, Energy, Telecom, Capital goods, Metals, Oil & Gas
Underweight Sectors -Auto, FMCG, IT, NBFCs, Power, Realty
There were no major changes in sector positioning during the month of May.
Strategy- During the month of May, the growth series of fund outperformed the benchmark by 337bps while Bluechip fund outperformed the benchmark by 145bps. The Opportunities fund outperformed the benchmark by 166bps. Thus now the fund performance is better than the respective benchmarks for 1 year and 5 year time horizons.
In last 6 months the market has been on an upturn and we are seeing good interest in the cyclical and midcap names on hopes of economic recovery, especially after the election results. In last 2 quarters, the results of large companies have been better than market expectations. Also initial signs of cyclical recovery are visible on ground. We intend to remain within risk limits in key sectors, while maintaining underweight on defensive and overweight in cyclical sectors on hope of economic recovery. We will remain valuation focused and maintain exposure to select cyclical stocks, where we believe the valuations are attractive and risk-reward is favorable from medium term perspective.
Outlook- Inflation is moving in a narrow range and the RBI remains committed to keeping the economy on a disinflationary course. We believe, if the economy stays on course, further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance.
The trend in the recently concluded earnings season suggests corporate performance is stabilizing. However, expect growth to remain meaningfully below trend over first half of FY15. The global monetary policy in terms of rolling back stimulus will be the key for the global liquidity and could be the key event to watch out for the direction of FII flows in the markets in coming quarters. We expect the market volatility to increase in coming months. There could be bouts of intermittent corrections, which we feel would be buying opportunities. Also, domestically recovery hopes are largely pegged on policy decisions by the new government.
With this backdrop we maintain a positive bias on the market going forward. The market valuations are reasonable at about 16.1x FY15 estimated earnings for SENSEX, which are building in about 17% earnings growth in FY15.
Previous Month – The month of May can be divided into two halves as far as the Bond market movements are concerned. The first half of the month, till the election results were declared, bond market movements were flat, on apprehensions over the shape and form of the new Government. Even after the election results, the markets were quite cautious as concerns over the fiscal deficit remained. Post the announcement of the Finance Minister and initial sound bytes from the new FM over the commitment to fiscal consolidation, the markets took a turn for the positive. The appreciating currency plus the stable Government regime, whetted foreign investors’ appetite for Indian debt. FII flows picked up sharply towards the end of the month, and bond yields softened significantly thereafter. The 10-year benchmark GSec ended the month at 8.64% down from the 8.83% level at the end of the previous month. RBI’s monetary policy statement at the beginning of June was seen to have a softer tone and bond yields softened further.
The over-weight positions at the short end of the curve, that we were running in April, were a drag on returns in April. These positions were trimmed down and portfolio duration was increased in May as the market took comfort from the shape and expected policies of the new Government. The increase in duration has helped our funds out-perform the benchmark in May, as the markets rallied towards the end of the month.
Market Outlook – The big event – General elections, came to a conclusion in May. Currency and equity markets have given an emphatic thumbs up to the results. However, as far as the bond markets are concerned, the big event is probably the Budget, that will be presented in July. It will give details of the new Government’s fiscal policy. The interim pronouncements by the newly appointed Finance Minister regarding the Government’s commitment to fiscal consolidation, inflation control as well as growth has calmed some of the markets’ fears regarding any profligacy in the Budget.
The stable / appreciating currency has also increased confidence of foreign investors in Indian Debt. FII inflows have picked up sharply in the latter half of May. This trend of positive flows may sustain for some more time, as long as developed markets’ bond yields are softening. The FII flows fill in the void in demand for GSecs due to the discontinuance of RBI’s OMO purchases of GSecs.
On these two key factors, fiscal deficit and demand-supply equation for GSecs, the outlook is turning positive. However, one key factor is still not known – Inflation trend.
On the inflation front, the focus is on developments in weather patterns that impact the monsoon rainfall. Current discussions are centered on the possibility of an El-Nino event that can reduce the rainfall in this season. A deficient monsoon is likely to have a bearing on food-grain prices and food inflation. The Government has stated that controlling inflation is a key policy aim. However, we will need to wait a little longer to get a clearer picture on the rainfall and food prices front. That means that RBI, inspite of the slightly softer tone of the Monetary policy statement in June, is likely to be on hold till the inflation trend is clear.
After the rally in bonds in May, we are likely to see a more range-bound secondary market trading, though the range will be lower than the levels seen in May.
Strategy- The developments post the election results have been favourable for bonds. The portfolios are now being run with higher duration to benefit from the softening yields. However, with a very low probability of interest rate cuts in the near future, we will look to trim the duration again to come closer to the benchmark during the month. A fresh view on the yield movements will be possible once the developments on the monsoon front are clear and inflation trends may be estimated with higher certainty.
The short end of the curve has also seen some softening as liquidity in the system has improved. Moreover, the sharp pickup in FII inflows has also increased the demand in this segment and has pulled yields lower. This trend is expected to continue, as mentioned earlier, till the yields on developed economies’ bonds remain soft. Any firming up of rate cut expectations will lead to the next leg of the rally at the short end of the curve. We, currently, do not expect any adverse liquidity event that can push short end yields higher.
Mr. Gajri joined HDFC Standard Life in April 2009 with a rich experience of 14 years in investments and banking industry. He started his career in 1995 with Citibank and was associated with it for over 6 years delivering various roles. He joined Tata AIG Life Insurance Company in October 2001 to start the investment function and stayed there until April 2009, the last role being that of the Chief Investment Officer.View Complete Profile
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