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Market Review

​​​​​​​​​​​​​​​​​​​OVERVIEW OF MARKET

Nifty was flat during the month on the back of easing of trade tensions, benign CPI inflation and in line Q3 corporate earnings. The Union Budget 2019-20 struck a balance of addressing Farm distress, Consumption & Fiscal Prudence. Among the sectors, IT, Energy and Banks outperformed while Auto, Metals and Infra underperformed the Nifty during the month. FIIs were net sellers to the tune of about Rs 33bn, while domestic mutual funds bought around Rs 75bn of equity during the month.

The Index of Industrial Production growth moderated to 0.5% in November compared to 8.4% in October. CPI inflation was stable at 2.2% in December against 2.3% in November. WPI inflation came in at 3.8% in December as against 4.6% in November.

The Bond yields rose during the month of January 2019. The old 10 year benchmark G-Sec (7.17% GOI 2028) closed 11bp higher at 7.48% against 7.37% last month.

Outlook

Headline inflation print substantially below medium term target opens up the possibility of rate cut by RBI in the near future. Though system liquidity remains comfortable, fixed income yield may not soften from the current level as government planning for higher market bor​rowing to meet its expenditure requirement. Beside domestic factors, global fixed income yield and crude price movement are also likely to impact domestic market. However, over the medium term, fixed income yield is likely to be guided by general election outcome, currency movement and FII flows.

Outlook​

Interim Union budget FY20 provides ~Rs1tn fiscal stimuli to economy through Rs750bn farm package, Rs185bn tax rebate for individual’s earnings below Rs0.5mn and Rs47bn savings in standard tax deduction. These measures should provide consumption impetus and it bodes well with our thesis of remaining heavy on consumer sector. Additionally, we are overweight IT, capital goods and corporate banks. While markets have been volatile lately, they offer reasonable valuations in select pockets. We are looking at quality businesses with supportive cash flows at reasonable valuations. With stable INR and correction in input costs, we see improving earnings trajectory in coming quarters. Pick-up in rural consumer spending supported by Government stimuli, expected revival in capex driven by higher capacity utilisation, improving earnings outlook and strengthening of banks’ balance sheets are key long-term positives for markets.

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