Rallying on the record breaking FII flows, Indian markets have scaled new highs in the month of November even as Indian macro data continues to disappoint, both IIP & GDP numbers.
We sense that the stronger FII flows and catch up in corporate earnings that is underway, could probably give the markets a longer pit-stop than anticipated earlier. And we are closely watching.
While global economic data has not been deteriorating further, policy stance stays more than accommodating thus leading to a congenial situation for financial markets. Our medium-term expectations are based on continuation of policy support with a significant number of central banks turning dovish and cutting rates, prospects of fiscal support in select economies, cyclical uptick in manufacturing, and forward movement in US-China trade discussions.
On the domestic front, some sectors that have been contributing to large pools of losses appear to be on the mend now with corporate banks and telecom being two of the largest. However, a delay in the revival of domestic demand, a further slowdown in global economic activity and geopolitical tensions are downside risks.
On the markets front, the recent run-up has been very strong, but has also taken valuations closer to +2 standard deviation mark. With valuations once again hovering near its peak, we may see profit booking soon.
We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 2-3 years. As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.
On the Fixed income front, RBI decided to keep the policy repo rate unchanged and continue with the accommodative stance ‘as long as it is necessary to revive growth’, while ensuring that inflation remains within the targeted range. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.
The bond yields have strengthened post corporate tax cut and have remained range-bound with a steepening bias. Government fiscal is under stress with tax revenues falling short, even as government tries to meet budget expenditure targets to support growth. This kind of coordinated response has increased uncertainty in the bond duration space.
We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.
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