In the month of January, Indian markets started the year with a lot of caution due to early signs of moderation in major economies. Already we have seen China and Eurozone struggling to keep up the pace. The last man standing had been the US. But even the US corporate earnings were below expectations in the last quarter, sales number have been decelerating whereas earnings are declining due to higher interest rates and wage cost. This has led the Fed chairman to have a change of stance in its last monetary policy. The Purchasing Manager’s Index of major economies has seen a gradual deceleration since Jan 2018(an indicator of expansion/contraction of economic activities). We are meticulously monitoring the global economic indicators and its impact on offsetting the improving Indian fundamentals. We believe that the ‘clouds are darkening’ and as a matter of caution, would like to increase our existing cash allocation from 10% to 25% in our ‘Aggressive’ model portfolio.
On the Domestic Front, the markets remained volatile on corporate governance news-flows and moderation of growth in major economies. The interim budget announced on 1st Feb looks well balanced prima facie, but the huge borrowing of Rs 7.1 lakh crore and the shortfall in GST collection may keep market interest rates at elevated levels. An upward revision in Fiscal target is also making FIIs wary about interest rates scenario going forward.
On the Global Front, US Fed Chairman has changed its stance over the past month from a monetary policy standpoint. It will not only be flexible on its Balance sheet, but also the interest rates would be on hold due to a slowdown in consumer discretionary spending. Whereas, in China, economic growth has continued to moderate. The UK has been anxious as Brexit ultimatum closing in. Purchasing Manager’s Index (PMI) of major economies are already signaling a global economic slowdown.
India’s Q3 FY19 result season has been a mixed bag. Uptick on Revenue has been a positive surprise but the bottom-line growth has been disappointing. However, the fag end of the result season needs to be watched closely. IT may have surprised positively, but Auto companies have been a disappointment. The way to go about it is to stagger any fresh investments in equities, as markets could give enough opportunities to invest in the coming three to four months.
Going forward all eyes would be on Inflation, crude oil prices, fiscal pressure and global yields which would drive the movement in interest rates. We believe that the risk-reward ratio still is unfavorable for any duration play and exposure to debt markets should be taken through short term to medium term debt funds as the shorter end of the yield curve will realign to the new policy rate expectations whereas the long end will get impacted by higher supply.
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