Winds of Change Wealth Edge, June 2018

In our earlier editions we discussed as to how India is in the pink of its health with respect to Macro-economic indicators such as the strengthening of GDP & IIP, subdued inflation and improving fiscal and trade balances, but corporate earnings were simply unable to pick momentum in absence of an improvement in demand. Another point of discussion was how the Indian markets were able to participate in the global stock market rally, but could not really be a part of the global economic recovery, which resulted in stretched valuations as earnings were lagging behind.

Fast forward to now, the macro economic scenario have started to look hazy with inflationary pressures strengthening, weakening of the twin deficits and a weakening currency, whereas, corporate earnings are showing signs of green shoots. We are experiencing a visible pick-up in corporate earnings whereas valuations are rationalizing due to the recent healthy market correction. We believe that certainly market dynamics are changing and the current scenario shall be seen with a new set of eyes.

Globally, geo-political risks have continued to dominate investor attention. US’ withdrawal from the Iran nuclear agreement, heightened trade tensions with China, aggravated economic crisis in Argentina, and the political risks staged in Italy, Spain and Venezuela have all contributed towards volatility. All these countries are witnessing their respective bond markets react adversely. Such developments also have a contagion effect on the other emerging markets (including India). The immediate impact is generally felt in the form of broad-based risk-reduction in investor portfolios. Hence, FII flows have turned negative in the emerging market equities and bonds.

On the domestic front, developments around the Karnataka elections kept investors cautious. Wholesale and retail-price based inflation both increased for April 2018. However, Optimism over the release of GDP data for Q4FY18 improved sentiment slightly in the latter half of the month. As far as equities are concerned, 4QFY18 earnings season has been below expectations. We have seen a clear divergence in earnings number, a visible improvement in earnings for Nifty companies (ex-Banks) against deteriorating numbers from Mid and Small cap companies making it the highlight of this result season. The same has been transpiring in the market performance of Nifty 50 vs Nifty Midcap and Smallcap indices. Going for wardwe do see a time correction in the Large cap equities but a certain price correction is warranted in the mid and small cap space.

In the Fixed Income space, we continue with our cautious stance due to rising US bond yields, elevated commodity prices, and fiscal pressures; and recommend investments in Short term and Accrual funds.

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