Nifty is up 2.97% for the month of December. FIIs sold equities worth US$0.7 bn while DIIs bought equities worth US$ 1.27 bn. Markets gained on back of global market rally. Sentiments turned positive post outcome of state elections. The following sectors outperformed the index – Real Estate, Telecom & Oil & Gas as against sectors such as Financials, Others & Infrastructure which underperformed in the index in 3 months ending December 2017.
Short term-Cautious; Long term-Positive
We are cautious on equity markets in the near term on the back of moderating economic growth and rising global interest rates leading to potential liquidity withdrawal. Further, sizable supply of paper is also expected to inundate the markets. Nifty valuations remain expensive at 22.3x FY18E as compared to LTA 14.7x. However, in the long term we expect corporate earnings growth in double digit.
Government announced additional borrowing of ` 500 billion in dated government securities and ` 210 billion in treasury bills. Government sought parliamentary approval for additional spend of ` 80,000 crore towards recapitalisation of public sector banks. This is the first tranche of the ` 1.35 lakh crore of bank recapitalization through bond route. Manufacturing PMI and Services PMI for January were seen at 54.7 and 50.9 respectively as against 52.6 and 48.5 in December. Credit and deposit growth was seen at 10.65% and 3.97% respectively for the fortnight ending December 22, 2017. Indian Rupee closed against the dollar at 63.87 as on December 29, 2017.
We have a cautious outlook on bond yields. Recent announcement of additional borrowing has added to uncertainty on the government’s fiscal deficit target for FY 2019. Therefore, bond markets will be keenly watching the central budget for FY 2019 to be announced at the beginning of February. From a medium term perspective, we believe the bond yield trajectory will largely depend on fiscal policy and oil prices. We expect RBI to keep the rates on hold. Global geopolitical developments will continue to remain a major factor.