Nifty is down 3.61% for the month of March. FIIs bought equities worth US$2.02bn while DIIs bought equities worth US$1.03bn. Markets fell due to rally in crude prices to $70, Long term capital gains tax on equity investments impacted sentiment and global sell off due to fears of continuing trade wars. The following sectors outperformed the index – Technology, EPC and Finance as against sectors such as Real Estate, Telecom and Capital Goods which underperformed in the index in 3 months ending March 2018.
Short term-Cautious; Long term-Positive
We are cautious on equity markets in the near term on the back of global withdrawal of liquidity on rising bond yields and political uncertainty before election season begins. Further, sizable supply of paper is also expected to inundate the markets (YTDFY18 - $27.7 Bn). Nifty valuations remain expensive at 17.8x FY19E as compared to LTA 14.7x. However, in the long term we expect corporate earnings growth in double digit.
There were many positive surprises for the bond market over the last month. Contrary to market expectations, government announced a much lower borrowing number for H1 FY 2019. Share of H1 gross borrowing was seen at the lowest since FY 2012, at 50.1%, versus expectations of 60-64%. Government reduced the supply at the mid-point of the yield curve which is favorable from demand perspective. This was a very important and positive announcement for the bond markets. Markets reacted by 25-30 basis points on the back of this news. RBI also allowed banks to defer their Mark-to-Market (MTM) losses for Q3 FY 2018 and Q4 FY 18 to be spread over next four quarters. This was a huge relief for the nationalized banks who had been on the sidelines because of the mounting losses in their bond portfolio. Manufacturing PMI for March was seen at 51.0 as against 52.1 in February. Credit and deposit growth was seen at 11.13% and 6.38% respectively for the fortnight ending March 16, 2018. CPI inflation for February 2018 was seen at 4.44%. Indian Rupee closed against the dollar at 65.18 as on March 28, 2018.
We have a neutral outlook on bond yields. We continue to believe the evolution of supply/demand dynamics in bond markets is key in determining the trajectory of yields in this fiscal year and is the most important factor to watch in coming quarters. From that perspective, H1 supply calendar announcement was an important development and positive for bond markets Other than bond supply, developments around the RBI’s reaction function to liquidity trends (OMO buybacks) and raising FPI limits are other key factors to watch to see how bond market supply/demand dynamics evolve. Global geopolitical developments will continue to remain a major factor.