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Read the latest market analysis and commentary on the Equity & Debt market from our Investment Desk as they share their views on market trends, market outlook and how to capitalize on investment opportunities.

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Debt Markets

Fixed Income Market Update: February 2017

  • The key event during the month which moved the markets was the RBI Monetary Policy Review announced on 8th Feb 2017. RBI kept key rates unchanged and in a surprise action changed the market stance to “neutral” from “accommodative”. The MPC (Monetary Policy Committee) which came at the decision unanimously cited upside risks to inflation and transitory effect of demonetization on growth and output gap as the main reasons. As a result yields rose sharply across the curve. Near term money market rates remained relatively less affected due to ample liquidity in the banking system.
  • The ten year benchmark gilt closed at 6.87%, 47 bps higher than the previous month. The ten year AAA Corporate bond benchmark closed at 7.83%, 27 bps higher than previous month. The five year AAA corporate bond benchmark closed at 7.53%, 20 bps higher as compared to previous month. SDL and Uday Bonds supply also kept long term yields on the higher side. SDL spreads (10 year segment) has widened to 80-85 bps.
  • 1 year CD rates rose by 37 bps to close at 6.92%. 1 year T bill yield rose 4 bps to close at 6.21%. 3 months CD rates closed at 6.25%, similar levels as previous month
  • Brent Crude oil prices were at similar levels as previous month at USD 55 per barrel
  • INR appreciated and closed the month around 66.69 as compared to 67.86 the previous month. For the month of February, FIIs were net buyers in the debt market to the tune of Rs 9568 crore approx..
  • The ten year benchmark US treasury yield ended lower at 2.39%
  • January WPI data release came at 5.25% as compared to 3.39% in previous month. CPI for January came at 3.17% compared to 3.41% in previous month. While WPI reflected the rise in commodity prices including base metals, depressed food inflation was main reason behind benign CPI release.    
  • December Industrial production (IIP) growth came at -0.7% primarily due to a negative base effect. The Index has actually gone up from the previous month reflecting renewed activity.
  • The fiscal deficit data for period April-January 2017 touched Rs 5.64 lakh crore or 105.7 per cent of Budget estimates for FY 2016-17.
  • Banking system liquidity remained well in surplus mode. Excluding CMBs, banking system averaged a surplus of Rs 4 lakh crore at various RBI liquidity facilities put together.

 Fixed income market outlook:

 We expect banking system liquidity to remain well in surplus zone

  • On global front market will take cues from the upcoming US FOMC meet. A rate hike can lead to further rise in domestic bond yields. Market will also await release of government borrowing calendar towards end of the month.
  • The ten year benchmark g sec yield is expected to trade in a range of 6.80-7.15% during the month. The five year AAA Corporate bond benchmark is expected to trade in a range of 7.40%-7.65%.
  • Money market rates are expected to remain stable on back of low CD issuance and surplus banking system liquidity. 

Equity Markets

Review of Equity Markets for the month of February 2017

The Indian equity markets continued their strong performance of January into February, with the NSE Nifty up nearly 4% during the month. The Emerging markets (EM) also outperformed the Developed markets with the MSCI EM (USD) index up nearly 3%, while MSCI World index was up 2.5% during the month. India was the second best performing EM during the month, with MSCI India (USD) up 5.3% during the month. Within Indian equity, the mid-cap and small-cap indices outperformed the NSE Nifty index as shown in the chart below.

The strong performance of EM equity was driven by the fund flows. Globally, offshore investors put in about USD 5.8 Billion in EM equity during the month (USD 2.8 Billion in January). FIIs invested USD 1.56 Billion in Indian equity during the month, though a substantial chunk of that was driven by FII investment in shares of HDFC Bank, where FII limits opened briefly during the course of the month. Flows remained strong into domestic mutual funds during the month. However, mutual funds were marginal net sellers in equity during the month in the secondary market.

The CRB index of all commodities was virtually flat for the month. However, precious metals did well (gold up 3.1%, silver up 4.3%) during the month. In energy, crude (Brent) was virtually flat while WTI was up 2.3%. In metals, aluminum was up nearly 6% in February, and is up nearly 13% in the year. The rally was partly driven by the fact that China is looking to cut production of the metal in the winter months from smelters in northern China to reduce air pollution. Iron ore was up nearly 10% during the month and is up nearly 17% for the year. This is likely driven by higher steel prices, fall in Chinese iron ore production, restocking and speculation. Incidentally, global steel prices are now higher than Indian prices and Indian producers have been exporters in the past few months. During the month, the Rupee strengthened by 1.7% versus the USD. The DXY itself, however was up 1.6% during the month. The EM currencies gained against the USD while the developed market currencies were weaker.

In global news, the US Fed at its meeting on February 1, acknowledged improvement in consumer and business sentiment. It noted that the labour market has continued to strengthen and that economic activity has continued to expand. The y-o-y increase in prices of items of personal consumption expenditure was 1.7% in January, still below the Fed’s target of 2%. Our economists expect two to three rate hikes this year, depending on incoming inflation and employment data.

PERFORMANCE AS ON February 28, 2017*

 

Index

1 Month (%)

3 Months (%)

6 Months (%)

1 Year (%)

Broad Markets

 

 

 

 

 

Nifty 50

8880

3.72

9.26

3.54

26.09

S&P BSE Sensex

28743

3.93

9.08

3.42

23.93

S&P BSE 100

9191

4.07

9.78

4.11

29.07

S&P BSE 200

3859

4.26

9.93

4.54

30.19

S&P BSE 500

12177

4.43

10.28

4.99

31.52

S&P BSE MID CAP

13552

5.40

10.17

4.20

41.21

S&P BSE SMALL CAP

13691

5.84

13.08

9.54

42.91

Sectoral Performance

 

 

 

 

 

S&P BSE AUTO

21486

-1.48

10.10

1.17

33.79

S&P BSE Bankex

23482

5.25

12.14

6.64

49.63

S&P BSE CD

13779

9.13

26.34

11.91

22.27

S&P BSE CG

15333

3.72

11.18

4.45

33.42

S&P BSE FMCG

8800

2.71

9.48

1.06

23.62

S&P BSE HC

15385

3.97

-2.09

-4.13

1.39

S&P BSE METAL

11893

1.89

11.96

20.27

75.53

S&P BSE Oil & Gas

13534

5.42

13.95

23.80

61.74

S&P BSE PSU

8464

1.52

8.51

14.14

50.54

S&P BSE Teck

5765

8.00

6.85

0.75

2.46

*Performance for less than one year are absolute returns.

Source: MFI Explorer

The positives of the union budget which was presented on February 1 were credible projections for revenue, moderate growth projected in government expenditure, targeted fiscal deficit of 3.2% of GDP for FY 18, continued push for rural areas and infrastructure etc. It is quite likely that the revenue estimates both on direct and indirect taxes front may be exceeded given the roll out of GST and the information available with the tax authorities post demonetization. The GDP numbers for Q3, FY 17 came in at 7%, which were a positive surprise compared to the analyst estimates. However, data for the informal sector, which appeared to have been impacted more by demonetization, is difficult to measure and is estimated using surrogate variables at least for the quick estimates. It is possible therefore that there could be revisions to GDP data when more data is available. Incidentally, a CARE study of results of 1640 companies (excluding banks, financials, oil and IT companies) for the results of Q3, FY 17 concluded that sales for the smallest companies in the study (those with annual turnover of less than Rs. 100 crores) shrank the most (nearly 10% yoy), while other companies in the study had flat sales, except for the largest companies, whose sales grew 8% yoy.

In terms of sectoral performance, IT companies were in the news on account of announced or expected share buybacks. The thesis is that growth is moderating and some of the companies are sitting on large cash piles part of which may be given back. This supported the IT companies’ performance. The energy sector did well driven by Reliance which gained as the company announced tariffs for the telecom business.

In trade data, exports grew at 4.3% yoy, positive for the fourth month in a row. However, non-petro exports grew only 1.6% yoy, with pharmaceuticals and gems/ jewellery pulling down the numbers. CPI inflation was low in January at 3.2%, but is likely to rise from here. While vegetables and pulses prices have been lower, there is price rise in wheat, sugar and dairy products on the food side. Prices remain sticky in services which have a fair weight in CPI.

Going forward, while in the near term the markets will watch the results of the state assembly polls, over the medium term, a smooth roll out of the GST should be taken positively by the market.






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