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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: October 2016

  • Gilt, bond and money market yields fell marginally on back of rate cut by RBI, OMO and gilt repurchase auctions, fall in inflation and comfortable liquidity conditions.
  • At its Monetary Policy review held on 4th October RBI under the new governor and newly constituted MPC (Monetary Policy Committee) reduced key rates by 25 bps and this was a unanimous decision.
  • The ten year benchmark gilt closed at 6.79%, 2 bps lower than the previous month. The ten year AAA Corporate bond benchmark closed at 7.65%, 3 bps lower than previous month. The five year AAA corporate bond benchmark closed at 7.52%, 8 bps lower as compared to previous month. 10 year SDL spreads remained stable.
  • 1 year CD rates fell by 14 bps to close at 6.92%. 1 year T bill yield fell 11 bps to close at 6.44%.
  • Brent Crude oil prices closed at USD 47 per barrel, similar levels as previous month.
  • INR depreciated and closed the month around 66.78. For the month of October, FIIs were net sellers in the debt market to the tune of Rs 7200 crore.
  • The ten year benchmark US treasury yield ended sharply higher at 1.84%, increase of 25 bps over previous month as markets now increasingly expect the Federal Reserve to hike key rates by December.
  • September WPI data release came at 3.57% as compared to 3.74% in previous month. CPI for September came at 4.31% compared to 5.05% in previous month.   
  • August Industrial production (IIP) growth continued to show tepid industrial activity at -0.7%.
  • The fiscal deficit in April-September 2016 was 84% of the FY2017 budget estimates at Rs 4.47 lakh crore. During the month government conducted the telecom spectrum auction where bid amounts were lower than expected. Government will garner Rs 32,000 crore this year as upfront payments from these auctions, which is below the Rs 64,000 crore budgeted.
  • Banking system liquidity remained well in surplus mode in first half of the month and then progressively declined and went into deficit mode in the second half. Overall it averaged Rs 3200 crore approx combined for daily LAF, term and variable LAF and MSF signifying neutral state. RBI conducted OMO gilt purchase worth Rs 10,000 crore. Government also conducted a repurchase auction of 2017 gilts maturing in 2017 to the tune of Rs 18000 crore.

 Fixed income market outlook:

  • Global events including results of US presidential election and movement of US treasury yields would be watched out for.
  • We expect banking system liquidity to remain in deficit zone in the range of Rs 20,000 crore to 30,000 crore approx. This estimate factors in likelihood of RBI conducting further gilt OMO purchases.
  • The new ten year benchmark g sec yield is expected to trade in a range of 6.75-6.87% during the month. The five year AAA Corporate bond benchmark is expected to trade in a range of 7.45%-7.65%.
  • Money market rates are expected to remain stable with upward bias as liquidity conditions may remain tight.

Equity Markets

Review of Equity markets for the month of October 2016

The equity markets closed virtually flat for the month though they rallied in the first half before correcting later in the month. Global news flows dominated as voter surveys pointed to a closer contest in the US elections than was anticipated earlier, the minutes of the September Fed meeting seemed to indicate that the Fed would likely hike soon and markets felt that higher yields in the developed markets could impact the carry trade. The flows into emerging market equities remained strong at USD 5.86 Billion for the month. However, India saw net outflows from FIIs at USD 745 million for the month. For the year however, India has received net inflows of USD 6.76 Billion out of the total of USD 16.5 Billion that EMs have received as a category (till October end). 

Domestic institutional flows were mixed. While mutual funds were buyers of USD 1.2 Billion during the month, insurance companies were sellers to the tune of about USD 200 million. While the narrow indices were broadly flat, there was meaningful rally in some indices, especially in metals and oil/gas as the table below shows. Metal stocks were driven by sharp rally in metal prices over the past month/quarter. As an example, prices of Aluminum were up 3.6%/ 5.5% over the past month/ 3 months. These numbers for zinc were 3.6%/ 9.8%. The LMEX (London Metal Exchange of 6 primary commodities) is up 3.1% in the past quarter. This rally has been partly driven by rebound in demand from China, where the GDP has grown at 6.7% for each of the first three quarters of 2016. In energy stocks, both oil marketing companies and gas distribution companies did well during the month. The OMCs were driven by expectations of better GRMs and volumes.  Oil marketing companies have seen upgrades from sell side analysts in the past few weeks. On the weaker side, fast moving consumer goods companies did not do as well as volume growth remains weak yet, though there are expectations of a pickup in the second half.

In other news, the Rupee was broadly flat (down by 0.2%) while the Dollar Index appreciated by over 3% during the month. Oil prices were down 1.6% during the month after rallying 4% in September, as doubts emerged if OPEC really could limit production as they had earlier said they would do.

PERFORMANCE AS ON OCTOBER 28, 2016* 

 

Index

1 Month (%)

3 Months (%)

6 Months (%)

1 Year (%)

Broad Markets

 

 

 

 

 

Nifty 50

8638

0.31

-0.01

10.04

7.09

S&P BSE Sensex

27942

0.27

-0.39

9.12

4.82

S&P BSE 100

8925

0.70

0.78

11.93

8.93

S&P BSE 200

3754

0.94

1.69

13.03

10.29

S&P BSE 500

11853

1.31

2.31

13.91

11.07

S&P BSE MID CAP

13408

1.83

5.90

21.42

22.18

S&P BSE SMALL CAP

13454

5.27

9.29

22.08

18.90

Sectoral Performance

 

 

 

 

 

S&P BSE AUTO

22168

-0.28

5.11

20.03

22.03

S&P BSE Bankex

22384

1.54

3.26

17.10

13.20

S&P BSE CD

12756

1.65

2.83

8.22

7.44

S&P BSE CG

14874

2.01

-3.90

12.66

-0.48

S&P BSE FMCG

8515

0.64

-2.41

10.62

8.51

S&P BSE HC

16374

1.19

0.46

5.08

-9.37

S&P BSE METAL

10286

5.35

9.35

29.23

40.75

S&P BSE Oil & Gas

12296

8.08

16.06

31.43

35.63

S&P BSE PSU

7913

6.03

10.11

26.24

16.75

S&P BSE Teck

5505

-2.23

-7.49

-10.07

-9.97

*Performance for less than one year are absolute returns.

Source: MFI Explorer

In macroeconomic news, the CPI for September came in at 4.3%, a one year low, led by lower vegetable and pulse prices. Core inflation also came in lower at 5.1% in September (August, 5.3%). RBI cut repo rates by 25 bps at their October meeting.  IIP, which is volatile, was (-) 0.7% for August, though it was better than the July number (-2.5%). Merchandise exports, which have been contracting for a while now, grew 4.6% in September. However, we need to see if it holds up given the slowdown in the global economy. Incidentally, according to data gathered at 17 Indian ports by Maersk, overseas container shipments grew by 11% in the first half of the year.

A number of companies have declared the Q2 results so far. Automobiles, capital goods, NBFCs, metals and oil and gas have done well. Pharmaceuticals, banks and telecom overall had a negative growth. As mentioned above, consumer staples’ numbers were impacted by poor underlying volumes.

The economic activity remains mixed. The broad sense from businessmen is that rural demand should show some signs of pickup in H2 led by good rains, and a good kharif crop. However, items showing strong demand are civil aviation (strong passenger numbers), consumer credit and two-wheelers.

One of the initiatives the government has been focusing on is on ease of doing business. In the latest WEF global competitiveness ranking, India has shown an improvement of 16 spots to 39th rank. If a GST which is relatively easy to administer is implemented, it can lead to further improvement in the rank. We should get the broad contours of the final shape of the GST over the next few weeks.

Among other things, the markets will watch for the results of the US elections, the US Fed, the earnings, and the commentary from corporates for Q3, especially on signals on consumer demand.






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