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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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Fixed Income Market Update: February 2017
Fixed income market outlook:
We expect banking system liquidity to remain well in surplus zone
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*
1 Month (%)
3 Months (%)
6 Months (%)
1 Year (%)
S&P BSE Sensex
S&P BSE 100
S&P BSE 200
S&P BSE 500
S&P BSE MID CAP
S&P BSE SMALL CAP
S&P BSE AUTO
S&P BSE Bankex
S&P BSE CD
S&P BSE CG
S&P BSE FMCG
S&P BSE HC
S&P BSE METAL
S&P BSE Oil & Gas
S&P BSE PSU
S&P BSE Teck
*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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