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Fund Manager Commentary

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: July 2017

  • During the month yields continued to fall across various fixed income asset classes. Ample banking system liquidity, expectations of rate cut and benign inflation were the key reasons.
  • During the month G-Sec yields came down further. The benchmark closed the month at 6.46%, 5 bps lower from previous month. The ten year AAA Corporate bond benchmark closed at 7.54%, 2 bps lower than previous month. The five year AAA corporate bond benchmark closed at 7.33%, 8 bps lower as compared to previous month. Currently SDL spreads are trading around 70-80 bps to the new gilt benchmark.
  • 1 year CD rates closed at 6.56%, 6 bps lower than previous month. 1 year T bill yield too fell by 11 bps to close at 6.24%. 3 month CD rates closed at 6.17% and 3 month T bill yields fell to 6.12%, 16 bps lower than previous month.
  • Brent Crude oil prices rose to USD 52 per barrel, compared to USD 48.23 per barrel in the previous month.
  • INR appreciated as dollar index weakened and FII inflows continued. It closed the month at 64.18 as compared to 64.58 the previous month. For the month of July, FIIs were net buyers in the debt market to the tune of Rs 20,312 cr.
  • The ten year benchmark US treasury yield ended at similar levels as previous month at 2.29%.
  • June WPI data release came at 0.9% as compared to 2.17% in previous month. CPI for June came at 1.54% compared to 2.18% in previous month.
  • May Industrial production (IIP) growth came at 1.7% compared to 2.8% for previous month.
  • Banking system liquidity remained well in surplus mode. RBI conducted Rs. 20,000 cr worth of OMOs of dated g-secs. Banks lent on an average Rs 3 Lakh Cr at various RBI liquidity facilities put together.
  • In a significant move, State Bank of India cut savings bank deposit rates on Rs 1 cr and below deposits to 3.5% from 4%. Main reasons seem to be to protect interest margins in an environment of low credit growth.
  • In its Third Bi Monthly Monetary Policy Review for FY 18 held on 2nd August, RBI cut key rates (repo and reverse repo) by 25 bps each while maintaining neutral stance. The MPC voted 4-2 in favour of this outcome. While they have acknowledged that some of the upside risks to CPI inflations have not materialized, they continue to remain cautious with eye still on the medium term target of 4% for CPI inflation. Apart from softness in food and fuel prices, RBI also noted interestingly that the Inflation in transport and communication services was depressed by the pricing war in the telecommunication space. Pricing power for industry also remains subdued as per RBI survey. Among the market development initiatives announced by RBI, it is noteworthy to mention the separate limit in IRFs (Interest Rate Futures) to the extent of Rs 5000 cr for FPIs. Also RBI plans to review the MCLR and Base Rate mechanism to address the issue of inadequate monetary transmission. Steps are being taken to close out the gap of information asymmetry between borrowers and lenders by having a comprehensive PCR (Public Credit Registry) for which RBI plans to set up a task force.

Fixed income market outlook: 

  • To some extent the rate cut was factored in money market, bond and gilt yields. We expect prices to be supported in the backdrop of ample banking system liquidity and overall benign macro environment. In the near term the ten year benchmark may trade in a range of 6.30 - 6.50%
  • We expect banking system liquidity to remain in surplus zone and the quantum of surplus is expected to be similar to last month and be in a range of Rs 2.5 Lakh to 3 Lakh Cr. There could be further MSS or OMO issuances to suck our durable liquidity.
  • Short term Money market rates are expected to remain stable on back of low CD issuance and surplus banking system liquidity. Corporate bond spreads for good quality issuers may contract on back of rate cut and lower supply as compared to gilts.

Review of Equity markets for the month of July

The equity markets moved up in July in line with world equity markets. The MSCI EM index (USD) was up nearly 5.5% during the month while the MSCI world index (USD), which tracks developed markets was up 2.3%. MSCI India (USD) at 7.3%, outperformed the EM index. In calendar 2017, the EM index is now up 24% vs a gain of 12% for the developed markets index. Offshore fund flows into emerging markets were about USD 5.1 Billion in July, with year to date flows into EM equity now stand at about USD 43 Billion. FII investment into Indian equity was about USD 390 million during the month with the year to date figure now is about USD 8.9 Bio.

The US Fed kept the fed funds rateunchanged as expected but moved a step closer to balance sheet unwind starting end Q3 or beginning Q4 this year. It acknowledged inflation running below its target but expected it to recover to its 2% in the medium term, necessitating further gradual hikes.

The month began with change in regulations regarding P-Notes limiting their usage to mainly hedging. This led to short covering of open positions which also gave an impetus to the rally. Against the trend for the past year, large cap indices have outperformed the mid cap index in the last 3 months as shown below. In terms of sector performance, metals and financials stood out. The metal stocks have done well on the back of higher metal prices. The Bloomberg all metals index was up 3% during the month. This has been led both by a weaker Dollar index (the DXY was down 3% in July) and decent performance of the Chinese economy and continued focus on shutting down inefficient metal producing capacitythere. The second quarter Chinese GDP grew at 6.9% while in terms of shutting capacity, 85% of the targeted capacity reduction in steel for 2017 has apparently been met. Among metals, copper was up 7% during the month, while iron ore was up 15%. Crude prices (Brent) were up 10% during the month.

The financials sector did well led by strong earnings numbers by a few private sector banks, while in a couple of cases, slippages remained elevated, and were from outside the watch list of accounts. NBFCs also recorded robust growth.

The performance of the FMCG sector was pulled down by the government additionally levying a cess on cigarettes which impacted tobacco stocks.

 

 PERFORMANCE AS ON JULY 31, 2017* 

 

Index

1 Month (%)

3 Months (%)

6 Months (%)

1 Year (%)

Broad Markets

 

 

 

 

 

Nifty 50

10077

5.84

8.13

17.71

16.56

S&P BSE Sensex

32515

5.15

8.49

17.57

15.82

S&P BSE 100

10433

5.89

7.72

18.13

17.71

S&P BSE 200

4382

5.60

7.16

18.38

18.57

S&P BSE 500

13897

5.45

6.92

19.19

19.84

S&P BSE MID CAP

15390

5.09

3.91

19.69

21.43

S&P BSE SMALL CAP

16094

4.43

4.59

24.41 30.57

Sectoral Performance

 

 

 

 

 

S&P BSE AUTO

24463

4.51 7.22 12.17 15.90

S&P BSE Bankex

28387

8.02 11.83 27.23 30.77

S&P BSE CD

16467

2.84 6.28 30.42

32.57

S&P BSE CG

17973

5.25 0.59 21.57 16.03

S&P BSE FMCG

10094

-3.21 7.09 17.81 15.60

S&P BSE HC

14195

0.03 -5.37 -4.07 -12.84

S&P BSE METAL

12426

9.25 9.72 6.46 31.93

S&P BSE Oil & Gas

14190

7.48 -1.79 10.53 33.74

S&P BSE PSU

8687

7.08 -3.61 4.19 20.77

S&P BSE Teck

5897

6.76 8.02 10.47 -0.90

*Performance for less than one year are absolute returns.

Source - MFI Explorer

In macroeconomic news, the GST was implemented from July 1. This should have far reaching impact on tax collections and gradual shift from the informal sector to the organized sector. The initial roll out has been relatively smooth. However, the manufacturing PMI for July fell to 47.9 (50.9 in June), likely related to transitional uncertainties as firms try to assess the implication of the new tax structure. Business optimism on future outlook however improved to 62.1 (an 11 month high). This suggests that businessmen expect the GST issues to be short lived. The confidence also probably stems from good progress of the monsoon and hopes of decent performance of the rural economy, expectations of a rate cut (the RBI cut the rate by 25 bps in early August) and continued focus of the government on infrastructure. As of August 1, 84% of the country’s area has received normal to above normal rains and area sown under kharif is higher by 3% yoy.

The merchandise exports in June grew 4.4% to USD 23.6 Billion with imports growing 19% to USD 36.5 Billion. A stronger Rupee probably impacted exports. The current account deficit for FY 18 is expected to be worse than the low of 0.7% of the GDP in FY 17 as imports of gold and non-oil imports pick up as the economy recovers.In the results declared so far for Q1, FY 2018, the auto companies, select private sector banks and cement companies and metal companies have shown good numbers. The results for this quarter will not be representative however, as many companies would have compensated the distribution channel for input tax related expenses for the roll out of the GST.