Market Outlook April 2015
Economic Data
▪ Index of Industrial Production (IIP) slowed for a second straight month to 2.6% in Janaury'15 vs. 3.2% in December'14 because of the poor performance of the mining sector. However, manufacturing production, which constitutes over 75% to the index, grew by 3.3% in Janaury'15 compared to a meager growth of 0.3% in the same month a year ago.
▪ CPI inflation in February'15 was 5.4% up from 5.2% in Janaury'15 mainly led by high food prices.
▪ In a surprise move, RBI cut the repo rate by 25 basis points to 7.50% on 04-March'15. This is the second rate cut by RBI in the last three months amid benign inflation rates.
▪ FDI more than doubled to USD 4.48 bn, highest in last 29 months, in Janaury'15 vs. USD 2.16 bn in December'14. During April-January 2015 FDI rose by 36% to USD25.52 bn as compared to USD18.74 bn in April- Janaury 2014.
▪ Indian rupee depreciated to INR 62.50 per dollar in end-March 2015 versus INR 61.84 per dollar at end-February'15. Interest rate outlook in the US would be the key determinant for rupee levels in coming months.
Equity market Update
▪ Indian equity markets declined during the month of March despite policy support, FII buying and positive developments in the budget session. BSE-100 index dropped by 4.3% in March.
▪ FIIs continued their buying streak and were net buyers to the tune of INR 121bn; also mutual funds were net buyers to the tune of INR 39bn.
▪ Sectors that outperformed were healthcare, capital goods, auto and oil & gas. Sectors that underperformed were metals, real estate, banking, utilities and FMCG.
Outlook
▪ The first half of the ongoing budget session saw the passage of three key reform bills viz insurance, coal mines and mines & mineral regulation. The government is likely to seek support for the land acquisition and GST bills during the month long recess before the parliament resumes on April 20.
▪ Government is already in a relative strong fiscal footing for FY16 and we expect government spending to pick up as the new financial years begins. We believe reviving investment cycle remains critical for recovery in GDP growth and market earnings growth.
▪ Budget 2015 has made upfront commitment to provide fillip to the infrastructure sector through public investments. The focus will now shift to execution.
▪ RBI's monetary policy stance will be largely unchanged and we expect interest rate cuts to continue. We expect benign commodity prices and lower interest rates to accelerate earnings growth.
▪ While corporate sector long term average growth is 15%, up cycle growth rates have averaged 25%. We have OW on sectors that are leveraged to revival in domestic investment and capex as they are likely see earnings recovery in FY16 and beyond.
▪ We continue to maintain a positive bias on the market from medium to long term perspective. The markets are trading at about 16.3x FY16 estimated earnings for SENSEX. We believe that multiple expansion driven gains are largely over and the next let of market gains will be driven largely by corporate earnings growth. We expect the earnings growth to pick up in FY16.
Debt Market Update
▪ Bond markets had a rather flat month during March if viewed from the net movement of the 10-year benchmark GSec yield. However, during the month, there was greater relative movement between the benchmark bond and other bonds. The term spreads at the longer end, i.e. yield spreads between the 10-year and 30-year bonds widened in March. Similarly, the spreads between the liquid and illiquid bonds also widened during the month.
▪ The caution in the markets reflected the tight liquidity conditions of March. Bond markets were also subdued due to apprehensions over the Government's borrowing calendar for the first half of FY16. After projecting a higher than expected fiscal deficit in the Budget for FY16, the market feared that if the Government's borrowing schedule was front loaded, the quantum of GSec supply in the first half would rise.
▪ Amid these concerns, the 10-year benchmark GSec ended the month at 7.74%, barely higher than 7.73% at the end of the previous month.
Outlook
▪ Over the last three months, RBI has surprised the market with two out of meeting rate cuts. These rate cuts were in clear response to the developments on the data front listed out by RBI in its Monetary policy in December 2014.
▪ In the statement accompanying the March rate cut, RBI has listed out a greater number of developments which would influence RBI's assessment of future economic conditions and inflation trajectory and accordingly shape its monetary policy actions.
▪ Apart from fiscal conditions and supply side developments, the key factors that will determine RBI's future rate actions are the behavior of food prices in the coming months, especially after the unseasonal rains and consequent crop damage, and monsoon forecasts. In this scenario, we expect that RBI will maintain status quo on interest rates for some time. We expect that the next round of rate cuts may take place around the middle to the later part of 2015. In this period of pause, other factors are likely to influence bond yield movements.
▪ Other key factors are commodities, especially Oil, price movements and expectations of the US Fed's rate hike cycle. After the sharp fall in prices over the last six - eight months, oil prices are seeing hardening pressures due to conflict in Yemen, while also being vulnerable to a nuclear deal between Iran and six key world countries. Oil prices are expected to trade around current levels in the coming months.
▪ Expectations of the start of the US Fed's rate hike cycle have been varying between a June start to a later start. The recent batch of data has been quite soft and has pushed back the expected timing of the rates lift-off. The push back has provided some room for easing in bond yields. However, if the data turns around and strengthens, we may see yields hardening as well.
▪ Apart from the short term volatility, we expect that the bond markets will be trading within the recent range, till we get greater visibility on the expected timing of the next round of rate cuts from RBI.
Happy Investing
Source: Bloomberg
Economic Data
▪ Index of Industrial Production (IIP) slowed for a second straight month to 2.6% in Janaury'15 vs. 3.2% in December'14 because of the poor performance of the mining sector. However, manufacturing production, which constitutes over 75% to the index, grew by 3.3% in Janaury'15 compared to a meager growth of 0.3% in the same month a year ago.
▪ CPI inflation in February'15 was 5.4% up from 5.2% in Janaury'15 mainly led by high food prices.
▪ In a surprise move, RBI cut the repo rate by 25 basis points to 7.50% on 04-March'15. This is the second rate cut by RBI in the last three months amid benign inflation rates.
▪ FDI more than doubled to USD 4.48 bn, highest in last 29 months, in Janaury'15 vs. USD 2.16 bn in December'14. During April-January 2015 FDI rose by 36% to USD25.52 bn as compared to USD18.74 bn in April- Janaury 2014.
▪ Indian rupee depreciated to INR 62.50 per dollar in end-March 2015 versus INR 61.84 per dollar at end-February'15. Interest rate outlook in the US would be the key determinant for rupee levels in coming months.
Equity market Update
▪ Indian equity markets declined during the month of March despite policy support, FII buying and positive developments in the budget session. BSE-100 index dropped by 4.3% in March.
▪ FIIs continued their buying streak and were net buyers to the tune of INR 121bn; also mutual funds were net buyers to the tune of INR 39bn.
▪ Sectors that outperformed were healthcare, capital goods, auto and oil & gas. Sectors that underperformed were metals, real estate, banking, utilities and FMCG.
Outlook
▪ The first half of the ongoing budget session saw the passage of three key reform bills viz insurance, coal mines and mines & mineral regulation. The government is likely to seek support for the land acquisition and GST bills during the month long recess before the parliament resumes on April 20.
▪ Government is already in a relative strong fiscal footing for FY16 and we expect government spending to pick up as the new financial years begins. We believe reviving investment cycle remains critical for recovery in GDP growth and market earnings growth.
▪ Budget 2015 has made upfront commitment to provide fillip to the infrastructure sector through public investments. The focus will now shift to execution.
▪ RBI's monetary policy stance will be largely unchanged and we expect interest rate cuts to continue. We expect benign commodity prices and lower interest rates to accelerate earnings growth.
▪ While corporate sector long term average growth is 15%, up cycle growth rates have averaged 25%. We have OW on sectors that are leveraged to revival in domestic investment and capex as they are likely see earnings recovery in FY16 and beyond.
▪ We continue to maintain a positive bias on the market from medium to long term perspective. The markets are trading at about 16.3x FY16 estimated earnings for SENSEX. We believe that multiple expansion driven gains are largely over and the next let of market gains will be driven largely by corporate earnings growth. We expect the earnings growth to pick up in FY16.
Debt Market Update
▪ Bond markets had a rather flat month during March if viewed from the net movement of the 10-year benchmark GSec yield. However, during the month, there was greater relative movement between the benchmark bond and other bonds. The term spreads at the longer end, i.e. yield spreads between the 10-year and 30-year bonds widened in March. Similarly, the spreads between the liquid and illiquid bonds also widened during the month.
▪ The caution in the markets reflected the tight liquidity conditions of March. Bond markets were also subdued due to apprehensions over the Government's borrowing calendar for the first half of FY16. After projecting a higher than expected fiscal deficit in the Budget for FY16, the market feared that if the Government's borrowing schedule was front loaded, the quantum of GSec supply in the first half would rise.
▪ Amid these concerns, the 10-year benchmark GSec ended the month at 7.74%, barely higher than 7.73% at the end of the previous month.
Outlook
▪ Over the last three months, RBI has surprised the market with two out of meeting rate cuts. These rate cuts were in clear response to the developments on the data front listed out by RBI in its Monetary policy in December 2014.
▪ In the statement accompanying the March rate cut, RBI has listed out a greater number of developments which would influence RBI's assessment of future economic conditions and inflation trajectory and accordingly shape its monetary policy actions.
▪ Apart from fiscal conditions and supply side developments, the key factors that will determine RBI's future rate actions are the behavior of food prices in the coming months, especially after the unseasonal rains and consequent crop damage, and monsoon forecasts. In this scenario, we expect that RBI will maintain status quo on interest rates for some time. We expect that the next round of rate cuts may take place around the middle to the later part of 2015. In this period of pause, other factors are likely to influence bond yield movements.
▪ Other key factors are commodities, especially Oil, price movements and expectations of the US Fed's rate hike cycle. After the sharp fall in prices over the last six - eight months, oil prices are seeing hardening pressures due to conflict in Yemen, while also being vulnerable to a nuclear deal between Iran and six key world countries. Oil prices are expected to trade around current levels in the coming months.
▪ Expectations of the start of the US Fed's rate hike cycle have been varying between a June start to a later start. The recent batch of data has been quite soft and has pushed back the expected timing of the rates lift-off. The push back has provided some room for easing in bond yields. However, if the data turns around and strengthens, we may see yields hardening as well.
▪ Apart from the short term volatility, we expect that the bond markets will be trading within the recent range, till we get greater visibility on the expected timing of the next round of rate cuts from RBI.
Happy Investing
Source: Bloomberg
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