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When it Rains, it Pours! - Alpha Edge, August 2019

Markets seem to have taken a cue from the rains that poured thick and fast. Nifty ended the month at 11,118 down 5.7% from June end and Mid cap and small cap indices were deep in the red. This downslide can be attributed to unfavorable tax developments on FPIs during the budget, challenges with NBFCs liquidity and global growth concerns.

The tax implications as per the Union Budget has prompted the FIIs to take a flight to safety. This had a significant impact on market sentiment which led to the sell-off. The way heavy downpour slows the pace of life, but when the clouds clear and the sun shines, the benefits are enjoyed in the harvest season. Similarly, the current turbulent times will provide enough opportunities to enter the market to harvest the benefits in the future.

On the global front, the Federal Reserve reduce the funds rate by 25bps to soften the effects of intensifying external headwinds. Whereas, China has seen the lowest GDP growth in the last three decades, Germany along with other European countries are in dire straits. In UK, analysts worldwide are expecting a hard Brexit leading to a hard landing for the economy.

On the local front, the weakness in consumption demand and household income prospects along with the waning risk appetite of lenders has been affecting economic growth. We are experiencing a serious slowdown in consumption as can be seen in sales of Automobiles, FMCG and other discretionary products. The earnings season has been a mixed bag with only Corporate lending Banks able to save the day.

Even with the recent fall, the valuations do not look cheap, and increasing concerns around global trade tensions and economic slowdown may continue fueling the market volatility for some more time. Any exposure towards equities should be considered in a staggered manner.

In the Fixed Income space, RBI has announced a fourth consecutive rate cut totaling a 110 bps reduction in 2019 and maintained its accommodative stance and a dovish tone. Going forward, factors such as Inflation, spatial and temporal distribution of monsoon, crude oil prices, fiscal pressure and global yields would drive the movement in interest rates.

We believe that the yield curve may steepen, due to large increase in gross market borrowings in FY20 over FY19 along with low demand for government bonds due to excess SLR in the banking system. This could put upward pressure on yields at longer end. Hence, we believe that exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

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TsuNamo...So? - Alpha Edge, June 2019

The curtain has fallen on the Indian political melodrama, General Elections 2019’,and the Knight in shining armour is back with an overwhelming victory. The result not only reinforces the belief in some of the policies undertaken during their last term, but also ensures of its continuity by providing the much needed stability in policy making.

A stable government is positive for the market especially as it could push through pro-growth policies with greater ease but it is going to be a long journey. Currently, the economic indicators are not in line with the excitement around Modi’s comeback. Consumption demand and GDP growth have slowed considerably, the liquidity crisis has not been resolved and unemployment is at a 45 year high. Hence the reservations, TsuNamo…So?

Globally, at one end, the major economies such as the US, China and Europe are showing signs of a slowdown and the escalating trade war is brewing a perfect recipe for market turbulence. While at the other end, the moderation in yields globally is hinting of rate cuts, indicating more liquidity to fuel equity markets, especially emerging markets such as India. Further, the slowdown has also resulted in lower commodity prices which will not only help improve India’s trade deficit but also the profitability of corporates.

On the local front, other than the landslide victory by NDA, the liquidity crisis has been making the rounds as DHFL missed a scheduled payment at the beginning of June. Apart from that, the result season was below consensus estimates due to weak volume and operating profit in the consumer sector.

We maintain our cautious stance as valuations are expensive, whereas, the earnings season has been a mixed bag and increasing concerns around renewed global trade tensions may lead to short term market volatility. To manage the short term volatility, we would like to raise our cash allocations by 10% if Nifty crosses 12400. Any incremental exposure towards equities should be made in a staggered manner.

In the Fixed Income space, RBI has announced a third consecutive rate cut totaling a 75 bps reduction in 2019. Given the near term inflation outlook remains benign and growth is moderating, it could provide some space for further policy easing. However, any future action by RBI is likely to be data dependent and in our opinion, this rate cut cycle is likely to be a shallow one.

Large increase in gross market borrowings in FY20 over FY19 along with low demand for government bonds due to excess SLR in the banking system could put upward pressure on yields at longer end.

We believe that the risk-reward ratio still is unfavorable for any duration play and exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

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Hold Your Breath! - Alpha Edge, May 2019

We have entered the month of May and all eyes will be on the General elections and its outcome on 23rd May. A clear majority to the incumbent government will give a huge boost to the Investor and Business community, as a stable government can provide a stable environment for economic growth.

Due to the structural reforms in the past few years, we believe the economy is at an inflection point towards higher growth. The outcome of the current general elections would further determine the path and trajectory of economic growth. Hold your breath! as we inch closer to the D-day that may decide the future of the three trillion dollar economy.

On the global front, stock markets continue to gyrate on every dodge and parry in trade talks between the U.S. and China. The recent tweet by Mr. Trump on likely escalation in tariffs with China has raised concerns again. Amid the rising tensions, China’s top trade negotiator, Vice Premier Liu He, will visit the U.S. for talks this week, on May 9 and 10, according to an official announcement. We have to keep a close watch on the developments and we believe it would be too early to conclude that the trade deal talks have failed.

Interestingly, the economic indicators for both the US and China have seen improvement in the last two-three months supported by their monetary and/or fiscal stimulus. Recent US GDP growth numbers and normalisation of the inverted yield are good signs for global equity markets. Oil price up-move has led to concerns about inflation, however current inflation is running below most global central bank targets. This makes a good case for an accommodative stance for central banks globally.

On the local front, we continue to believe that, elections and its outcome which is expected on 23rd May would be the key event going forward.

Apart from that, earnings announcements, consumption demand, liquidity and financial stability, monsoon forecast, oil price movement, and global trade tensions would be the other factors affecting markets.

We continue to remain cautious as valuations are expensive and any exposure towards equities should be in a staggered manner and for mutual funds via SIP/STP.

In the Fixed Income space, 10-year G-sec has moved up by 10bps since the latest RBI policy, notwithstanding the 25bps rate cut. The current inflationary environment is benign and favours monetary easing. However, Rs 7.1 lakh crore of expected borrowing program for the fiscal year is keeping the yields high despite easing monetary policy.

We believe that the risk-reward ratio still is unfavourable for any duration play and exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

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Fear of Missing Out? - Alpha Edge, April 2019

Since the beginning of 2019, Indian equity markets were lagging behind as the emerging markets rallied after a dismal 2018 performance. However, the mood of the nation and the investors has changed. Post the Pulwama attack response, the probability of the incumbent government coming back to power has increased. This triggered the catch-up rally that started in the later half of February driven by fresh flows from FIIs that seems unabated in March too. The smart investors jumping in initially, the later stretch seems to be soon fueled by those with 'Fear of Missing Out'. But they need not.

With the lower cost of capital and subdued commodity prices, the investment and consumption is expected to pick up resulting in corporate earnings to catch up as well. These expectations coupled with fresh flows drove Nifty to post a 7.70% monthly gain in March. Albeit, there probably is a long way to go post-election results too. 

On the global front, we saw buoyancy in global equities, after the US Fed indicated that it may not raise interest rates in 2019 amid signs of a slowdown in the US economy. Hopes of the US and China inching closer to settling on a trade deal and British lawmakers rejecting “No-Deal” Brexit also augured well for the local indices.  However, renewed fears of global economic slowdown and Inversion of the US bond yield curve which reignited fears of a potential recession in the world’s largest economy can be a cause of worry going forward.

On the local front, Robust inflows by FIIs post opinion polls, strengthening of Rupee over the dollar and strong global equities cue were the key reason for equities market inching higher. Our call on increasing allocations towards mid-cap space has augured well for the month.

However, we maintain our cautious stance and would like to remain nimble-footed as valuations are not cheap and any allocations towards equities should be in a staggered manner and for mutual funds via SIP/STP.

On Fixed Income front, RBI announced a rate cut of 25 basis points. However, the Central banker has also announced an increased carve out from Statutory Liquidity Ratio (SLR) enabling banks to use a certain portion of G-Secs under SLR to compute Liquidity Coverage Ratio (LCR) through the Facility to Avail Liquidity for LCR (FALLCR). This is likely to dampen demand for G-Secs and has led to yields steepening further. While long bonds may offer tactical opportunities in time to come. Currently, we prefer short to medium duration schemes which could mitigate interest rate volatility.

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Divergent! - Alpha Edge, March 2019

After a subdued 2018, the global equity market has come back strong in the year 2019. MSCI World gained by 10.7% during January-February. Within the emerging markets, China has been leading the pack with 18.04% amidst news on fiscal stimulus and expectation of probable trade deal.

However, India had underperformed its peers for the same period due to the uncertainty about the election outcome and even the Q3 FY19 have been a mixed bag which had adversely affected the investor sentiments.

We continue to experience a ‘Divergent’ trend in earnings across the market cap spectrum as Large caps have again disappointed but Mid-caps saw decent earnings and Small-caps have seen robust earnings.

The heavy correction in the Mid and Small-Cap space has shrunk the premium Mid-Caps (excluding PSU banks) had over Large Caps to fair levels. Such levels have often heralded an appreciating trend, as we have seen in the past.

With better revenue growth trends and corporate banks’ asset quality turning around are early signs of improving demand and should help boost earnings henceforth but dismal Auto and NBFC numbers have raised new concerns.

Going forward, monetary and fiscal policy, stable government and improvement in global demand and domestic consumption would be key drivers to determine earnings trajectory.

Globally, The US Fed’s swing to a more dovish stance and a probable truce between the US and China on trade war have surely helped push the global rally in risky assets. However, we believe most of the positives with respect to the trade deal have been captured. Further, the growth indicators have moderated in China and fiscal stimulus and monetary easing may take some time to revive the economy, improvement in economic activities in the UK hinges on Brexit.

We continue to stay cautious on equity markets as valuations have again steepened and general elections are just around the corner. However, any volatility in markets can be seen as an opportune time to increase your allocation to equities, preferably in the mid and small cap space can be done by staggering investments over next 3 months, as we believe that the broad underperformance of the mid-caps is overdone and interesting opportunities in selective pockets are now available in this space.

Due to the extreme valuations in January 2018, we reduced our allocations of the Mid & Small Cap Funds from 30% to 10% in our Aggressive Model Portfolio, anticipating a fall. It played out extremely well. We are now increasing allocation to Mid & Small Caps by 10% of strategic weights. This would take back the allocations to 20%.

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