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Coronage! - Alpha Edge, March 2020

Is the significant fall of the 10 Year US G-sec to an all-time low of 0.34 bps and crude oil collapsing to $ 30 signaling to a US/Global recession? What seemed to be a normal correction due to the Coronavirus scare has been accelerating with the contagion effect across interest rates, currencies and all asset classes. Historically, we have seen that central bank policy actions have been able to halt the market downfall. However, the recent market fall, post the US fed cut seems to signal probable loss of control of Central banks. We shall await for a next leg of policy action and the market reaction thereafter to assess a structural shift in the direction of markets.

In February, equity markets have been on free fall with Nifty 50, Nifty Midcap 100 and Nifty Small cap 100 index falling 6.4%, 6.8% and 8.8% respectively. Markets all over the world have turned ‘risk-off’, as investors struggle with the economic ‘Coronage’ that is happening. With the advent of the novel virus spreading over to new territories with each passing day, global economic and corporate earnings forecasts are being revised sharply downwards.

On the global front, as an emergency response to any economic fallout from the epidemic, the Fed has announced a 50 bps rate cut on 3rd March. If the impact of the virus is not contained, central banks world over may follow suit. With the US elections not far away, a tax cut is also expected from the Trump government if the impact of the Coronavirus aggravates. Our allocation to Gold for many portfolios since 2016 has started to pay-off. The time may not be far away when we see US rates at near Zero and Gold crossing its previous highs and reach 2500 USD.

On the domestic front, the juggernaut has been hit hard, though with a delay. With the global interlinkages increasing and getting more substantial, we have no choice but to adapt to outside shocks affecting us. The current virus epidemic is yet another shock that will at a minimum have a temporary impact if managed well. And at a maximum, we tread into the unknown.

Certain industries such as auto manufacturing, and auto component industry may see tough times as raw materials inventory depletes in the next couple of months. On the other hand, due to the disruption in production of the chemical industry in China, Indian specialty and agrochemical players with global export footprints may benefit from a hike in international prices. Cool off in commodity prices will help improve margins for Industrial manufacturers, but the adverse impact of the virus on global demand might offset the benefit.

Markets may continue to experience volatility in the near term in such uncertain times.  Historically, whenever US Fed had to cut rates out of turn, i.e, inter-meeting, the year went on to be mostly turbulent. As we have highlighted earlier, this may provide mid & small caps better entry points than their larger counterparts for medium to long term investments, short term pain notwithstanding.

On the fixed-income front, the bonds have rallied, partially influenced by global softening of bond yields. Benchmark 10-year bond yield is at 6.18%, partially helped by the recent fall of US Treasury 10-year yield to 0.34% post a 50 bps Fed rate cut. RBI's stance on policy rate action remains accommodative, but action depends on the easing of inflation.

With less expectation from duration funds and credit space still being a cause of worry, any exposure to debt markets should be taken through short term to medium term debt funds with a non-negotiable high-quality portfolio.

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1-All! - Alpha Edge, February 2020

On the onset of 2020, the equity markets have finally seen a broad-based rally as Small caps significantly outperformed large caps with the Nifty Small Cap 100 rising 6.71% for the month versus a 1.7% fall in the Nifty. Similarly, Nifty Mid Cap 100 rose 5.31% outperforming the Nifty by 7.01%. This is in line with our view of the past few months that the extreme polarization that the market had witnessed in favour of selective large caps should continue to reverse as a revival in economic activity and corporate profits materializes going ahead.

On the global front, it was an eventful month. It started with geopolitical tension between the US and Iran, then a respite through the US-China trade deal and Brexit but ended with Corona Virus.

On the domestic front, the Union Budget, RBI policy were key events. The Union Budget continued with its focus on infrastructure, Agri and rural economy, social welfare, simplification on taxes but reviving consumption demand seemed to be the key agenda.

However, few expectations were not addressed in this Budget. Expectations were high on the removal of LTCG and measures to revive the real estate sector given its employment generation potential and the multiplier impact it has on the economy.

RBI in its bi-monthly policy kept the rates unchanged but has announced several measures to boost credit growth. They had tried to address the liquidity concerns in the system through Long Term Repo Operations (LTRO). Further, to boost consumption demand, the RBI also removed a mandatory requirement of CRR of 4% for every new loan extended to retail loans for automobiles, residential housing and loans to MSMEs. These measures make the environment highly conducive for increased liquidity and credit growth. Though the Union Budget fell short on expectations, RBI’s ‘Policy measures’ was a very good move. We believe that the eventful month was a ‘1-All’ for the Indian economy.

Q3 FY20 earnings so far are in line with expectations. Earnings growth has likely bottomed out and Nifty earnings growth expected to increase from 13% in FY20 to 23% in FY21 as per market consensus. Sectors such as Auto, Telecom, Corporate Banks, and Pharma which had seen a cyclical downturn have shown early signs of a recovery.

We believe that the yield will stay in a narrow range due to the increase in fiscal deficit and on the other hand, the central bank’s efforts on LTRO and policy measures to improve liquidity and credit growth. With less expectation from duration space and credit space still being a cause of worry, any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

On the equities front, with valuations once again hovering near its peak and if Corona Virus is not contained then there could be risk-off from equity markets in the near term. We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 2-3 years.

As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.

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Play it by ear! - Alpha Edge, January 2020

Wish you and your family a happy new year. Hope you had a great time welcoming it.

2019 was a year of ‘divergence’ in many ways. While the economy decelerated considerably, equity markets did well even though corporate earnings fell short.

Further, even within equities, we saw a strong polarisation, with a preference for a few large corporate houses, whereas, broader markets didn’t do well. A similar trend of polarisation was witnessed in the debt space as well, as quality was preferred over anything which was non-AAA post the ILFS crisis.

It had been like a Bull market for Large Caps and Quality names but a bear market for the broader market. Ample liquidity and a dearth of investment opportunities were the key reasons for this selective risk-on behaviour. Sound Balance sheets and better earnings /cash flow visibility was rewarded handsomely.

In contrast to 2019, 2020 seems to be a year with a lot of promise for the broader market especially mid & small caps. However, a few key events such as the Union Budget, Earnings season (impact of Corporate tax cut), US- China trade truce agreement, Brexit and a build-up of US general election will have a major role to determine the further market direction. Hence we believe we must ‘Play it by ear’ in 2020, with heightened alertness.

The recent run-up has been very strong, taking the valuations closer to +2 standard deviation mark. With valuations once again hovering near its peak, we may see profit booking soon. We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 2-3 years.

As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.

On the Fixed income front, yields are likely to trade within a range as conflicting forces are at play. On the positive side, factors such as moderation of global growth, easing stance of major global central banks, slowing domestic economic activities, RBI’s Accommodative stance, attractive term premium over repo rate and moderating credit growth favour lower yields.

On the negative side, possible increase in the fiscal deficit due to corporate tax rate cuts, excess SLR (Statutory Liquidity Ratio) investments within the banking system, Higher food inflation, etc. might impact yields adversely. However, we believe that most of the aforesaid factors are largely priced in and scope of significant move on either side from here on seems limited.

With a lesser scope of a significant move in yields on either side, any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

Gold has seen a significant run up as highlighted last year. Financial and geopolitical uncertainty combined with low interest rates globally will likely continue supporting gold investment demand. Therefore, we believe that the appeal of Gold is likely to remain elevated at least in the first half of 2020. Historically, dollar weakness is associated with commodity strength. Hence, we are closely watching the dollar movement in anticipation of a breakout in the commodity index. 

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A longer pit-stop? - Alpha Edge, December 2019

Rallying on the record breaking FII flows, Indian markets have scaled new highs in the month of November even as Indian macro data continues to disappoint, both IIP & GDP numbers.

We sense that the stronger FII flows and catch up in corporate earnings that is underway, could probably give the markets a longer pit-stop than anticipated earlier. And we are closely watching.

While global economic data has not been deteriorating further, policy stance stays more than accommodating thus leading to a congenial situation for financial markets. Our medium-term expectations are based on continuation of policy support with a significant number of central banks turning dovish and cutting rates, prospects of fiscal support in select economies, cyclical uptick in manufacturing, and forward movement in US-China trade discussions.

On the domestic front, some sectors that have been contributing to large pools of losses appear to be on the mend now with corporate banks and telecom being two of the largest. However, a delay in the revival of domestic demand, a further slowdown in global economic activity and geopolitical tensions are downside risks.

On the markets front, the recent run-up has been very strong, but has also taken valuations closer to +2 standard deviation mark. With valuations once again hovering near its peak, we may see profit booking soon.

We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 2-3 years. As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.

On the Fixed income front, RBI decided to keep the policy repo rate unchanged and continue with the accommodative stance 'as long as it is necessary to revive growth’, while ensuring that inflation remains within the targeted range. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.

The bond yields have strengthened post corporate tax cut and have remained range-bound with a steepening bias. Government fiscal is under stress with tax revenues falling short, even as government tries to meet budget expenditure targets to support growth. This kind of coordinated response has increased uncertainty in the bond duration space.

We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

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Halt in the March! - Alpha Edge, November 2019

In the last couple of years, we have experienced a significant polarization in price performance as a shrinking profit pool has led to investors herding into the safety of the select few companies that continue to grow at a reasonable pace.

Last Diwali to this, while the Nifty is up over 9.7%, the Nifty Midcap 100 and the Nifty Smallcap 100 indices are down over -6.5% and -9.5% respectively. The market breadth should improve as investment cycle revives and profit growth becomes more broad-based.

We have seen green shoots in the recent earnings season, and with the i) benefit of corporate tax cut to support earnings from next quarter onwards, ii) a lower base effect and iii) a reasonably better monsoon boosting rural demand, we may finally expect a revival in corporate earnings.

Globally, central banks are pumping liquidity to boost their economy, Fed has cut interests by another 25 bps, China and the US are inching closer towards an agreement on trade talks in a phased manner and the ‘Brexit’ is deferred until 31st January 2020. All these events have provided an adequate amount of tailwinds for emerging markets such as India.

However, the recent run-up has also taken valuations way above +1 standard deviation mark and markets may take a ‘Halt in the march’ from hereon, this pause will help participants to evaluate the changing trade dynamics and likely perception of investors, domestically and globally.

We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 1-2 years. As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.

For Fixed Income, the near term growth-inflation dynamic along with an elevated term premium (premium of long-term bonds over short term bonds) should keep a ceiling on bond yields. Within corporate debt, polarization in favor of top quality continues as many others struggle to borrow. This may be a cause of concern, for now, however, an economic revival can change this eventually.

We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through the short term to medium term debt funds with a high-quality portfolio.

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