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On a solid ground? - Alpha Edge, September 2018

In the month of August, Indian markets continued their bull run boosted by a continuous inflow of positive news on the economic front. Market participants have taken the cue and helped elevate the markets to new highs. We believe that it is a good sign to start off with, however we need to keep a close eye on the sustainability of these macroeconomic indicators to ascertain whether we actually are on a solid ground or on thin ice.

On the global front, uncertainty continues to linger with respect to the trade conflict. With the US and Mexico potentially entering into a bilateral trade agreement, the focus has now shifted to China and the European Union. Given that the US and China together account for one-fourth of the global trade, one should definitely take cognizance of the contagion effect the trade war has already caused on the emerging currencies.

On the domestic front, Indian markets were elated throughout the course of the month on the back of a series of encouraging macroeconomic numbers. With inflation cooling off marginally, GDP accelerating to 8.2% for the June quarter and the industrial output recording a 5 month high growth rate of 7% in June, the numbers are definitely encouraging. However, the key question about its sustainability remains. Key factors such as higher oil prices and tighter global financials suggest a few external headwinds.

The Q1 FY19 earnings have again clocked a lower single digit number. The general consensus was of a 21% YoY growth in Q1FY18-19 for Nifty 50 companies. The miss in the aggregate PAT estimate was driven by financials, mainly PSU banks and corporate lenders due to higher provisions and MTM treasury losses. The market rally coupled with relatively poor earnings have led the valuations within the touching distance of their all-time highs. We continue to believe that equity markets will be range-bound for the next couple of quarters because of rising interest rates and commodity prices, weakening currency and political uncertainty.

The risk-reward ratio continues to be unfavourable for equities as we remain cautious on a short-term basis. Any additional exposure towards equities shall be done in a gradual manner.

With consecutive pre-emptive rate hikes by RBI namely in June and August, we expect that the policy rate may remain unchanged when the MPC meets next month. However, if the currency pressure sustains which in turn push the inflation numbers higher, there may be some pressure on the committee for the October meet. We continue with our cautious stance on the fixed income space due to a weakening currency, elevated commodity prices and fiscal pressures. We continue to recommend investments in Short-term and Accrual funds.

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