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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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