BridgeMonte

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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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