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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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