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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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