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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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Play it by ear! - Alpha Edge, January 2020

Wish you and your family a happy new year. Hope you had a great time welcoming it.

2019 was a year of ‘divergence’ in many ways. While the economy decelerated considerably, equity markets did well even though corporate earnings fell short.

Further, even within equities, we saw a strong polarisation, with a preference for a few large corporate houses, whereas, broader markets didn’t do well. A similar trend of polarisation was witnessed in the debt space as well, as quality was preferred over anything which was non-AAA post the ILFS crisis.

It had been like a Bull market for Large Caps and Quality names but a bear market for the broader market. Ample liquidity and a dearth of investment opportunities were the key reasons for this selective risk-on behaviour. Sound Balance sheets and better earnings /cash flow visibility was rewarded handsomely.

In contrast to 2019, 2020 seems to be a year with a lot of promise for the broader market especially mid & small caps. However, a few key events such as the Union Budget, Earnings season (impact of Corporate tax cut), US- China trade truce agreement, Brexit and a build-up of US general election will have a major role to determine the further market direction. Hence we believe we must ‘Play it by ear’ in 2020, with heightened alertness.

The recent run-up has been very strong, taking the valuations closer to +2 standard deviation mark. With valuations once again hovering near its peak, we may see profit booking soon. 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.

On the Fixed income front, yields are likely to trade within a range as conflicting forces are at play. On the positive side, factors such as moderation of global growth, easing stance of major global central banks, slowing domestic economic activities, RBI’s Accommodative stance, attractive term premium over repo rate and moderating credit growth favour lower yields.

On the negative side, possible increase in the fiscal deficit due to corporate tax rate cuts, excess SLR (Statutory Liquidity Ratio) investments within the banking system, Higher food inflation, etc. might impact yields adversely. However, we believe that most of the aforesaid factors are largely priced in and scope of significant move on either side from here on seems limited.

With a lesser scope of a significant move in yields on either side, any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

Gold has seen a significant run up as highlighted last year. Financial and geopolitical uncertainty combined with low interest rates globally will likely continue supporting gold investment demand. Therefore, we believe that the appeal of Gold is likely to remain elevated at least in the first half of 2020. Historically, dollar weakness is associated with commodity strength. Hence, we are closely watching the dollar movement in anticipation of a breakout in the commodity index. 

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