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A longer pit-stop? - Alpha Edge, December 2019

Rallying on the record breaking FII flows, Indian markets have scaled new highs in the month of November even as Indian macro data continues to disappoint, both IIP & GDP numbers.

We sense that the stronger FII flows and catch up in corporate earnings that is underway, could probably give the markets a longer pit-stop than anticipated earlier. And we are closely watching.

While global economic data has not been deteriorating further, policy stance stays more than accommodating thus leading to a congenial situation for financial markets. Our medium-term expectations are based on continuation of policy support with a significant number of central banks turning dovish and cutting rates, prospects of fiscal support in select economies, cyclical uptick in manufacturing, and forward movement in US-China trade discussions.

On the domestic front, some sectors that have been contributing to large pools of losses appear to be on the mend now with corporate banks and telecom being two of the largest. However, a delay in the revival of domestic demand, a further slowdown in global economic activity and geopolitical tensions are downside risks.

On the markets front, the recent run-up has been very strong, but has also taken 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, RBI decided to keep the policy repo rate unchanged and continue with the accommodative stance 'as long as it is necessary to revive growth’, while ensuring that inflation remains within the targeted range. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.

The bond yields have strengthened post corporate tax cut and have remained range-bound with a steepening bias. Government fiscal is under stress with tax revenues falling short, even as government tries to meet budget expenditure targets to support growth. This kind of coordinated response has increased uncertainty in the bond duration space.

We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

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A longer pit-stop? - Alpha Edge, December 2019

Rallying on the record breaking FII flows, Indian markets have scaled new highs in the month of November even as Indian macro data continues to disappoint, both IIP & GDP numbers.

We sense that the stronger FII flows and catch up in corporate earnings that is underway, could probably give the markets a longer pit-stop than anticipated earlier. And we are closely watching.

While global economic data has not been deteriorating further, policy stance stays more than accommodating thus leading to a congenial situation for financial markets. Our medium-term expectations are based on continuation of policy support with a significant number of central banks turning dovish and cutting rates, prospects of fiscal support in select economies, cyclical uptick in manufacturing, and forward movement in US-China trade discussions.

On the domestic front, some sectors that have been contributing to large pools of losses appear to be on the mend now with corporate banks and telecom being two of the largest. However, a delay in the revival of domestic demand, a further slowdown in global economic activity and geopolitical tensions are downside risks.

On the markets front, the recent run-up has been very strong, but has also taken 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, RBI decided to keep the policy repo rate unchanged and continue with the accommodative stance 'as long as it is necessary to revive growth’, while ensuring that inflation remains within the targeted range. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.

The bond yields have strengthened post corporate tax cut and have remained range-bound with a steepening bias. Government fiscal is under stress with tax revenues falling short, even as government tries to meet budget expenditure targets to support growth. This kind of coordinated response has increased uncertainty in the bond duration space.

We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

Click here to read the report

Halt in the March! - Alpha Edge, November 2019

In the last couple of years, we have experienced a significant polarization in price performance as a shrinking profit pool has led to investors herding into the safety of the select few companies that continue to grow at a reasonable pace.

Last Diwali to this, while the Nifty is up over 9.7%, the Nifty Midcap 100 and the Nifty Smallcap 100 indices are down over -6.5% and -9.5% respectively. The market breadth should improve as investment cycle revives and profit growth becomes more broad-based.

We have seen green shoots in the recent earnings season, and with the i) benefit of corporate tax cut to support earnings from next quarter onwards, ii) a lower base effect and iii) a reasonably better monsoon boosting rural demand, we may finally expect a revival in corporate earnings.

Globally, central banks are pumping liquidity to boost their economy, Fed has cut interests by another 25 bps, China and the US are inching closer towards an agreement on trade talks in a phased manner and the ‘Brexit’ is deferred until 31st January 2020. All these events have provided an adequate amount of tailwinds for emerging markets such as India.

However, the recent run-up has also taken valuations way above +1 standard deviation mark and markets may take a ‘Halt in the march’ from hereon, this pause will help participants to evaluate the changing trade dynamics and likely perception of investors, domestically and globally.

We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 1-2 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.

For Fixed Income, the near term growth-inflation dynamic along with an elevated term premium (premium of long-term bonds over short term bonds) should keep a ceiling on bond yields. Within corporate debt, polarization in favor of top quality continues as many others struggle to borrow. This may be a cause of concern, for now, however, an economic revival can change this eventually.

We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through the short term to medium term debt funds with a high-quality portfolio.

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A New Beginning! - Alpha Edge, October 2019

In the midst of the festive season, we at BridgeMonte, wish you a very Happy Dussehra on this auspicious occasion.

On this day eons back, the Pandavas completed their exile and ventured for a new beginning. Well, India Inc.’s profitably too which was in an exile for the last few years is set to make a new beginning with the slew of measures that the Government has begun to undertake.

With the much needed fiscal push, India Inc. has got a shot in the arm as corporate earnings can now push higher due to the corporate tax cuts. The intent shown by the government will definitely increase confidence within India Inc. and shall lead to a ‘New Beginning!’.

On the global front, the slowdown has become much evident and corrective measures have already been taken by major economies and we believe more monetary and fiscal measures are to be followed. However, Brexit and US-China trade talks would be the key events to watch for, in the months ahead.

On the domestic front, the Indian government with the help of RBI are trying to bring back the economy on track. A direct tax code with a significant simplification and lowering of personal taxes will go a long way to boost the demand, triggered by likely increase in consumer spending. While these tax cuts will help in boost the private sector, a focused approach on NPA resolution and bank recapitalization are needed to kick start credit growth as well.

With the fiscal stimulus announcement, we have increased our allocation to 100% in equities in our Aggressive portfolio. In the Large Cap space, current valuations are reasonable if not cheap and any incremental returns will only come from earnings growth which is underway. As to the Mid & Small Cap Space, the price and time correction over the last 18 months have rendered them relatively cheap vis-à-vis Large Caps. In the past, whenever the relative performance or valuations of Mid & Small Caps have touched the bottom extreme of a pattern , the journey ahead for them has been very fruitful.

In the Fixed Income space, RBI has announced a fourth consecutive rate cut, totaling a 135 bps reduction in 2019 and maintained its ‘accommodative stance’ with a dovish tone. Going forward, factors such as Inflation, crude oil prices, fiscal pressure, and global yields would drive the movement in interest rates.

We believe that the yield curve may steepen, due to the 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. This could put upward pressure on yields at the longer end. Hence, we believe that exposure to debt markets should be taken through the short term to medium term debt funds with a high-quality portfolio.

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On Thin Ice! - Alpha Edge, September 2019

At the onset of the festive season, equity markets continue its turbulent journey. The recent announcement of Q1 FY20 GDP growth, at 5% (lowest quarterly GDP growth in the last 6 years) has added fuel to fire. The major reason for the decline in the GDP has been a steep drop in consumption growth (3.1%).

The sharp fall in GDP warrants a policy action at a massive scale, as the economy is struggling to find solid ground. This weakness in economic activity can add further stress to already beaten down tax collection. With very less scope of a big fiscal push, the Indian economy is literally stranded ‘On Thin Ice’

On the global front, the US and China are back to talking terms on trade concerns, China and Germany are planning for a fiscal stimulus and Brexit has been delayed are few positives amid the global economic slowdown worries.

On the local front, the weakness in consumption demand and liquidity concerns have prompted the government to take crucial measures such as capital infusion for PSU banks, clearing government dues and GST refunds in a time-bound manner and rollback of surcharge on capital gains for FIIs.

The measures may not be enough for the economy to break the shackles. However, it highlights the intent of the government to give a much-needed push to the lingering economy. Many such measures but at a larger scale are expected from the government. Any delay in such an announcement will add to investor’s concerns who are already skeptical with several broad activity indicators having a poor show.

Hence, we continue to be watchful on equities per se, and any exposure towards equities should be considered in a staggered manner. But we also believe that such turbulent times will provide enough opportunities for the investors to reap the benefits in the next 2 to 3 years.

In the Fixed Income space, after a sharp drop of ~90bps in 10-year G-sec yields between May to July 2019, the bond market consolidated in August. While the recent news flow of RBI was broadly neutral and valuation attractiveness has also narrowed, given the growth-inflation dynamics, we may expect some action in the next two policy meetings.

However, we continue to believe that the yield curve may steepen, due to a 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. This could restrict a major rally at the longer end of the yield curve. Hence, we believe that exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

Click here to read the report

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