Markets seem to have taken a cue from the rains that poured thick and fast. Nifty ended the month at 11,118 down 5.7% from June end and Mid cap and small cap indices were deep in the red. This downslide can be attributed to unfavorable tax developments on FPIs during the budget, challenges with NBFCs liquidity and global growth concerns.
The tax implications as per the Union Budget has prompted the FIIs to take a flight to safety. This had a significant impact on market sentiment which led to the sell-off. The way heavy downpour slows the pace of life, but when the clouds clear and the sun shines, the benefits are enjoyed in the harvest season. Similarly, the current turbulent times will provide enough opportunities to enter the market to harvest the benefits in the future.
On the global front, the Federal Reserve reduce the funds rate by 25bps to soften the effects of intensifying external headwinds. Whereas, China has seen the lowest GDP growth in the last three decades, Germany along with other European countries are in dire straits. In UK, analysts worldwide are expecting a hard Brexit leading to a hard landing for the economy.
On the local front, the weakness in consumption demand and household income prospects along with the waning risk appetite of lenders has been affecting economic growth. We are experiencing a serious slowdown in consumption as can be seen in sales of Automobiles, FMCG and other discretionary products. The earnings season has been a mixed bag with only Corporate lending Banks able to save the day.
Even with the recent fall, the valuations do not look cheap, and increasing concerns around global trade tensions and economic slowdown may continue fueling the market volatility for some more time. Any exposure towards equities should be considered in a staggered manner.
In the Fixed Income space, RBI has announced a fourth consecutive rate cut totaling a 110 bps reduction in 2019 and maintained its accommodative stance and a dovish tone. Going forward, factors such as Inflation, spatial and temporal distribution of monsoon, 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 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 longer end. Hence, we believe that exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.
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