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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.

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