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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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