Monthly Market Outlook – Debt & Equity Outlook for February 2020

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India – Equity Outlook: Key factors & Analysis


Indian equity markets:
  • Equity markets have remained buoyant and consolidated near its all time-high levels post the balancing act by the government on union budget (to revive growth & maintaining deficit at expected levels) and steady FII flows on the back of easy global liquidity scenario.

Macro-economics:
  • High frequency indicators of economic growth have shown some green shoots in recent months; however we expect gradual recovery in economic growth in the coming quarters.
  • Prospects of a good Rabi crop, dual tax structure for individuals to boost consumption, expectation of inflation topping out, prevailing low interest-rate regime, manageable crude oil prices, firm rupee, proactive government leaving no stone unturned to revive the economy, paradigm tax reforms are reasons enough to revive the economy soon.

Sectoral view:
  • We expect financials, FMCG and infra stocks to positively surprise on earnings in FY21, while green shoots for automobiles seem to be around the corner. Mid and small-cap segment will be highly fragmented. Stock-specific outperformance is expected in mid and small-cap segments.

Equity market valuations
  • Traction in the Nifty 50 is likely to be led by expanding EPS rather than PER multiples. We believe the low base of FY20 augurs well for EPS growth. Nifty50 EPS will see traction of over 20% in FY21. Thus, discounting FY21E at a PER of 21x, Nifty50 is likely to end 2020 at around 12,600.

Outlook going forward:
  • We continue to remain positive on equities; however, valuation comfort in certain large caps has moderated after the recent up move. Outperformance of Mid & small caps in the past two months is starting to reverse the polarization in the market. However we believe broader markets still have room to catch up with frontline indices hence it is recommended to increase allocation to the Mid and small cap space.

India – Debt Outlook: Key factors & Analysis


Monetary policy actions

  • As expected – given the current growth-inflation dynamics – the RBI in its last policy meet of the financial year kept the policy rate unchanged and stance as accommodative for as long as it is required to revive growth.
  • The RBI may remain on a pause for a longer time (till Q2FY21); however, there might be space for future monetary policy action once inflationary pressure ebbs.

Yield curve:
  • Yields on the 10-year benchmark G-sec fell to ~6.40%, from ~6.60% post budget announcement, as government stated that there won’t be any additional market borrowing in FY-20, as the balance borrowing would be adjusted through borrowings from the National small savings funds.
  • Current macro economic situation provides visibility for a prolonged period of lower policy rates for the coming months as the MPC indicated that there is a policy space available for future rate action.

Liquidity & bond rates

  • Short term bond yields for AAA; AA & A rated papers have come down by ~ 25 to 30 bps post the Budget and RBI bi-monthly policy announcement.
  • From a risk-return perspective, the short-to-medium end of the yield curve still offers better riskadjusted returns as we except more spread compression to happen in this space.

Outlook going forward:
  • We continue to recommend a combination of short-duration and medium duration funds with a portfolio maturity range of 2 – 4 years
  • Going forward, decent quality AA-rated papers shall see higher spread compression and offer an attractive investment opportunity for investors willing to go down a bit on the yield curve.

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