When Geo-Political Conflicts Rule Markets

Thu 14-Sep-2017 06:23 PM
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The market was glued onto events at Doklam and North Korea’s fascination with its missile tests thus, the month saw a nervous and volatile market reaction. Both equity and debt markets trended downwards: It certainly was not an enjoyable occurrence; when conflicts rule over it!

Bond and Money Market

We present a matrix detailing movement in some key market rates (domestic and global) and key economic indicators:

Data as on: August 31, 2017| Source: Bloomberg

The MPC did cut repo rates by 25 basis points (bps) during the month. The minutes of the MPC, released on August 16, did not seem to suggest a further easing was on the cards. The majority of the members noted that inflation would likely rise in the near future. Likely fiscal slippages, farm loan waivers, and elevated inflation expectations were suggested as potential upside risks. What also emerged from both the Governor and Deputy Governor was a reemphasis on making the monetary transmission process work.

With indications of a long drawn pause and external conflicts afflicting market sentiments, the benchmark 10 year gilt sold off by around 7 bps during the month. The shorter term yields remained unchanged with liquidity aiding the shorter end of the curve. However, risks emerging previously due to rising yield from advanced economies subsided as yield softened in both US and Euro Zone.

Equity Markets

We present charts tracking domestic indices and sectors, and global indices movements:



Data as on: August 31, 2017 |Performance – Absolute Returns | Source: Bloomberg

The equity market for the month of August ended on a negative tone. All the indices except FMCG index ended in the negative territory. FII flows were negative to the tune of more than 12000 Crore. Globally markets were nervous and volatile due to the geo-political tensions. India had its own piece with the Doklam effect. Domestic institutional investors supported the market with a net inflow of more than 14000 Cr.

Data Hangover

  • Retail Inflation for July 2017 indexed to CPI moved up to 2.36% marked by a slowing food price deflation to 0.29 %. This soft inflation continues to be led by the vegetables subcomponent (having a weight of 6.04% in the index) where the inflation slowed down to print a number of -3.57%. Pulses inflation at -24.75% (2.38% weight age) also kept the inflation on a lower bound. The benign inflation however masked a sharp uptick in the month on month (m-o-m) inflation which recorded a number of 1.67%, the highest witnessed since August 2014. With Core CPI too inching up, there may be a distinct possibility of CPI bottoming out
  • The Index of Industrial Production (IIP new series) languished in June 2017, declining by 0.10%. It was a combination of a high base effect of June 2016 (8%) and partly related to GST led disruption. On a sectoral basis, Manufacturing index (78% weightage) witnessed a negative growth of 0.40%; while on a use based, capital goods (-6.80%)and consumer durables (-2.10%) dragged the index lower. The Consumer Non Durable segment of the index (food items, medicines, etc) has shown resilience with April –June period reflecting a growth of 7. 70%.
  • Composite PMI for July declined to 46.0 by 6.70 points from the June numbers .The GST related uncertainty seems to be the primary reason for this large decline and we expect activity to rebound in the coming months
  • INR vs USD continued to appreciate during the month by 0.43% to close at 63.90; an almost two year high
  • Trade Deficit for July stood to USD 11.45 billion, with the cumulative trade deficit (excluding services) for April –July 2017 at USD 51.50 billion - a number significantly higher than the previous year when the trade deficit had stood at around USD 27 billion
  • April-July Fiscal Deficit stood at 92% of the Budget estimates (BE) versus 71% last year. Total expenditure was at 38% (previous year 33%) of BE and total revenue being 20% (previous year 18%) of the BE
  • GDP (at constant 2011-12 prices) for Quarter 1, 2017-18 dropped to a growth rate of 5.70% with GVA printing a number of 5.60% during the quarter; one of the lowest numbers printed in recent times.
  • RBI’s annual report revealed that an estimated INR 15.28 trillion of banned notes (of around INR 15.44 tn) was returned to RBI. Further the fake currency returned during the exercise was also minuscule. However the demonitisation exercise may have presented the authorities with a data trail which could be used for improving tax compliance

Source: MOSPI, CGA, OEA, RB

Quo Vadis

Debt Markets:

The debt markets may continue to be challenged by both inflation and liquidity as we go ahead. Inflation continues to be a worry for policy makers. Rising commodity prices during the month may create further pressure on inflationary expectations. As we move to a pre demonitisation level of currency in circulation, we might also see a gradual withdrawal of the surplus liquidity. Further, front loading of government expenditure may be followed by a lower expenditure during the subsequent period, thus compounding liquidity woes. A deluge of equity IPO offerings may also impinge liquidity.

We continue to remain cautious on positioning of our portfolios in debt schemes and may continue our bias towards the shorter end of the yield curve.

Equity Markets:

Equity market continues to trade at an elevated valuation of 1+standard deviation (from historic averages) even after this month’s small correction. Market will keenly look at three data points for further movement:

a) Near term Macro and earnings recovery post implementation of GST

b) The success implementation of already announced reforms : GST, Insolvency Code, doubling of farmer income, affordable housing, etc in medium term earnings and macro data point growth; and

c) US Fed direction towards shrinking its balance sheet from September

From here on, recovery of earnings and macro data points could be critical for markets to move higher, rather than flows alone.

Disclaimer

The views expressed here in this document are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. While utmost care has been exercised while preparing this document, Mahindra Asset Management Company Private Limited (Mahindra AMC) does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The data/statistics given in the document are to explain general market trends in the securities market, it should not be construed as any research report/research recommendation. Readers of this document should rely on information / data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Neither Mahindra Mutual Fund, Mahindra AMC nor Mahindra Trustee Company Private Limited, its directors or associates shall be liable for any damages that may arise from the use of the information contained herein

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