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Market Review

Month gone by – A snapshot: Global equity markets remained under pressure in June amid trade concerns, geo-political worries and rising crude oil prices. While developed market index remained broadly flat, emerging market (EM) index fell sharply by 5%. Indian equity markets outperformed the broader EM pack with Nifty ending flat in June even as mid-caps continue to decline. Domestic bond yields firmed further amid a unanimous 25bps rate hike, surging crude oil prices and depreciating INR. 

World Bank expects global growth to peak in 2018
The World Bank expects global economic growth to remain robust at 3.1% in 2018 before slowing gradually over the next two years. This is largely on account of gradual removal of monetary stimulus by global central banks and escalating trade concerns. India’s economic growth is expected to improve to 7.3% in FY19 and 7.5% in FY20 largely driven by robust private consumption. The key downside risks to global growth include financial market volatility, policy uncertainty, rising trade protectionist sentiments and geo-political risks.

RBI hikes policy rate by 25bps
The RBI’s Monetary Policy Committee (MPC) unanimously decided to hike the policy rate by 25bps   – the first hike since January 2014. This was largely led by recent surge in core inflation (inflation excluding food and fuel) with risks tilted to the upside, even as economic growth recovery remains on track. However, the MPC reiterated its “neutral” stance amid global and domestic uncertainty and remains committed to achieving medium-term inflation target of 4% on a durable basis.

Monsoon expected to improve in July
According to India Meteorological Department (IMD), cumulative rainfall in the country in June was at 5% deficit. However, the IMD expects monsoon to revive in July, retaining their estimate of “normal” rainfall at 97% of long-period average (LPA) for the 2018 monsoon season (June-September).

Fixed income market remains weak
Fixed income markets remained weak in June, largely led by 1) surge in crude oil prices following a lower-than-expected increase in oil output in the wake of Iran sanctions and disruptions in a few other oil producing countries, 2) a unanimous 25bps rate hike by RBI, 3) weak INR (-7% YTD) and 4) worries around inflation and fiscal deficit. The foreign institutional investors (FIIs) have remained net sellers for five consecutive months, with net outflows at US$ 1.6bn in June. The 10-year g-sec yield ended 8bps higher at 7.9% and is up 80bps from April-low level.

Bond yields expected to remain firm
Increasing macro-economic headwinds have strengthened expectations of more rate hikes even as RBI has maintained a “neutral” stance. This, along with demand-supply mismatch, is likely to keep bond yields firm in the near-term. The key factors that are likely to impact fixed income markets include 1) decision on MSP (Minimum Support Price) hikes, 3) movement in crude oil prices, 3) trend of GST collections, 4) inflation trajectory and 5) monetary policy actions by global central banks, particularly US Fed.

Equity market continues to consolidate
Equity markets remained in the consolidation mode. The weakness was largely on account of 1) rising macro-economic concerns amid surging crude oil prices, 2) hardening bond yields, and 3) global trade concerns. The FIIs remained net sellers for third consecutive month, while domestic flows remained fairly robust. While Nifty index ended broadly flat in June (+2% YTD), Mid-cap index declined by 4% (-13% YTD).

Equity market to remain weak in near-term; medium-term outlook positive
Rising domestic macro-economic headwinds and political uncertainty are likely to keep equity markets under pressure in the near-term. On the global front, evolving geo-political environment and monetary policy actions by global central banks remain crucial for equity markets. In the medium-term, improving economic growth outlook and continued revival in corporate earnings bode well for equity markets.