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The month gone by – A snapshot
Global equity markets were down in December 2018 as concerns over liquidity tightening, macroeconomic worries and slowing growth gripped markets. Indian equity markets outperformed developed markets as well as broader emerging markets. MSCI India was flat while MSCI EM was down 3% and MSCI DM was down 8%. Nifty 50 was unchanged, while BSE mid-cap was up 3%. Fixed income market continued to rally supported by fall in crude oil prices, declining inflation and RBI’s bond purchases.

Macroeconomic scenario turns positive
RBI kept rates on hold at its December MPC meeting. The MPC minutes suggest that RBI is in a ‘wait and watch’ mode.  Equity markets showed nervousness in earlier part of the month on account of resignation of the RBI Governor and setback suffered by the ruling party in state elections. However, markets recovered soon largely due to the macroeconomic scenario turning positive.  CPI inflation eased to 2.3% compared to 3.4% in the previous month led by deflation in food prices.  Core inflation also eased from 6.2%to 5.7%. The CAD for 2QFY19 stood at 2.9% of GDP. INR ended the month flat at 69.8/dollar amid easing crude oil prices and positive FPI flows. FPIs invested US$1.1bn in equity and debt markets in December.

Fixed income market performance

Fixed income markets continue to rally
Fixed income markets continued to rally with the 10 year G-Sec yield ending the month down by about 20 bps. A pause from RBI in the December policy, easing inflation and crude oil prices led to the rally. The RBI conducted Open Market Operations (OMOs) of Rs. 500bn each in November and December 2018. It has guided for OMOs of similar quantum over the next few months. Foreign investors were net buyers of US$655mn in fixed income market in December (Outflow of US$6.9bn in 2018).

Outlook: After a strong rally, we expect bond yields to consolidate as investors keenly monitor government’s fiscal situation as well movement in crude oil prices. RBI’s views on inflation and interest rates, movement of INR and commentary by global central banks are important parameters to monitor.

Equity market performance

Equity markets remain range-bound
Nifty ended the month flat, while the mid-cap index ended 3% higher. In 2018, Information Technology, Consumer Staples and Banking have been the best performing sectors whereas Telecommunications, Automobiles and Metals have been the worst performers. Foreign investors’ flows were positive in December with purchase of over US$476mn (Outflow of US$4.4bn in 2018) whereas domestic fund flows for 2018 were positive US$15.5bn.

Outlook: After a strong growth and benign liquidity conditions over the last few years, global economic growth has started showing signs of a slowdown. This coupled with monetary tightening by key central banks makes global macroeconomic outlook challenging. Though current macroeconomic conditions are supportive for India, uncertainty with respect to corporate earnings growth and outcome of General elections would keep investors in a wait-and-watch mode. We expect markets to consolidate in the near term.