Indian equities had a spectacular month with benchmark indices
registering all-time highs amid strong foreign inflows, improving
outlook for corporate earnings and better than expected macros. The
BSE Sensex, Nifty 50 and the Nifty Bank scaled new lifetime highs and
the Nifty 50 surpassed the 19,000 mark. S&P BSE Sensex & NIFTY 50
ended the month up 3.4% and 3.5% respectively. NIFTY Midcap 100 &
NIFTY Small cap 100 continued to outperform their large cap peers, up
5.9% & 6.6% respectively. Market breadth remained strong while
volatility declined further over the month.
The guiding theme for debt markets was the monetary policy decisions
by the Reserve Bank of India (RBI) and the central banks globally
including the US Federal Reserve (Fed). Markets also witnessed oil
production cuts by OPEC and a slew of positive macro data releases in
India and the US. All these together led to a 10-12 bps rise in yields for
all bonds over one year. Additionally, there was a broad based rise in
global bond yields. The yield on the benchmark 10-year G-sec stood at
7.11%, up 12 bps from last month.
On the domestic front, as widely expected, CPI inflation declined to a 2-
year low of 4.25% in May from 4.70% a month ago. Favourable base
effects and a decline in food prices were the reason for the fall. One
needs to see whether the monsoon is deficient due to a strong El-Nino
and this could push up food prices. India's economic growth over the
quarter remained resilient at 6.1%. Meanwhile, industrial production
rose 4.2% in April, up from a revised 1.7% in March supported by
investment and consumer demand. The broad-based rise growth
indicates that despite weak external demand, lower inflation and
higher capex supported industrial activity.
The RBI's Monetary Policy Committee (MPC) maintained a cautious
stance ahead of the US Fed's June policy meet. While the central bank
retained its status quo on interest rates, the MPC members stressed on
the 4% target for headline inflation. The US Fed policy was a consensus
pause but the policy members released Fed dot plot chart that showed
two further potential hikes while the members were upbeat on macro
economy data projections.
Private sector capital expenditure finally showed signs of a rebound,
with the announcements more than doubling in FY23 from prepandemic
levels and outpacing Central and state governments' capex
plans for the year. Overall, new capex crossed the pre-pandemic peak
and stood at Rs 12 trillion in the fourth quarter of FY23, according to
data from CMIE. Furthermore, indicators such as capital utilisation and
improving PAT/GDP ratio suggest that a broad-based capex revival is on
the horizon.
Market View
Equity Markets
India's GDP CAGR growth over the last 5 years stands at ~ 3.8% while
nominal growth is ~9.7%. The spurt in GDP growth to above 6% on real
GDP opens up a significant growth opportunity in our opinion across
sectors. A confluence of cyclical & a structural tailwind are driving the
recovery. Cyclically stronger balance sheets, improving macro stability
- which reduces pressure on policymakers to tighten policy stance -
and structural policy reforms are the keys to sustainable growth.
However, some companies are likely to benefit over others on account
of flexibility, product differentiation and market leadership. This
pocket-wise growth rather than 'across the board' and active investing
in growth and quality are likely to be key to alpha creation.
Our fund performance has seen a strong rebound driven by active stock
selectin driving much of this recovery. This unique trait across
portfolios has historically been key to long term wealth creation and
this is reflected in our conviction plays across schemes.
Debt Markets
In the near term, bond markets might see a marginal upside of 5-10 bps
in yields. We believe investors should use this rise in yields to increase duration across their investments. Structurally, we believe we are at
peak of both inflation and interest rate cycle and anticipate limited
upside in yields from this point. Banking liquidity should remain positive
in near term and bond prices are indicative of the supply pressures
within the bond markets. Consequently, in the next 3-6 months, we
expect a fall of 20-40 bps in yields across the curve beyond 1 year. We do
expect the yield curve to steepen post a first rate cut by the RBI.
Demand from insurance and mutual funds could decline but Rs 2,000
note deposits in banks (~ Rs 2.25 trillion already deposited) will ensure
more than sufficient SLR demand from banks in near term.
From a portfolio standpoint, in line with our medium-term view, our
portfolios currently run duration at the higher end of the respective
investment mandates. Our expectations of incrementally softening
yields across the curve and a possible policy pivot in favor of softening
rates in the latter half of the financial year, this has already been
factored into the current portfolio positioning. Recovery in credit
spreads over the last 3-4 months has also made corporate credit (AA &
above) attractive from a risk reward standpoint. For investors with a
medium-term investment horizon, we continue to believe actively
managed duration strategies offer ideal investment solutions to
capitalize on a falling interest rate outlook and attractive 'carry'
opportunities as compared to comparable traditional investment
solutions.
Source: Bloomberg, Axis MF Research.