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Equity Market Update
After hitting an all-time high level, the market turned volatile but broader market significantly underperformed since the start of CY20. The performance is on expected lines towards some normalisation in terms of performance with the broader market after outperforming headline indices.
The performance cycle, which was in favour of large caps in 2018 and 2019, seems to have turned around in the last three to four months with midcaps and small caps outperforming. However, the divergence in return is higher within the midcap/small cap category. Therefore, proper diversification among midcap/small cap funds is also required.
While in the long run, equity markets have trended upwards, there are many bull and bear market phases within that larger uptrend. Within that market phase, different category of funds viz. large cap, multicap and midcap/small cap perform differently. In general, in a bull phase, midcap/small cap funds perform better while in a bear phase, large cap funds outperform. In general, multicap funds are a more stable category with performance ranging between large caps and midcaps during all market phases.
No fund outperforms across all investment horizons. Every fund performs in cycles. Hence, investors should be more cautious while investing in a best performing fund.
While in the long run, equity markets have trended upwards, there are many bull and bear market phases within that larger uptrend. Within that market phase, different category of funds viz. large cap, multicap and midcap/small cap perform differently. In general, in a bull phase, midcap/small cap funds perform better while in a bear phase, large cap funds outperform. In general, multicap funds are a more stable category with performance in between large caps and midcaps during all market phases.
In the near term, some consolidation amid profit booking is expected given the sharp rally across segments in the last two to three months. Any correction amid such profit booking should be used as a buying opportunity to accumulate and increase equity allocation.
Markets perform in cycles. While investing, one needs to ensure that investment is made at the lower end of the market cycle. Conversely, lumpsum investment should be done when historical returns are negative or lower than long term average.
While midcaps outperformed large caps significantly in FY15-18, they witnessed a reversal in trend amid liquidity issues along with NBFC crisis and other corporate defaults over the past 18 months. In turn, this skewed investor’s focus towards quality companies, leading to underperformance of the broader markets, in general. Quality companies in both large cap and midcap/small cap have done well in 2019. We expect this trend to continue even in 2020. Lumpsum investment in midcap/small cap funds at current levels may be considered. However, the core portfolio should always comprise multicap oriented funds with accumulation being done through an SIP approach.
An important lesson learnt in 2019 was that predicting market performance based on regular economic data prints is a futile exercise. Investors should just focus on regular investment.
Debt Market Update
Year 2020 started on a positive note, particularly post the Union Budget and RBI monetary policy. The benchmark 10 year G-Sec yield started January on a cautious note with yields moving up towards 6.60% but correcting below to 6.40% in the first week of February. The fall in short-term yields was sharper with three year G-Sec yield falling more than 25-30 bps during the same period.
The two major event, Union Budget and RBI policy rejuvenated investor sentiments.
In the Budget, gross borrowings for FY21 are pegged at Rs 7.8 lakh crore against FY20 number of Rs 7.1 lakh crore. Net borrowings for FY21 were pegged at Rs 5.36 lakh against FY20 number of | 4.74 lakh crore. The borrowing numbers were below market expectations. The Budget also furthered the opening up of the local bond market to offshore investors by increasing the participating limit for foreign portfolio investors (FPIs) in corporate bonds hiked from 9% of outstanding currently to 15%. Also importantly, certain specified categories of government securities would be opened fully to non-resident investors, apart from also being available to domestic investors. The same, along with comments from policy makers, indicate that efforts are being made to include Indian debt into global bond indices.
In its policy meeting, while RBI maintained status quo on rates, the positive surprise came from announcement of long term repo operations (LTRO). LTROs of one-year and three-year tenors for improving monetary transmission has been introduced up to a total amount of | 1,00,000 crore at the policy repo rate. This measure is likely to support yields at the short to medium end of the curve. Effectively, RBI from the shorter end of the yield curve has now moved up the yield curve to ensure yields move southwards up to three to five years duration. Three year G-Sec yield corrected around 15 bps post policy announcement. While there are no explicit guidance on operation twist or any other measure to support long tenure yields, the RBI Governor has hinted that twist operation was to bring long bond yields down and ensure transmission. More such operations cannot be ruled out as spread between 10 year G-Sec yield and repo rate remained near all-time highs. While inflation expectation has been revised sharply upwards till H1FY2020-21, Q3FY2020-21 inflation is being projected at 3.2%. Effectively with one year ahead inflation likely to be well below RBI’s 4.0% inflation target, one more rate cut in the later part of the year is not ruled out.
Global bond yields have fallen sharply in the last month due to Coronavirus on global growth. Almost all major commodity prices, particularly crude oil prices, have corrected sharply.
Interest rates structurally shifting lower: Interest rates are slowly moving down and are likely to move further down. Therefore, coupon or interest on all fixed instruments are likely to be lower than historical averages. Investors needs to lower their interest income expectations, in general.
Selective opportunity in non-AAA segment: Credit spreads continued to remain high as risk aversion among investors remains high. There is a selective investment opportunity in non-AAA rated segment of the market both from a relative and absolute return perspective.
Gold: Golden run continues amid multiple tailwinds
Gold prices continue their golden run in 2020 on the back of concerns surrounding Coronavirus and its impact on global growth. Global prices touched almost US$1700 per ounce while Indian prices are trading at alltime high levels of above Rs 43000 per 10 gram, rising sharply aided by depreciating currency.
The rally is following one of the best year in 2019 in terms of performance getting a lift from Federal Reserve rate cuts and geopolitical tensions with global prices rising around 18% and domestic prices rallying 24% during CY19.
After consolidating in a narrow range for around three months, global gold prices rallied during December and continued their positive momentum on the back of heightened political tension between the US and Iran. The initial part of the rally occurred alongside a weakening US$ and rising inflation expectations combined with still weak economic growth.
The US Federal Reserve trimmed interest rates by 25 basis points in July, September and October, before announcing a halt in December. The market expects low interest rates to remain for long. There is very little expectation of any hike in the near term. Low rates help the precious metal in several ways in terms of lower opportunity cost and weak US dollar, which is good for gold due to the historical inverse relationship between the two.
The historical negative correlation of gold prices with other asset classes does not seem to be in sync in the near term. The year 2019 saw all three major asset classes viz. global equity market, debt market as well as gold delivering double digit returns. One of the likely reasons could be that even gold has become a financial asset, which gets a premium in an environment of surplus global liquidity. In times like these, investors need to be extra vigilant in analysing asset class returns.
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