It was a big bold move. On October 24th, the Finance Minister announced a recapitalization plan of INR 2.11 trillion for public sector banks. A move aimed at restoring the capital of the banks and restart the lending cycle was indeed a much needed succor for the capital starved PSU banks. And the markets cheered the news. For the PSU banks; fortified finally!
Bond and Money Market
We present a matrix detailing some movement in some key market rates (domestic and global) and key economic indicators:
The bond markets was definitely not cheering; the benchmark 10 year Gilt inched up by around 25 basis points during the month, one of the sharpest moves in recent times. It was a series of news which did not please the bond market participants: hawkish minutes of the MPC meeting, possible implications of recapitalization bonds, rumors of an RBI functionary talking about a steep yield curve and rise in US yields. While the benchmark 10 year sovereign sold off, the corporate bonds were resilient and did not follow the sell off witnessed in the Gilts. In fact the news of recapitalization, spurred a big rally in perpetual bonds issued by PSU banks with yields softening by around 50-125 bps!
The shorter end of the yield curve too inched up by around 15 bps reflecting the tighter liquidity situations prevalent in the market.
We present charts tracking domestic indices and sectors, and global indices movements:
Source: Bloomberg | Data as on: 31 Oct, 2017 |Performance – Absolute returns
The market buried the ghost of the past two months: it was a risk on trade globally. With hostilities with North Korea thawing and strong set of economic data, it was a global equity market rally. The domestic markets too rallied with the benchmark indices moving up by 6 % and the Midcap indices rallying by around 8% during the month. It was also a broad based sectoral rally with commodities, energy, and reality index leading the rally. The FIIs continued to sell (about USD 2.5 billion) and DIIs continued to buy during the month.
The biggest mover during the month was the PSU bank stocks. While the recapitalization move potentially frees them of capital constrains, it may also kick start the investment cycle starting a virtuous cycle of balance sheet growth. Also what has boosted the market sentiments has been the second quarter results which have broadly followed the street estimates, with commodities and consumptions showing better results than the street estimates.
Source: MOSPI, CGA, OEA
- Retail Inflation for September 2017 indexed to CPI moved up to 3.28%. Vegetable prices rose 3.9% compared to 6.1% in August. Inflation stabilized in September after accelerating for two straight months.
- Index of Industrial Production grew 4.3% in August, after rising 0.9% in July. The growth for Index of Manufacturing, Mining and Electricity was 3.1%, 9.4% and 8.3% respectively during August, 2017. Primary goods, Capital goods, Consumer durables and Consumer non-durables registered positive growth of 7.1%, 5.4%, 1.6% and 6.9% respectively in August 2017.
- The Nikkei India Composite PMI Output Index, a measure of private sector activity in both the manufacturing and services sectors, came in at 51.1 for September. It was at 49 in August.
- INR appreciates vs. the USD in October. INR was seen at 64.74 an hour before month end closing, appreciating by 0.82% in October.
- Trade deficit in the month of September came in at USD 8.98 billion compared to USD 7.7 billion during the same month a year ago. Cumulative exports during April-September 2017-18 increased by 11.52 percent to USD 147.18 billion, while imports grew by 25.08 percent to USD 219.31 billion, leaving a trade deficit of USD 72.12 billion.
- April-September Fiscal Deficit stood at 91.3% of the Budget estimates (BE) versus 83.9% last year.
We had been cautious on the rates for a long time. However we feel that rates may stabilize from here on now. Corporate bonds appear richly valued, as they have not participated in the sell off in the bond markets. We think from here on Gilts have the potential to offer a better return trade offs than corporate bonds and we may position our portfolios accordingly across the debt portfolio. While the uncertainty on the rates would continue to remain (inflation, fiscal deficit, global yields), we would continue maintaining lower duration with bias towards the gilts.
We continue with our opinion that markets look richly valued: markets trade beyond the 2 standard deviation across market capitalization. While an earnings revival looks likely in Quarter 3, we believe markets have already captured in the earnings growth of the next quarters. As we moved, the future movements could be determined by earnings improvement leading to specific stock/sector movements.
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