Equity: Review and Outlook

In keeping with our forecast for a good April, the Nifty index gained 6.4% from its March 2018 close of 10,097.With earnings just about meeting expectations, and a host of short-term global uncertainties emanating from the USA, indices have been volatile so far in May.

The up-move may continue after this consolidation, especially if global markets continue to be complacent about rising interest rates.While we believe the time has not yet come to reduce equity allocations, we remain watchful especially as interest rates across the world are rising. With the US 10-year Government Bond breaching 3%, risks will increase assymetrically from here on.

For now, we hold on, and let a probable earnings-led rally take us back hopefully beyond Jan 2018 levels (which was 3.5% away from the April close), at which point we will actively consider reducing allocations to equity, especially the mid-cap and thematic spaces.

Debt: Review and Outlook

After the relief rally in March, and the initial enthusiasm of April when RBI held rates, and sounded more benign on inflation, yields shot up as the RBI meeting minutes seemed totally disconnected from the policy statement. Higher oil prices literally added fuel to this fire, and at the time of writing this note, the 10-Year bond is at 7.9% levels.

This has been especially disappointing for those who entered debt funds from Aug 2017; dynamic bond funds have returned -0.6% over this period, and the medium-term funds have returned 4-6%, a performance on par with liquid funds.

However, most dynamic bond funds seem to have adjusted their portfolio maturities towards the shorter-term bonds; between April 5, 2018 and May 15, 2018, when the 10-Year Government bond went from Rs.100 to Rs.95 (a -5% return), the dynamic bond funds have returned -1% to -2.5%, clearly reflecting reduced portfolio maturities.With the 10-year bond at 7.9% and the 4-year bond at 7.86%, clearly there is no compensation for going into longer maturities.

Going forward, with these portfolio maturities, dynamic funds should perform similarly to medium term funds; shifting from these funds to medium term funds may not be necessary. However, there may be exceptions especially with very recent investments, where we will discuss proposed actions with you, and implement the same.For fresh allocations to debt funds, we continue to advise allocations into good credit quality medium-term bond funds