Equity: Review and Outlook

In the Feb 2018 review, we had noted that March would be volatile thanks to expected profit taking on every rise, before the new long-term gains regime kicks in. This, combined with unexpected US tariff measures, kept markets down, and saw the index lose 3.5% over the month, after a 5.1% decline in Feb 2018.

In the same review, we had mentioned that “there should be a good up-move in the Apr-June quarter, thanks to better earnings visibility (Jan-Mar ’18 may look good in comparison to Jan-Mar ’17 which bore the brunt of GST and demonetization).”

This seems to have started, with the Nifty index gaining 4.5% so far in April, from its March 2018 close of 10,097. With earnings just starting to come in, and a favourable base effect of Jan-Mar 2017, this up-move may continue, especially if global markets continue to be complacent about rising interest rates.

We must how ever use this rally to bring equity down to the lower end of the allocation range, as a sharp decline may be very much on the cards, if interest rates continue to climb.For now, we hold on, and let a probable earnings-led rally take us back close to Jan 2018 levels, at which point we will actively consider reducing allocations to equity, especially the mid-cap and thematic spaces.

Debt: Review and Outlook

Finally, some relief on debt, with the yield of the benchmark 10-Year Government Bond moving down to 7.3% from 7.68% (bond fund NAVs go down as interest rates go up), on the back of a lower-than-expected central government borrowing for the first half of FY 2019.

Banks, who hesitated to add treasury losses to their already dismal results were also cheered by the RBI announcement, allowing them to spread their mark-to-market losses over a few quarters, and started participating in the bond markets again.

While a benign RBI policy caused yields to moderate further to 7.12% in Apr 2018, this caused an untenable 0.01% difference between the 5-year and 10-year Government Bonds. This meant that the 5-year had to go down, or the 10-year up. The latter happened, and 10 Y rates are again back up to 7.5% levels.

The elevated yield levels with the 10-Y moving up, rather than the 5-Y moving down is understandable, given the one major uncertainty still at large- government finances, and whether the revenue projections outlined in Budget 2018 are feasible. A heavier cumulative borrowing by State Governments are not helping matters either.However, at these levels, downside does appear limited, and we may start seeing improvement in returns that started in Mar 2018 sustain through the year.

We however advise fresh allocations into good credit quality medium-term bond funds, while continuing to hold on to existing positions in dynamic bond funds.