Equity: Review and Outlook

After a strong showing in April, the Nifty took a breather in May 2018, with a small gain of 0.4% over the month. Volatility was high given the global uncertainties emanating from various facets of US external policy.While the Nifty held on to gains the Midcap index went below the level it touched in Mar 2018, and has only recovered marginally in June. Midcaps, as a category however, still continue to be expensively valued.

The up-move may continue after this consolidation, especially if global markets continue to be complacent about rising interest rates. Midcaps may also trend higher, but with increased volatility.

We hold on to the view that the time has not yet come to reduce equity allocations, even as interest rates across the world are rising. However, we remain watchful for any sign that markets get shaken out of their complacency regarding the benign nature of interest rates and monetary policy.

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

Debt: Review and Outlook

May was yet another disappointing month for bonds, with the 10-year GoI Security scaling close to the 8% mark.

Mixed signals from the central bank, raising FPI limits for bond purchases, while finally raising the repo rate in June on concerns of higher inflation have not helped the cause of bond investors.While investors over the last one year in bond funds have witnessed a fairly dismal performance so far, portfolio YTMs have moved up by over a percentage point from then. This jump has been more for the AAA bonds, than it has been for the sub-AAA bonds.

Our stance has always been towards the higher credit-quality funds with reasonable expense ratios, and these now stand to deliver the best returns, going forward from here.

Higher interest accruals in these funds, and a possible end to expectations of higher rates later this year should help debt funds do well from here.Given that most dynamic bond funds seem to have adjusted their portfolio maturities towards the shorter-term bonds, we also do not see an advantage in churning out of these funds and into other funds.For fresh allocations to debt funds, we continue to advise allocations into good credit quality medium-term bond funds.