Euphoria in domestic market and mixed global environment attract investors

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Market took a breath of fresh air as geopolitical tension eased. While announcement of general election dates and positive opinion polls (as per media) for the ruling party further propelled the benchmark indices to a six-month high. This gain was broad based in nature, mid and small caps which nosedived in the last one year got a new leg in the rally. This phenomenon is largely due to change in investors’ sentiment towards high quality mid and small caps which is now available at attractive valuation. Foreign inflows have increased in the domestic market, stimulating liquidity in the system. India is outperforming the emerging market by 4% in the last one week. In months of February and March, FIIs have continued their aggressive buying with inflows of Rs16,887cr in February and Rs9,336cr as on 11th March. The undercurrent in mid and small caps are positive due to cheap valuation with a minor risk of downgrade in Q4FY19 result earnings, leading to some profit booking in the near-term. However, on a long-term perspective, we believe that such volatility can generate an entry point and FIIs are positive on India due to better bargain led by prolonged pause in FED rate stance and a positive outlook in the future. Rupee gained strength and move below 70/dollar for the first time in more than two months owing to increase in foreign inflow and stability in oil prices.

Opportunities in domestic economy is picking up, analysts expect earnings to gain traction during FY20 due to revival in sectors like cement, infra, consumption and banks. Market is focusing on domestic businesses in expectation of improvement in future outlook while growth is normalizing in the rest of the world. Probability of a stable government at the centre and the inflation being continuously below the RBI’s target increases the chance of rate cut in the coming two to three quarters.  After the slowdown in Q3 GDP, investors are focusing on rate sensitive stocks. India’s 10 -year yield has declined in expectation of a dovish monetary policy.

During the week, market momentum was mixed in the global front, due to drop in Chinese export, Brexit worries, trade tensions and renewed concern on global growth. On an average the developed markets are down by ~1% in the last one week. After the disappointing US job data and retail sales, the likelihood of moderation in the first quarter GDP data has increased. Additionally, the defeat of Theresa May’s latest version of Brexit deal is creating uncertainties in UK’s economic growth. Having said that, near term global momentum will depend on the outcome of major central banks meetings – FED on 19th and 20th March, BoJ on 14th and 15th and BoE on 21st March. The global liquidity conditions have eased in the expectation of more dovish stance by FED diverting funds to high yield emerging markets.

Posted: March 14, 2019.

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