Monthly Strategy Brief

Monthly Strategy Brief - February 2017

Asset Class View Outlook
Indian Equities – Short/Medium Term Negative

With no negative surprise, Union Budget was appreciated by market at large. Nifty gained almost 1.8% on budget day, over and above 4.6% up-move in the month of Jan 2017. Street expectation was a hike in STT or LTCG on Equities, which currently are tax free after 12 months. Union Budget skipped such changes and stayed away from populist measures. Simultaneously, result season is on and till now, Corporates have announced numbers in line with expectations. Demonetisation impact will still be felt in 4QFY17 numbers. Also, GST which is likely to be implemented from 1st July2017, may impact the supply chain specifically in industries which are largely controlled by unorganised players. There are also high concerns about change in policies by new US President impacting few sectors like IT & Pharmaceuticals. All these factors along with high valuations make us to take cautious stance and we maintain Negative view on Indian Equities.

Indian Equities – Long Term Positive

Over the longer term, there will be few drivers for the equity markets. Firstly, the massive liquidity (Rs.14.5 Trillion) that banks have already collected as deposits. Part of this may reduce with revival in credit demand. This liquidity will provide a solid platform for banks to expand their asset books. This liquidity will keep yields low. Low CPI inflation, despite non-food risks, will urge the RBI to broadly maintain a dovish rates policy. Secondly, the Union Budget 2017 is focussed on push in terms of capital expenditure. Lastly, a delayed GST launch this year will gradually add 2% to GDP growth. With currency stability, India shall be a preferred destination for FIIs.

Debt – Short/Medium Term Positive

We have already seen softening in yield curve during last few months, with some volatility in month of Dec 2016. In this Union Budget, with Government maintaining focus on fiscal discipline and target of 3.2% of Fiscal Deficit to GDP, it looks rate cut by RBI in this Feb 2017 monetary policy rate cut is imminent. Going forward, there could be gradual softening in yield curve as surplus liquidity in the banking system is likely to be high and also growth is likely to remain slow.

Debt – Long Term Neutral with Positive Bias

With demonetisation and GST which is likely to be operational in next few months, the businesses may get more structured in the way they operate. This may improve the productivity at broader economy level. This could be slow and long term process of transformation for good number of industries. Hence we are maintaining Neutral view for Debt over longer term. However, with better efficiency across many industries post-demonetisation, structurally it should be positive for Fixed Income space.

Global Equities Negative

With new US President there have been many changes in US policies around global trades and Jobs in USA and immigration to USA. Global equities are likely to be volatile under such circumstances. Many other events like BREXIT, French election, Italy exit and more events may keep global markets volatile.

Gold Negative

Gold after having corrected USD 1350 level to 1120 levels has now bounced back to 1220 levels. Post demonetisation and greater Income-Tax vigilance, demand for Gold may get impacted. With Trump’s focus on higher consumer spending and infrastructure, the focus of investors is likely to shift towards equities and other risk assets. Also, higher interest rates are negative for Gold, as people prefer to invest in financial assets rather than physical assets like gold.

 

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