Given the benign global yield backdrop and favourable inflation-growth dynamics, there is room for a further rate cut by the RBI.
Equity market outlook
· Earnings growth, which is key to market performance, is likely to remain robust over the next two years. The same provides us comfort in remaining constructive on the markets. We expect the earnings momentum to continue, going forward. A stable currency amid an increase in crude price, softening system interest rates (controlled inflation) and resolution of stressed asset is expected to lead to healthy 20%+ earnings CAGR in FY19-21E. Earnings growth at the index level may be led by the index heavyweight banking & NBFC space, which is expected to report earnings CAGR of 36.1% in FY19-21E. Accordingly, we maintain our positive stance on banking and diversified funds while being overweight on the banking sector.
· The global macro set-up (dovish outlook by Fed, range bound crude) as well as domestic macroeconomic indicators such as RBI rate cut (possibility of further rate cuts), driven by benign inflation and stable currency levels, are key drivers of our positive outlook on markets. With uncertainty around elections results behind, a majority government is likely to bode well for equity investment.
· Going ahead, underlying macroeconomic growth coupled with corporate earnings growth momentum is likely to remain a key catalyst for market movement in the next three to five years. The resilient corporate earnings growth across most pockets is a positive.
· Volatility is expected to remain elevated in the near term as expectations of a strong and stable government already seem to have been discounted by the market. Therefore, investors are advised to invest in a systematic and staggered manner over the next few months. Also, any small correction should be used as a lumpsum investment opportunity as we do not foresee any major correction in the near term.
Debt market outlook
· Given the benign global yield backdrop and favourable inflation-growth dynamics, there is room for a further rate cut by the RBI. The RBI is also increasingly focusing to ensuring liquidity deficit improves through forex swap programme and OMO auctions. The same is likely to supply durable liquidity and improve transmission, going ahead. The current lower government spending is also set to improve post election results.
· The growth–inflation dynamic favours more rate cuts from the Reserve Bank of India. CPI has been below 4% for nine months now while core CPI, which peaked at ~6-6.25% in October, has now trended down. It is now at around 4.5%. At the same time, almost all high frequency data like auto sales, consumer sector related volume growth, IIP, tight liquidity in NBFC sector, all indicate at a slowdown in economic activity. We expect more than one rate cut from RBI during the current calendar year 2019.
· Structurally, we continue to remain positive on the Indian debt market. Good quality short-term funds and corporate bond fund category are best placed for long term fixed income allocation. It is better to continue to avoid the credit risk fund category.
· Once the liquidity tightness abates and supply concerns are addressed, we expect bond yields, both sovereign and corporate bond, to trend lower from current levels over a period of time.
· Short-term debt funds or lower duration funds are better placed over the next few months. We maintain our cautious stance on credit risk funds or funds with higher credit risk. The corporate bond fund category is best placed for long term debt allocation.
[Disclaimer: The author is ICICI Direct. The views and opinions expressed in this article are those of the author and do not necessarily reflect that of Business Television India (BTVI)]