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chief investment officer
Poonam Tandon
Chief Investment Officer

Market Matters June 2021

June saw the Indian equity market indices gaining modest ground on the back of reduction in daily COVID-19 cases and relaxation in movement curbs. Emergence of delta plus variant of COVID-19 kept market sentiments under check. Domestic fixed income markets saw hardening of yields on the back of rising inflation concerns as crude oil prices continued to rise. 

Globally, inflation worries came to the fore as US CPI saw biggest YoY rise since August 2008. US Fed revised upwards its inflation and growth projections for 2021 and also reaffirmed its commitment to stimulus measures. However, there were hawkish undertones at the meeting. US 10-year treasury yields softened with yield curve flattening. US Dollar rose, crude oil followed suit. Domestically, IMD’s first monthly rainfall forecast saw rainfall over the country during July projected to be normal. COVID-19 case count declined further. Government hiked MSP’s for various kharif crops, announced additional fertiliser subsidy, a loan guarantee scheme for COVID-19 affected sectors with additional outlay under the Emergency Credit Guarantee Scheme. Retail inflation hardened whereas industrial activity rose. GST collections (for May) fell, impacted by the lockdowns.   

In the past few years, accommodative monetary policies stance of global central banks had led to the creation of liquidity glut causing multiple expansion which led to higher equity market valuations. Domestic equity markets had been hovering above 21x PE multiple zone which is in the historical context is considered as expensive. COVID-19 triggered a market correction which compressed valuation multiples. Post COVID-19 outbreak, global central banks not only sustained their accommodative monetary stance but governments also stepped in through fiscal policies as they co-ordinated efforts to curb the impact of the pandemic on their respective economies. Also, there could be rotation within sectors going by past trends and newer sectors could emerge as leaders. On the fixed income side, RBI’s continued with its accommodative stance but revised inflation forecast upwards and economic growth estimates downwards. It continued support through GSAP 1.0 and announced GSAP 2.0. 

Going ahead, course of global central bank monetary policy considering recovering economic growth and higher inflation forecast would be keenly watched. Vaccine coverage, trajectory of COVID-19 infections including the new mutant virus strain, upcoming corporate earnings season and key commodity price trend would also be eyed. Additional risk factors include flare up in geo political tensions and trade tariffs.

Latest quarter earnings came above expectations on the back of demand recovery and low base. Upcoming quarter corporate earnings performance would provide more clarity on sustenance of the earnings revival. Thus, optically high headline valuations could be reflective of uptick in corporate earnings. Considering the steep rise in equity market valuations, there could be intermittent market corrections. Market volatility could also rise in the short term but it can provide opportunities to accumulate quality stocks. Hardening of bond yields was due to rising worries about inflation as crude oil prices continued to rise. However, RBI’s continued accommodative monetary policy stance, forecasts of normal monsoons and rising vaccination coverage could offset those market concerns keeping bond yields ranged.

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