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chief investment officer
Dr. Poonam Tandon
Chief Investment Officer

Market Matters February 2023

The month saw the Indian equity market indices continuing their decline in-line with most global markets. Indian fixed income markets saw hardening of yields during the month tracking strong domestic retail inflation data and the movement in global yields. INR depreciated against the USD during the month.   

Strong incoming economic data meant that interest rates could rise further which led to muted sentiments among market participants. US headline CPI rose 6.4 percent YoY, lower MoM but higher than market expectations. US retail sales activity, services and production remains on firm footing Global bond yields spiked following building up of expectations of a higher terminal rates. German Bond yield rose to the highest level since 2011.  European gas prices declined, down about 84 percent below 2022 peak and 40 percent YTD as gas storage levels remained very high. India Meteorological Department (IMD) predicted “above normal” summer temperatures in most of northeast, eastern, central India and parts of northwest India. Inflation hardened, IIP grew and GST collections remained steady. Merchandise trade deficit narrowed to a one-year lows in January as decline in imports more than offset the decline in non-oil exports.   

Global inflation remains elevated despite the recent moderation with several economies even experiencing double digit inflation rate. Prolonged Russia-Ukraine military conflict has compounded global uncertainties as supply disruptions have further exacerbated inflationary pressures. Global monetary policy trajectory has seen a major shift with inflation control being prioritised over economic growth and interest rates are expected to rise even higher from the current decadal high levels. However, central bankers would have to increasingly maintain a balancing act between supporting growth and taming inflation. Domestically, further rate hikes and liquidity withdrawal measures could continue to anchor inflation expectations but terminal rates could be around the corner. Government’s actions with respect to duties and cesses are also aimed at curbing inflation and reining in the current account deficit and reducing fiscal slippages. Moderation in global commodity prices augurs well for the medium-term outlook even as arrival of the seasonal harvest and favourable base could also support its moderation. Union Budget has reinforced governments commitment towards public capex thrust as a preferred path to kickstart economic revival post the pandemic.

In the near term, inflation outlook & key global central bank monetary policy actions, currency movement, geopolitical tensions, global bond yields and direction of institutional flows and commodity price trajectory would be eyed.   

Recently concluded corporate results season saw an overall in-line performance with divergences within sectors and companies. Banks, autos, capital goods, consumer staples and power registered strong growth. On the other hand, commodity oriented sectors viz., Metals, energy, cement and building materials witnessed muted performance. In the backdrop of elevated macro uncertainties on account of risks to economic growth, high and sticky inflation and prolonged geopolitical tensions, our broad approach remains stock specific with preference for companies that can navigate this turbulent macro environment with ability to maintain margins backed by a healthy balance sheet. Market corrections can provide opportunities to accumulate quality stocks. Relatively strong government tax revenue growth and falling crude oil prices are positives. However, hardening inflation print, emerging tight liquidity conditions and rising supply of paper in the final quarter are concerns which could lead to upward movement in yields especially at the shorter end and higher corporate bond spreads.

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