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Poonam Tandon
Chief Investment Officer

Market Matters October 2020

Equity market indices resumed their upward march driven by strong FPI flows. Global equities fell on account of mounting corona virus cases & uncertainty surrounding US presidential elections. Fixed income markets remained fixated on RBI’s liquidity enhancing measures & measures to ease rising yields.

Global equity markets fell on the back of concerns of a potential second wave of corona virus cases & uncertainty surrounding US presidential elections. On the US macroeconomic data front, data points remained subdued. US dollar strengthened further whereas commodity prices remained range bound. Crude oil prices fell due to cloudy demand outlook on account of virus spread. US presidential election campaign entered the final leg. Domestically, government continued with the phase wise opening (un lock) of the economy. Government also announced further measures, as part of its economic stimulus package, to stimulate domestic demand & boost governmental infrastructure spend. RBI MPC maintained status quo on policy rates & announced several liquidity enhancing measures. Macro-economic data viz., industrial production, core sector data, manufacturing PMI displayed sequential improvement. GST collections registered a YoY rise.

Global central bank loose monetary policies and falling interest rates created a liquidity surge which found its way into riskier higher yielding assets. This boosted equity market valuations led by multiple expansion without accompanying earnings growth. Based on historical data (for domestic markets), PE ratios above 21x have always been considered as expensive and the markets had been hovering in that zone for past 3-4 years. COVID-19 triggered a correction which caused market valuations to mean revert. Going ahead, investor sentiment could tilt in favour of newer sectors as historically such a tectonic shift has led to a rotation of sector leadership. On the fixed income side, the RBI has utilised various unconventional measures to support the market as high and sticky CPI inflation (above RBI MPC’s tolerance threshold at 6%) for past few quarters had lead to a pause in the policy rate action. RBI’s sustained measures are directed towards improving the flow of credit to the economy. Centre also resorted to additional market borrowings on behalf of states to help meet the GST revenue shortfall. The additional borrowing has increased centres total market borrowings for the fiscal.

Going ahead, markets would keenly watch the outcome of the news flow on corona virus vaccine trials, US presidential elections, ongoing BREXIT negotiations & the evolving geo politics. Commodity price movement, trade war and further fiscal / monetary stimulus would also be eyed.

With normalcy yet to resume, economic growth path would remain uncertain in the near term. Considering the looming risks and uncertainty, equity market correction cannot be ruled out from current levels. Market volatility could remain elevated but it can also provide attractive opportunities to accumulate quality stocks. Bond yields have eased post the long term measures for easing of bond yields, spreads and liquidity was announced offsetting the impact of high CPI inflation, fiscal deficit & additional government borrowing.



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