• We remain apprehensive of a gradual rate rise as we move through the next year. We believe that the markets may have stopped coat tailing the RBI, and are not ignoring a commodity prices rise-induced inflation and a larger borrowing program
• The possibility of a bear flattening of the yield curve exists with long term rates rising lesser than short term rates
• Liquidity being in sustained surplus mode, the extreme short end of the yield curve may remain stable.

Globally, equity markets continue to remain bullish with expectations of economic recovery post the Covid vaccination driving the sentiments. The liquidity comfort remains strong as evident from multiple comments by policy makers in US on both monetary policy, as well as fiscal policy front. With the new US President coming in, we could see changes on quite a few fronts. While any change in stimulus and fiscal policy will definitely impact economy, any change in foreign policies may also influence the global economics and asset prices.

Indian markets again had a good month with a sharp recovery across indices to make a new high. The pre-budget fall in markets that we saw in January was fully recovered post the Union Budget announcement. Mid and Small cap indices fared significantly better than Nifty as focus continues to shift on broader markets. This is quite similar to trends being seen across the global markets where the recovery is broad-based. Among large sectors in market; Financials, Commodities, Energy outperformed Nifty while IT, FMCG, Pharma underperformed Nifty. The rotation among sectoral indices continue in Indian markets as leaders change almost every month. From FII flow perspective, Indian equity markets continue to attract strong flows in-line with quite a few emerging markets.

The economic normalization continues with improving data across economic indicators. GDP for Q3FY21 came in at 0.4% and this set the tone for some upgrades in GDP outlook for FY21. The consensus shifted towards a significant growth in FY22 with estimates ranging from 8% to 13%. These estimates put India as among the fastest growing economies in FY22.

Union budget for FY22 was presented during the month with a focus laid down on economic growth. Finance minister relaxed the fiscal deficit constraints under Fiscal Responsibility and Budget Management (FRBM) to prefer growth in next 2-3 years. We believe that focus on growth is what India needs from the government, especially when private sector is busy exploring growth opportunities presented under “production linked incentive (PLI) schemes” or “China Plus One” sourcing plans of global corporates.

The corporate results for Q3FY21 have been quite strong vis-a-vis the expectations. The corporate profits have been quite strong as they gained market shares over unorganized competitors, and also gained from strong cost-cutting. Indian corporates are likely to report a good profit growth in FY21 vis-a-vis the estimates at beginning of the year. Moreover, the profit growth is significant in light of around 8% decline in GDP expected for FY21. The profitability has grown, despite a fall in volumes, essentially on account of cost reductions across the operations.

The economies continue to be in lockdown in several countries. The real scare on growth was in March, 2020, but strong and coordinated monetary and fiscal support by policymakers across the globe have helped prevent an economic accident. As we move ahead, next 4-6 months may show good data points on YoY basis as the base was quite low. The real challenge is how much of inflation scare could revert in US as inflation could lead to bond yields in US rising and impacting all asset classes. We would continue to monitor data points as well as Fed commentary on the outlook for inflation and monetary policy stance in US.

As the economic recovery is getting traction across the globe, metal prices as well as crude oil prices have rallied sharply. This may hit cost structures and going ahead it would be a delicate balance between maintaining margins and growing volumes for many corporates. While the expected growth in earnings look good for FY22 based on the expected economic growth, we would monitor the growth vs profitability equation as we look for more data points on the same.

The markets have proven in last 12 months that it has its own volatile phases where investors’ psyche oscillate between fear and greed. While it may be a bit difficult for investors to avoid these phases, it is definitely possible for investors to avoid acting in haste during those phases. A strategy to keep a focus on longer term of 3-5-7 years definitely helps in avoiding hasty decisions in fearful times. Thus, SIP could be a good alternate to avoid the behavioural traps during the extreme phases of markets. We maintain that investors could use SIP as part of their core investment philosophy and use the lumpsum route during the extreme fearful phases to top-up on their SIPs.

For investments in debt oriented products:

• We believe that the investors with a shorter investment horizon may continue investments in ultra-short term and low duration funds
• For a long investment horizon and with a suitable risk appetite, an allocation to short term fund merits attention

For investments in equity oriented products:

• Our view is that volatility may continue and SIP may be a good way to increase equity market allocations
• We believe investors with shorter investment horizon and lower risk appetite, may invest in arbitrage fund to hedge against volatility
• Investors looking to invest for a longer period, can consider SIPs or STPs into focused, multicap or balanced funds based on risk appetite.
• Investors looking for a better return opportunity and with a suitable risk appetite, may consider part allocation in the mid cap scheme as well.