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Poonam Tandon
Chief Investment Officer

Market Matters February 2021

The month of February witnessed a sharp rise in the Indian equity markets amid volatile trade. Global rollout of COVID-19 vaccine and rising US Treasury Yields remained under focus. Larger than anticipated government borrowing plan continued to impact sentiments in the domestic fixed income markets. 

Globally, US House gave its go-ahead to the corona virus relief package which would be in addition to the stimulus already delivered. US macro-economic data points remained mixed. US Treasury yields rose sharply led by inflation concerns. US Dollar remained at highs. Crude oil rose on account of adverse weather conditions impacting supplies whereas precious metals fell. Domestically, the government approved PLI scheme for select sectors. COVID-19 recovery rate remained high amid lower infection rate resulting in continued drop in the active caseload. Retail inflation moderated further whereas Real GDP, GST collections (for January), industrial activity & manufacturing PMI continued to expand. As per the 2nd Advanced Estimate, food grain production for the year is expected to rise whereas for commercial crops it is expected to fall on YoY basis.  

Global accommodative monetary policy of major global central banks had led to a surging tide of liquidity propelling equity market valuations due to multiple expansion. However, it wasn’t accompanied by meaningful earnings growth. Equity markets had been hovering above 21x PE multiple zone for past 3-4 years which is considered as expensive in historical context for the domestic markets. COVID-19 triggered a correction which brought down market valuations. Post the pandemic outbreak, enormous amount of monetary & fiscal stimulus respectively by global central banks and governments combined with improving data and rapid progress on vaccines helped the markets rebound from the lows. Based on past experience, there could be rotation of sector leadership and newer sectors could emerge as leaders. On the fixed income side, negative global cues in the form of rising US treasury yields and crude oil prices outweighed growth supportive comments in the minutes of February MPC meeting. The RBI Governor in his interview re-iterated support for the market amid large supply. CPI Inflation moderated further. Softening of CPI inflation provides monetary policy with some headroom space to support economic growth.

Going ahead, market focus would remain on mass vaccination drive. Emergence of a new mutated virus variant remains a risk especially against the backdrop of the efficacy of existing vaccines. Other risks include sharp rise in commodity prices, rise in inflation expectations, flare up in geo political tensions & trade wars.

Better than expected corporate earnings performance in the preceding quarter reflects initial signs of corporate earnings revival. Thus, the optically high headline market valuations could be factoring an uptick in earnings. However, only the next quarter earnings performance will provide more clarity on the overall earnings trajectory. Considering the sharp rise in market valuations post the Budget announcements, there is increased likelihood of intermittent equity market corrections from current levels. Market volatility could also remain elevated in the short term but it can also provide attractive opportunities to accumulate quality stocks. Bond yields have hardened on the back of additional government borrowing this fiscal and large borrowing programme in the next fiscal and unfavourable global macros. Accommodative policy stance, surplus systemic liquidity offset to an extent the impact of unfavourable global macros, high fiscal deficit & additional government borrowing.

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