CIO Speak

Equity markets scaled lifetime highs in the month of May as the ruling party retained power with a thumping majority. Both the benchmarks, Sensex and Nifty 50, witnessed strong increases on a MoM basis of 1.7% and 1.5% respectively. The election results along with some softening of crude towards the latter stages of the month were enough to offset renewed escalation of the US-China trade conflict. Banks, Capital Goods and Realty sectors led the rally for the month while the main drags were Pharma, Metals and IT. All institutional investors bought into the rally with FIIs continuing their buying spree to the tune of USD 1.1bn while DIIs also bought to the tune of USD 754 mn.

 

March IIP growth contracted by (-)0.1% as against a growth of 0.1% in February led largely by slowdown in the manufacturing segment which contracted -0.4%. The sharp decline in the manufacturing sector in March was led by large sectors such as fabricated metal products (-15.3%), motor vehicles, trailers and semi-trailers (-7.5%) and machinery and equipment (-5.3%). Growth in the mining sector slowed to 0.8% while electricity production growth rose to 2.2%. From the use-based classification side, production of capital goods, consumer durables and intermediate goods led the slowdown, contracting by -8.7%, -5.1%, and -2.5%, respectively.

 

CPI inflation inched up to 2.92% in April 2019 from 2.86% in the previous month. Food inflation rose to a 9-month high in Apr’19 at 1.1% from 0.3% in Mar’19. The increase was led by vegetable prices which increased by 2.9% in Apr’19 (-1.5% in Mar’19), after remaining in deflation since Jul’18. The rate of price increase for meat and fish category also accelerated to a 35-month high of 7.5% in Apr’19. Core CPI edged down to 4.5% in Apr’19 (lowest since Oct’17) compared with 5.1% in Mar’19, helped in part by a base effect. April WPI inflation moderated to 3.07% as against 3.18% in March primarily due to a moderation in fuel and manufacturing inflation even as food inflation hardened.

 

The fixed income market witnessed an even more impressive rally as the election euphoria, softening of crude and a lower inflation print all combined to result in sharp fall in yields. The new benchmark 10 yr yield softened 38 bps on a MoM basis to 7.03% from 7.41%, the steepest fall since Nov 2016. The rally has also been bolstered by expectation of a further rate cut in June by RBI's Monetary Policy Committee.

 

The first few sessions of June have once again witnessed domestic markets scaling new lifetime highs, seemingly unperturbed by slowing growth seen across the world. Even a 20 quarter low GDP print of 5.8% hasn't been able to dampen sentiments significantly. Markets participants will now eagerly watch out for the upcoming Union Budget.

 

Regards,

Amit Patra

Chief Investment Officer

DHFL Pramerica Life Insurance.