In the month of November, Equity markets bounced back strongly after a dismal performance in the previous month. The rally was fueled by improvement in macroeconomic prospects due to a sharp fall in oil prices and a stronger currency. Further, Presidents Trump and Xi have called a truce in their trade war.
Although we have seen a majority of headwinds moderated or temporarily deferred, we believe events such as OPEC meet and the Fed Meet are very critical and could have a major impact on the further direction for the markets.
On the global front, the US Treasury yield curve has inverted for the first time in more than a decade. Markets have always been vary of inverted yield curves as each of the seven recessions that the US has seen, the spread between short and long-term Treasury yields, the yield curve, has dropped below zero and started to invert.
On the domestic front, State election results are just a week away and the general election a few months from now, investors would prefer to stay on the fences and let the dust settle.
The market movement in November may have been ‘Two Steps forward’, but December might be ‘One step back’.
With corporate earnings falling short of market expectations and valuations expensive, the risk-reward ratio continues to be unfavorable for equities in the short term and we continue to be cautious on equities on a short-term basis. Any exposure to equities should be done in a gradual manner.
On the Fixed Income front, until more clarity emerges on the durability of the recent decline in inflation, RBI could stay on ‘pause mode’. Accordingly, yields may continue to soften, while exhibiting some amount of volatility. We believe that the shorter end of the yield curve continues to offer better risk-adjusted return than the longer end, and hence, we continue to recommend investments into short duration and accrual funds.
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