The second half of the year started with a bang as the Indian markets concluded the month of July on a positive note with the benchmarks hitting all-time highs. Over optimism on the corporate earnings also played a big role in the markets’ record run. However, the divergence of the performance of a handful of blue chip names that took NIFTY and Sensex to new highs are in contrast to the broad market that seems to fizzle on the other end.
We believe that the current market run is very shallow in nature with just a handful of companies pulling the sleigh. With enough headwinds from lower than expected earnings growth and peak valuations, we are finding it difficult to see the momentum sustain one-way.
On the global front, U.S. and European markets benefitted from the U.S. Federal (Fed) positive outlook of the economy and the easing of trade war tensions between the U.S. and the European Union (EU). Optimism around the upcoming corporate earnings and encouraging economic data also supported the European and US markets. Oil prices witnessed their largest monthly decline in the last two years as Russia’s and OPEC’s output appeared to reach a 2018 high in July.
On the domestic front, Indian markets followed suit as they shrugged off trade war concerns, a weakening currency and higher interest rates. Furthermore, a GST rate cut across consumption basket, approval by the government on capital infusion into five state-run banks, lower crude prices and a normal monsoon contributed to the recent rally.
The Q1 FY18-19 result season has been mixed so far. We may have observed a strong growth in revenue and operating profit on the back of lower base due to streamlining of GST rollout last year, but the bottom line of the 32 companies from the 50 Nifty companies who have published their earnings so far, have just seen a single-digit growth.
Valuations are near all-time highs and the risk-reward ratio still looks unfavourable for equities in the short term. We continue to be cautious on equities on a short-term basis. Any exposure towards equities should be done in a gradual manner. We reiterate our cautious stance in the fixed income space due to a weakening currency and fiscal pressures. Investments in Short-term and Accrual funds are recommended.
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