The Sensex and Nifty fell by close to 2% today bringing calendar year to date returns to almost zero percent. Ten year government bond yield is down by just 5bps calendar year to date despite two rate cuts by the RBI totalling 50bps. The INR is up by 0.7% against the USD since January 2015. Markets have hardly given any returns since the beginning of 2015.
Expectations of returns from equities and bonds are high. Sensex and Nifty have delivered returns of 30% in calendar year 2014 while ten year government bond yields have fallen 100bps. The INR fell by 2.9% against the USD in 2014.
Why are equities and bonds not continuing their rally? The first four months of 2015 have seen equity markets touch peaks before falling back to levels where they began the year. Sensex and Nifty touched record highs in March before falling to trade at current levels of 27886 and 8448 respectively. Ten year bond yield at 7.80% levels has been trading in a 15bps range. USD/INR has trended lower from levels of Rs 63.35 seen at the beginning of the year but has been rangebound in a Rs 62 to Rs 63 range ever since.
There are a few factors hurting equities and bonds at present. On the global front, worries of Greece defaulting on loans and exiting the Euro have resurfaced. China’s economy and its markets are on a divergent path and that is adding to market’s fears. Read our analysis on Greek Debt and China Equity Rally. Oil prices that had fallen over 50% over the last one year have shown volatility at lower levels on geo political issues in the Middle East. Russia and Brazil, two big BRIC economies are seeing nervousness on their economic outlook. Rate hikes by the Fed is a constant worry for the markets.
On the domestic front, high market valuations with Sensex and Nifty valuations climbing over 30% despite corporate earning expectations staying muted is leading to caution. Markets are yet to see strong reforms from the government and questions are being asked on the Centre’s commitment to reforms.
RBI cut the Repo Rate by 25bps in January and 25bps in March but in its April policy the central bank did not commit itself to further rate cuts though it did maintain its stance of an accommodative policy. Bond markets were factoring in front loading of rate cuts for this fiscal year and disappointment on that front has led to lacklustre trading in markets. Read our analysis on RBI 7th April Policy.
Unseasonal rains in the country has hurt crops in parts of the country and this is giving rise to issues of food price inflation, fall in rural demand for goods and services and weak agriculture sector growth for this fiscal year.
The above factors are all short term factors affecting the markets and that is leading to almost flat returns on markets calendar year to date. Going forward, positives should come to the fore leading to equities and bonds looking up and resuming their positive trends. Positives include high global liquidity with ECB and Bank of Japan carrying our monthly asset purchases of USD 125 billion. Fed is guiding towards a gradual rate hike cycle and is not looking to cause any damage to US economic recovery. China has reduced interest rates and freed up liquidity through bank reserve ratio cuts with the last 100bps cut done on 19th April freeing up USD 125 billion of liquidity. Oil price outlook is benign given global oversupply. Inflation expectations are still muted.
India will benefit from improved macros of lower fiscal and current account deficit and falling inflation expectations. Moody’s raised India’s sovereign credit rating from “Stable” to “Positive” on India’s improved economic outlook. RBI will maintain an accommodative stance to encourage credit growth in the economy to improve consumption and investment demand.
Government is hardly one year old since it came to power last May and reforms could speed up in the coming year. Corporate sector growth will pick up once consumption and investment demand starts to pick up.