The month of August was the second consecutive month of Nifty rally. Favourable domestic indicators, such as improved business activity, softening inflation coupled with on track Q1FY2019 corporate earnings brought cheer to the markets. However, geo political tensions surrounding trade war and Turkish currency crisis, falling Rupee and rising crude kept the exuberance in check. Overall the interim volatility in global markets kept both domestic and foreign players cautious.
How did funds react?
Pharma sector funds made a strong comeback this month after consistently underperforming the market. Technology and consumption themed funds also delivered robust performance. On market capitalisation basis, large and mid-cap category funds scored higher than pure large or pure mid cap funds.
We talked with Nimesh Chandan, Head Offshore Investments, Canara Robeco MF, Viral Berawala, CIO, Essel MF and Saravana Kumar, CIO LIC MF to understand equity market triggers in the near term and their market outlook.
Key triggers for the upcoming month
In the near term, global crude price and the movement of Rupee compared to US$ could decide the path, which the Indian equities will take believes Nimesh.
After a brief correction, oil prices moved back to near 80$ levels. Viral expects that oil prices will continue to inch up in the coming months. "Market participants will closely track geo-political events causing oil price rise. On domestic front, market participants are awaiting the announcement of the polling dates for the four state elections," he added.
The Fed policy meeting is also another key event. Saravana feels that rise in US rates will help strengthen US$ against other currencies further. A sustained fall in Rupee will elevate concerns of RBI rate hike.
Along with these triggers, markets are also keeping a close eye on inflation numbers and escalating US-China tensions for cues.
Impact on different categories of funds
Viral feels that a turnaround for the mid and small cap segment is on the way. "After the correction in first half of 2018, there are pockets of attractive valuation in this space. Mid and small cap companies have started recovering from their July lows. We expect this trend to continue in the coming weeks," he said.
Saravana sees export driven sectors delivering positive performance. He feels IT, pharmaceuticals, export oriented textile and chemical companies will benefit with Rupee depreciation.
Outlook
Nimesh believes that while the long-term outlook of Indian equities remains intact the markets are likely to move sideways and remain volatile in near term. “The Indian macro dynamics, especially the fiscal deficit and current account deficit is currently weaker than the expectations. While GST collections are gradually doing better, other sources of revenue such as from disinvestment may be under pressure which could provide discomfort to the markets. On a positive note, expectation of a better than normal monsoon has led to higher-than-normal sowing of crops across the country which is expected to increase rural income. This in turn will have a ripple effect on the economy as a whole. Our economy with structural improvement continues to provide a period of sustainable growth and the pick–up in corporate earnings in upcoming quarters could offer better investment opportunities and investor could increase exposure to equities. However, global fund flows are expected to be moderate this year. Having said that, the overall long-term outlook of Indian equities remains intact as we are structurally well positioned to benefit once the global market conditions become healthier,” he said.
Viral believes that some consolidation in large caps is underway. "Over the last 2 months, Nifty has generated returns of around 10%. However, such performance may not be repeated in the near future. After a strong rally, we expect the large cap indices to consolidate in the coming weeks,” he added.
Saravana observes that historically whenever markets have crossed their 52-week highs there has been significant volatility in the markets. The recent market volatility may lead to some flight to safety. Consequently, consumer goods companies and large caps are likely to see more interest.
Which funds should you recommend to your clients?
Viral observes that historically whenever, Nifty PE crosses 25x levels aggressive-hybrid funds deliver better performance than pure equity schemes. He feels investors should consider investing in aggressive – hybrid funds in staggered manner in the current scenario.
Saravana feels that post the correction, midcaps are trading at attractive levels. Long-term investors can consider adding midcap funds to their portfolio at this juncture.
While Nimesh is positive about the long-term outlook of Indian equities, he believes the current market is expected to be volatile. Investor looking at increasing allocations towards equities should do so in a staggered manner.
