The month of November saw markets slowly return to normalcy as fear regarding NBFC liquidity cooled. RBI’s Open Market Operations (OMO) also provided liquidity support to g-sec market during the month. On the global front, oil prices fell sharply following Russia’s stance of maintaining oil production. Subsequently, we saw an uptick in Rupee which gave a further boost to market sentiment. Other positives for the markets were deceleration in Consumer Price Index and a softer Fed view, which resulted in significant drop in longer rates. The 10-year yield has dropped further in November by 25 bps to 7.60%.
How did funds react?
Long duration and gilt fund recorded higher returns compared to short duration funds in November as OMO by RBI increased interest in government bonds.
We talked with Lakshmi Iyer, CIO (Debt) & Head Products, Kotak MF, R. Sivakumar, Head - Fixed Income, Axis MF and Siddharth Chaudhary, Senior Fund Manager – Fixed Income, Sundaram Mutual Fund to understand market triggers in December and their near term market outlook.
Key triggers for the upcoming month
RBI monetary policy will be a crucial event for markets during the month said Chaudhary. With the key risks highlighted by RBI within comfort zone, both Sivakumar and Iyer believe that a pause in rate hike cycle is likely during the upcoming monetary policy meeting.
Markets will also follow the upcoming OPEC discussions for cues on the direction of oil prices, according to Chaudhary, Sivakumar and Iyer. India being a net importer of crude, lower crude oil prices is likely to have a positive impact on its current account deficit and Rupee. This in turn will help boost foreign investor confidence in Indian markets.
In addition, markets will also track Trump policy measures and inflation numbers, according to Iyer. She expects the upcoming CPI inflation number to be below 3%.
According to Chaudhary, markets keenly await FOMC meeting as it unexpectedly indicated that current policy rate isn’t very far from neutral rate.
Sivakumar feels that with the macroeconomic and liquidity concerns reducing, markets will now focus on fiscal deficit numbers. In the near term, market participants will try to gauge whether Government will be able to achieve its fiscal deficit target for the financial year.
Outlook
Iyer believes that both g-sec and corporate bond yields are likely to find support at current levels. On an immediate basis, g-sec may perform better due to higher momentum in government securities. However, as market returns to normalcy, we may see increased interest in corporate bonds, she added.
Sivakumar expects yields to be reasonably supported in the near term. The main concern for markets is likely to be fiscal deficit data. According to him, g-sec yields may fall marginally if government sticks to its borrowing programme in the coming months.
Chaudhary said that subdued food inflation has helped keep inflation below RBI’s target for some time. However, crude and core inflation posed as key risks to inflation. Thus, crude dropping by ~30% in two months has brought respite and put the rate hike option off the table for now. According to him, RBI is likely to lower inflation projection for the rest of FY19 and continue addressing liquidly concerns. Market would keenly watch RBIs projection for FY20 as core inflation still remains high he added. Chaudhary expects rates to remain range bound in short term as fiscal risk remains. However, continued OMOs will help soothe the markets he feels. He also cautioned that market volatility may increase in case OPEC decides to lower production and crude prices rise again.
Which funds should you recommend to your clients?
Sivakumar mentions that currently, the yield curve is very steep between the overnight to three year space. Yields are particularly attractive in the 2-3 year bucket. Thus, investors can consider investing in either high quality funds or credit funds in this duration bracket based on their risk appetite.
Chaudhary feels that investors with shorter holding period can look at liquid, ultra-short term, money market and low duration funds while investors with 9 to 12 months focus can consider taking exposure to accrual focussed short duration funds. Moreover, investors with investors with 36 months+ investment horizon can look at mid duration funds and systematic deployments in long duration funds.
According to Iyer, at the current juncture, g-sec yields have already corrected sharply. So, investors can consider allocating their funds to a combination of short to medium term funds.
