CIO Comments – December 2016

By Mr.Sampath Reddy, CIO Bajaj Allianz Life Insurance

Macro-economic developments

  • RBI’s Monetary Policy Committee (MPC) kept the key policy rates unchanged, with all six members of the MPC unanimously voting in favor of the monetary policy decision citing upside risks to the CPI inflation target of 5% for March 2017 and external factors like future stance of US monetary and fiscal policy.
  • RBI’s growth projection has been revised downward for FY17 to 7.1% from 7.6%, on account of short run disruptions in economic activity due to cash crunch and slump in demand due to adverse wealth effects due to demonetization.
  • Currency in circulation reduced by ~ Rs 8 trillion from Rs 17.77 trillion in October, 2016 to ~Rs 9.2 trillion on December 23, 2016 on account of government’s demonetization move and restrictions in cash deposits and withdrawals in banks.
  • Liquidity in the system continues to be in surplus mode by ~ Rs 6.6 trillion (including cash management bills of Rs 5.2 trillion).
  • US Fed in its December FOMC meeting decided to hike Fed rate by 0.25% to 0.50%-0.75% – citing strong labor market data and steady increase in inflation towards US Fed’s 2% target. Moreover, it has indicated 3 hikes in CY 2017 in its guidance.
  • Fiscal deficit for April – November 2016 was 4.58 lakh crore viz. 85.8% of 5.34 lakh crore of the budgeted fiscal deficit for FY17 (against 87.0% during the same period last year).
  • November CPI inflation moderated to 3.63% YoY as against 4.20% in October; primarily on account of moderation in food inflation to 2.11% YoY in November as against 3.32% in October.
  • IIP contracted by 1.9% in October as against growth by 0.7% in September, primarily on account of contraction in manufacturing sector (-2.4%).
  • Brent crude rose by 12.6% in December to close at USD56.82/barrel; versus USD50.47/barrel in November.
  • INR appreciated by 0.68% in December to close at INR67.92/USD; versus INR68.39/USD in November.

Equity market developments and Outlook

  • The Nifty declined slightly by 0.5% in Dec’16, after falling by 4.7% in the preceding month. The benchmark index, however, fared better than the broader market; the NSE500 fell by a sharper 1.4% in December. Mid and smallcap stocks continued to trend lower, with the NSE mid and smallcap indices falling by 2.3% and 3.1%, respectively, in Dec’16. These had fallen by 8-11% in the preceding month.
  • The Nifty had a stellar run for most part of 2016. It had risen by 25.3% during Mar’Oct’16 before the Government’s demonetization drive halted the uptrend.
  • The performance of NSE sectoral indices was mixed in Dec’16. The CNX pharma, PSU bank and metals were the worst performers, declining by 7.3%, 6.2% and 5.2%, respectively. The NSE energy and IT were the top performers, rising by 3.3% and 3.1% respectively.
  • FIIs pulled out money from Indian equities for the third straight month in Dec’16. Their equity sales exceeded purchases by US$1.2bn in the month. Mutual funds continued to pump in money into Indian equities for the 5th consecutive month in December. Their equity purchases exceeded sales by US$1.3bn in the month.
  • December was a very good month for global equity markets. US equities closed gained; the S&P500 rose by 1.8% in the month. US markets have been on an uptrend post the announcement of the US election results. All European markets posted healthy returns during Dec’16 – Italy, France, Russia, Germany, Spain, Portugal, Hungary and Denmark rose by more than 5% in the month. The Stoxx Europe 600 (index of 600 European companies) rose by a sharp 5.7% in the month.  The performance of Asian markets was mixed in Dec’16. China declined sharply, while Singapore and Hong Kong posted loses. Japan, Indonesia, Malaysia, Philippines and South Korea gained in the month.

Fixed Income market developments and Outlook

  • 10 year G-Sec yields closed higher at 6.52% in December  v/s 6.25% in November, due to absence of rate cut by RBI in December and a hawkish policy statement and lesser than expected Fiscal bonanza to the government owing to demonetization. Domestic yields came under further pressure owing to perceived hawkishness of the US Fed.
  • With the surge in inflow into the banking system, RBI is expected to take temporary measures to absorb the surplus liquidity through MSS (Market Stabilization schemes), OMO sales etc.
  • We believe that CPI inflation readings would continue to be benign with the expectations of lower food prices and subdued demand on account of demonetization move, with RBI maintaining CPI inflation target for 2016-17 at 5%.
  • We expect the government’s demonetization move to have opened up room for rate cut by RBI in order to support growth which may get adversely impacted due to cash crunch in the economy.We expect RBI to cut policy rate by 0.25% in February, 2017 and continue with its accommodative stance.
  • Key factors to watch out for will be –Union Budget on Feb 01, 2017, impact of demonetization on growth and inflation, pace of US Fed rate hikes, sustained uptick in commodity prices (especially crude), GST framework, and upcoming state elections.
  • In view of the improving macro-economic dynamics, policyholders would be well placed to benefit from the economic revival and further rate cut going forward, if they continue to remain invested in the India growth story.

The opinions expressed in this document is personal opinion of Chief Investment Officer of Bajaj Allianz Life Insurance Company Limited based on his perception of the present market conditions and economic scenario of India and is not indicative of nay future investment trend to be followed by the company

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