What's happening in the markets?

What’s happening across the world

• The US central bank-- the Federal Reserve-- has been pulling out all the stops to support the US economy and US jobs by already pumping over $4.5 trillion into the economy via direct transfers and various programs of buying bonds.
• The Fed has also lowered rates rapidly to near 0 levels in order to prop up the economy by making borrowing cheap.
• On June 10th, the Federal Reserve stated that they would keep interest rates close to 0 until at least the end of 2022, as they expect it to take years to bring unemployment back down to the levels before the coronavirus pandemic.
• The chairman of the Fed said that their pursuit currently is towards maximum employment and stable prices in the US.

What does this mean

• This grim outlook was not taken well by markets across the world as it was an indicator that the global economy will not have a V-shaped recovery 
• Most central banks across the world are also expected to keep rates in the economy low and the yield on the high-quality debt will remain low in the medium term

The chart below compares India’s repo rate movement with the US Federal Funds rate in the last 24 months:

How will India be impacted?

• The Reserve Bank of India’s monetary policy committee cut its policy rates to their lowest ever level in an emergency meeting on May 22nd. The repo rate currently stands at 4%
• Although the US Fed’s latest action creates much more room for RBI to ease rates, most estimates see minimal rate cuts by the RBI going forward with repo rates expected to remain in the 3.75-4% level through to 2021.

Impact on Equities

• As a result of liquidity pumping by central banks, and the low yield on bonds, equities have seen a sharp pullback in May with the US markets now almost at all-time highs.
• Outperforming sectors globally have been IT, Communication, HealthCare while laggards have been Energy (Oil and power), Financials and banks and industrials. The table below compares Nifty's performance with other major sectors in YTD terms

• While the Indian economy has been suffering the effects of lockdown equities have recovered from their lows driven by over Rs 28,000 cr inflows since May
• Equity markets are expected to benefit from the availability of cheap liquidity, however, movement in equities will be highly stock and sector-specific.
• Our stock analysis model is currently bullish on 2-wheelers (Bajaj Auto & Eicher Motors) and select stocks across IT, Pharma and Banks

Impact on Debt

• The concerns over the rebound in the economy further underscores the need for you to stick to high-quality AAA-rated debt.
• We expect the after-effects of the lockdown to have long-lasting effects on the economy that will leave companies with large debt levels struggling. This will impact growth and will result in several defaults on payments going forward.
• AAA-rated high-quality companies will be best placed to navigate this difficult economic crisis.

INDwealth analysis

• Both equity and debt markets are expected to remain volatile in the medium term
• Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
• Stick to AAA-rated Low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up.

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