volatile year for Indian equities
The sharp rise in global bond yields was a key factor that contributed to the recent volatility. Yields on India’s 10-year government securities also touched a four-year high in February on fears of high domestic inflation and aggressive rate hikes by the US Federal Reserve. Likewise, widening of the fiscal deficit targets raised concerns of a reversal in the policy stance by the Reserve Bank of India (RBI). This, coupled with the scam involving Punjab National Bank, weighed on banking shares that have significant weight in key stock indices. The reintroduction of the tax on long-term capital gains (LTCG) in the Budget and higher taxes on mutual fund investors also dampened sentiment.
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| Capitalstars financial research pvt ltd |
Long bond yields reflect the growth-and-inflation mix in the economy. If growth is strong, bond yields are usually rising. They also rise when inflation is going higher. The impact of these two situations is different for equities. When growth is strong, the salutary impact of higher growth on the numerator (cash flows or, more precisely, dividends) more than offsets the negative impact of the rise in the discount factor (due to higher yields) causing equity share prices to trade higher. Put another way, the confidence in the future is high, and equities are rewarded with higher multiples. The opposite is the case when bond yields are rising despite sluggish growth, i.e., due to inflation worries.
Concerns over looming trade dispute between the United States and China that weighed on global markets may impact crude oil prices too due to risk-off sentiment. Last week, Industrial Commodities fell after the US President signed a memorandum that could impose tariffs on up to $60 billion of imports from China.
On the brighter side, earnings growth, which was a drag in the first two quarters due to demonetisation and goods and services tax (GST) rollout, was promising in quarter ending December 2017. Experts believe that an economic recovery is on its way and that should help corporate earnings grow in double digits in FY19.
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