Market is not able to hold on to even small gains, and is falling easily under global & domestic volatility avoiding any type of positive ques. No pinch of positivity seen as macro data like GDP & IIP improved and political strength of central party expanded from North-East state elections. Consolidation continued with selling across all the broad sectors. Market has broken the last low in which bank struggled under NPA issue, higher bond yield & cost of funds. Global headwinds on account of trade war by US to hike steel duty slid world’s equity market. Metal loosed its sheen, while Investors were nervous and not looking to accumulate, waiting for major triggers to get direction.
India’s government 10yr yield currently stands at 7.8, 49bps up in the last 2months. Deposit and lending rates are increasing and trajectory of inflation continues to be on the higher side. This augurs for further cut in valuation. In the near-term, RBI is expected to provide additional liquidity to the bond market, which will provide some support to the market especial the financial sector.
Globally, the current effective fed rate is 1.4% while the 10yr yield is 2.9%. If Fed rate increases by 3times as anticipated by consensus, the effective rate will be 2.15% by the end of dec-2018. If the same spread is maintain the bond yield will increase to 3.65%. The US bond yield has increased by 60bps in the last 3month, bringing high volatility in the Indian market. Currently the domestic market is down by about 8-9%, but if the situation continues in the global bond market, India will also be impacted.
In terms of PSUBs, an analyst is not in a position to properly infer today’s actual book value. So to contemplate future value gives a vague expression, making it difficult to know whether it is a good time to invest in PSUB or not? Hence it may be best to see some stability in the situation. Having said that, PSUB can provide opportunity in the long-term as the group of PSUBs consolidates with changes in ethos. In terms of the financial sector, increase in cost of borrowing and reduction in credit growth are two negative factors, during which valuation gets downgraded. As a result the current year may be difficult for the sector to maintain a positive trend. In terms of valuation, the 1yr forward Price to Book is at 2.3x, which is till at the higher side compared to a range of 2.5x to 1.5x in the last 3years.
Flight of foreign funds from domestic market due to pick up in US economy, hawkish FEDs view and reduction in India’s weightage in important FIIs brokerages model portfolio are adding pressure. In the month of Feb, FIIs have sold about Rs12,500cr and continue to be negative in the first week of March. With high amount of cash in hand, MFs are increasing the exposure on equity on MoM basis, but not good enough to absorb completely. Any stability in global market, non-redemption in MF and availability of market at bargaining price can provide some support to the domestic market in the near-term.