In the last couple of months, the Government of India has shown its intent to revive the economy with a slew of positive measures to address concerns on the weak economic activity and consumption levels. The initiatives include bank recapitalization, policy changes in auto sector to revive demand, reduction of corporate tax rate from 30% to 22% (effective tax rate including surcharge and cess: 34.9% to 25.1%), removal of surcharge on capital gain tax from equity or equity funds and Rs.25,000 crore booster package to real estate sector.
The RBI has also supported the government by reducing the repo rate to 5.15% (cumulative rate cut of 135 bps since Feb-19). However, the actual transmission of rate cuts from banks to end borrowers has been slow. To speed up transmission, the RBI issued a circular making it mandatory for banks to link their lending rates to an external benchmark specified by them.
Although the macroeconomic indicators are yet to show positive signs, the equity markets have factored in the expected earnings’ growth with Nifty and Sensex reaching new highs.
The equity markets are close to their all-time highs, led by the revival in sentiments post bank recapitalization and the corporate tax cut reform. The earnings results were also better than expectations for the majority of the companies in the second quarter.
Largecap stocks continued to outperform. Nifty 50 returned 0.8% while S&P BSE Sensex returned 1.9% in the last four months ended 31st October 2019. The Midcap and Smallcap segment i.e., Nifty Midcap 150 and Nifty Smallcap 250 returned -2.3% and -6.8% respectively.
Debt funds especially ones with exposure to weaker credit securities have been going through tough times since the last 8 months because of liquidity crunch, high corporate debt levels, downgrades and defaults in some cases.
Post the announcement of corporate tax rate cuts by the government in Sep-19, the market is concerned about the revenue lost (~1.4 lakh crore) to the government and how the government will bridge this gap (though the government has clarified its stance of sticking to the fiscal deficit target).
Reflecting this, the benchmark 10-year government bond yield has risen to 6.6% from a low of 6.3% in July-19. RBI, during its policy meeting in Oct-19, has cut the Repo Rate to 5.15%. The environment remains conducive for RBI to maintain its accommodative stance on the back of domestic factors like growth continuing to falter and inflation remaining within RBI’s comfort zone (4%) and accommodative stance of global central banks. The market is currently expecting another rate cut from RBI to revive consumption and investment activity.
As the historical performance of the existing select funds has been consistent, not much change is observed in the rating of existing funds. However, a few changes have been made in the FundsIndia Select funds considering both qualitative and quantitative aspects. In this regard, several fund specific or AMC specific factors have been considered in shortlisting the funds where some funds have been changed from buy to hold recommendation.
Our investors can find a more detailed report on the Select Funds changes in their email.