The month gone by – A snapshot

The month of March witnessed a sharp sell-off across asset classes as investor sentiment was impacted due to the ongoing West Asia conflict. Crude oil prices increased by 63% as oil and gas production as well as transportation in the Middle East was severely affected. Asian and European economies have been particularly impacted due to supply chain disruptions and sharp increase in energy costs. To mitigate the impact, International Energy Agency member countries have agreed to release 400mn barrels of crude oil from their respective strategic reserves.

The increase in energy prices have brought inflation concerns to the fore. However, most leading central banks, including the US Fed, have indicated that they are likely to adopt a patient approach and not raise policy rates in the near term. The IMF has cautioned that the ongoing conflict will ‘lead to higher prices and slower growth’ globally.

The MSCI World Index declined 7% last month, while the MSCI Emerging Market Index declined by over 13%. The sovereign yields for most economies have increased significantly. Contrary to its reputation as a ‘safe heaven’, gold prices also declined sharply last month. The INR depreciated by 4% in March amidst increase in cost of energy imports, and outflows by foreign portfolio investors (FPIs) from both equity and debt markets.

Economy: Stable amidst rising uncertainty

The Indian economy has demonstrated a resilient trend, with minimal disruption to economic activities compared to other emerging markets. However, recent data points such as manufacturing PMI indicate that shortage of natural gas and petrochemical products has started impacting some industries. The Government has reduced excise duties on petroleum products to offset the impact of higher global energy prices on domestic consumers. The resolution of the Iran conflict and restoration of global energy supply chains remains an important variable for India’s economic outlook.

Equity Market: Sharp correction; some earnings downgrades likely

Nifty and Midcap indices were down by 11% while Smallcap index corrected by 10%. Amongst sectors, Real Estate and Banking underperformed while Healthcare and Power sectors outperformed. Foreign Institutional Investors (FIIs) sold equities worth US$12.1bn while Domestic Institutional Investors (DIIs) bought equities worth US$15.4bn.

The global macro-economic landscape continues to remain fragile. While the domestic economy remains relatively resilient, deceleration in GDP growth cannot be ruled out amidst energy supply chain disruption, adverse impact on inflation and resultant slowdown in demand. Though a quick resolution of the Middle East war can lessen the impact to a large extent. Post the correction, valuations look attractive from a medium to long term perspective. We maintain our positive view on equity markets.

Fixed Income market: Yields rise sharply amidst global uncertainty

The retail inflation for February at 3.2% remained below RBI’s midpoint target of 4%. The sharp increase in energy prices has generated upside risks to inflation outlook. While the MPC is expected to maintain policy rates unchanged this month, the market has started to price in the possibility of the central bank implementing rate hikes, going forward.

Amidst geopolitical tensions, global yields rose sharply in March. The India 10-year GSec yield rose by ~38bps to 7.04%. FPIs sold US$ 0.7bn from Indian debt markets in March. Amidst significant global uncertainty, domestic yields are likely to mirror global trends and exhibit heightened volatility in the near term.