After opening with a bit of volatility, equity markets settled down and posted a recovery towards the end of December. Bothe the benchmark indices ended the month with gains of ~2% each. The strong support shown by the RBI MPC, general confidence in manufacturing sector coming back to pre-Covid level and reports of Omicron being less fatal than the Delta virus played key roles in the market recovery. The top outperforming sectors for the month were IT, Capital Goods and Metals while underperformance was largely seen in Banks, Oil & Gas and Telecom. As history has suggested earlier also, FIIs sold significantly in December, net sellers to the tune of USD 2.5bn.

                                                  

The composite Purchasing Managers’ Index (PMI) produced by IHS Markit fell from 56.3 in November to 54.9 in December. Firming demand conditions continued to underpin new orders and output growth but the pace of the expansion softened in December. Moreover, employment levels and business sentiment fell in December. On the price front, input prices rose notably, while firms charged less for their services to spur demand amid stiff competition in December.

                                                  

November CPI inflation picked up further from October at 4.91% (October: 4.48%). Sequentially, headline inflation increased by 0.7% (1.4% MoM in October), led by 1.3% MoM increase in food prices and 0.4% MoM increase in core inflation. Food inflation increased to 1.9% (October: 0.8%) primarily led by sequential rise in prices of vegetables, fruits, and eggs, while prices of meat and fish and oil and fats declined and pulses remained muted. The high frequency mandi prices further seem to be suggesting moderation in cereals, vegetable, pulses, oil and fats, with prices of fruits seeming significantly elevated. Fuel and light inflation moderated to 13.3% (October: 14.3%). Core inflation at 6.3%, rose by 30 bps. The WPI, however, witnessed the steepest rise in 9 years, shooting up to 12.4% in October, led essentially by Power & Light inflation. WPI jumped to 12-year high of 14.23 % in the month of November, fuelled by rise in manufacturing and food prices.

                                                  

Bond yields hardened across maturities even as the RBI MPC maintained rates and its accommodative stance, reflecting the ongoing normalization in monetary policies by key central banks across the world along with expectations of domestic inflation creeping up. The yield curve shifted upward across the maturity spectrum with relatively more steepening at the short end (around 25 bps hardening) led by the sharp upward move in VRRR auction cut-offs. The benchmark 10 year G Sec hardened 12 bps to 6.45% from 6.33% in November. Corporate bond spreads too witnessed contraction across maturities.

                                             

The first few days of January has seen the markets continuing their upward journey from the end of December as fresh FII participation and increased buying in Financials has provided key support. The continued support from the RBI has led to the belief among participants that any impact from the Omicron virus could be negated by further monetary policy support. The 3Q earnings will kick off from the next week, which will hold the interest of participants for the rest of the month as will the upcoming Union Budget on Feb 1st where the focus will be on Govt borrowing and fiscal deficit target.

 

Regards,

Investment team

Pramerica Life Insurance