After a brief lull in June, Indian markets continued their upward journey which began early this year. Both Nifty and Sensex clocked generous 5.8% and 5.2% in July and made fresh lifetime highs.

Markets have been buoyant for most part of this year and it’s clearly evident from the YTD returns. At 23% and 22% achieved by both indices (up to July), it has been a stellar year for investors till now.

From New to Newer Highs

Interestingly, the returns have been much higher for those who have invested outside the index and in mid-&-small cap space (our R&R portfolio too has been a big beneficiary of this upward journey).

RBI’s Hawkish Stance Continues… Rightly So

As was widely anticipated, RBI reduced the policy rates marginally (25 basis points) in its latest meet.

But the monetary policy committee (MPC) which is responsible for deciding rates is now increasingly being criticized for its ultra-cautious decision-making. Many are of the view that the MPC has consistently erred in overestimating inflation, which has meant that the policy stance has been unduly hawkish. This in turn has been detrimental to the revival of economic growth.

Our view is slightly different here. India’s monetary policy has been mostly inflation-targeting. The idea of such a regime is to keep inflation within a band first and accordingly set the policy rates. It is not about erring in predicting inflation but about keeping inflation within a range. And that is what RBI has been doing commendably well. Of course, it can mean policy stances that are not very growth-friendly. But one cannot have both together. Additionally, demonetization and GST have created their own micro-factors that increase uncertainty in the medium term.

RBI continues to refuse to accept the notion of many that inflation has reached a new and permanently lower level. In fact, RBI believes that from here on, retail inflation has only one direction to move and that is upwards. We believe RBI is right here. Inflation in India has been a tough and an uncontrollable animal in past. Ignoring history just because it has been in control in recent past is not a wise thing to do.

Economic Survey (2nd Part) says there is still a scope for reducing policy rates by another 25-75 basis points in 2017-18. But it will depend on multiple factors and there is still nothing we can be sure of.

Boost for NDA’s 2019 Political Ambitions

In a big surprise, Bihar’s political landscape changed overnight. Ruling non-BJP alliance (RJD+JDU+Congress) split up after corruption charges against RJD. But Nitish Kumar’s JDU was once again able to form the government but with the support of BJP this time.

With this change, BJP is on an unprecedented political upswing and is capturing power in one state after the other. Possible challengers are slowly being short-circuited politically and economically as BJP emerges as a bigger force than it was in 2014. And with 2019 general elections not very far off, it seems a given conclusion that Mr. Modi will have a clear majority for another term till 2024.

Geopolitical Risks

Geo-political risks are once again raising their ugly heads.

The faceoff between the US and the North Korea coupled with the dim outlook of Trump administrations’ ability to ensure actual economic growth is one such risk. Though experts are of the view that things would de-escalate sooner or later, the fact is that two aggressive head of states are running these two nations and hence, risks do exist.

On the domestic front, India and China face off near Bhutan. This too is not expected to last very long. But with Indian markets in the high-valuation territory, the bad news (if any) from any quarter can trigger a mild rationalization of markets levels.

R&R View on Economy & Markets

Given that markets have been on a continuous rise since the start of this year, it’s quite clear that they aren’t cheap on valuation parameters. And this is the reasons that an increasing number of people are waiting for a correction to happen ‘soon’.

But markets don’t correct because everyone wants them to correct.

So waiting for the correction is not something that we focus on. We remain committed to monitoring our existing portfolio of stocks and finding new fundamentally sound businesses that can be included in the 5×5 portfolio.

The recent correction in the markets is a good time to accumulate the companies which are fundamentally sound and available at decent valuations.

On that note, we end this newsletter and as always, appreciate you for taking time to read this message. Do share your views/comments by email/comment section below.

Regards
Team Equentis