Developed market equities were virtually flat during January outperforming EM equity. The MSCI EM (USD) index was down 4.7% during the month. Rising geopolitical tensions between US and Iran were overshadowed by positive news on US-China trade talks with the signing of Phase One trade deal though it is likely to be more of a ceasefire than a long term solution. However, gains in the first half of the month were pared in the second half on concerns about the impact of the coronavirus on global growth. The WHO has called the outbreak a global health emergency and the Chinese government extended the new year holiday in some regions. The brunt of this disruption was borne by commodities which were down substantially. Crude oil (Brent) was down nearly 12 % during the month while the London Metal Index of six major hard commodities was down 7.5%.

Indian equities were relatively resilient during the month with the Nifty index down only 1%. The Mid cap and small cap indices outperformed the Nifty index substantially. On a trailing 3-month and 6-month basis, these indices are doing substantially better than the large cap indices.The month however was a volatile month with the India Volatility index (based on NSE 50) up nearly 50%. In terms of flows, FPI flows were positive fifth month in a row (at Rs. 12,123 crores) and Mutual fund flows, though positive, were more muted at Rs. 1,053 crores.

The markets went into the budget with expectations of a pick up in infrastructure spend to revive investment, cut in taxes to increase consumption, and some sort of support for the real estate sector and HFCs / NBFCs. Given the fiscal situation and weak revenue growth, the FM had a tough ask to meet expectations of market participants.

The tax cuts in the budget will help persons in the lower tax bracket and possibly lead to more disposable income with them. Given the tight fiscal situation, and the FM’s decision to move to a lower fiscal deficit target for FY21, growth in infrastructure spending has been moderate. The decision to scrap DDT will help a section of taxpayers and will especially be seen as positive by MNCs whose parent companies were unable to claim offset of DDT paid here. In terms of estimates, the budget has been reasonable in estimating a 10% nominal GDP growth for FY 21 and tax revenues broadly in line.While the disinvestment target of Rs 210,000 crores looks high,given the names being talked about viz. BPCL,Air India, Concor etc. and part disinvestment in LIC, it may be possible to hit the target. Equity Market Outlook

The budget should not have a major impact on the markets who will remain focused on earnings.

We have been saying that we expect a rural recovery led by a good rabi crop,better prices of agricultural commodities, and the government’s continued focus on the rural economy. While numbers for auto sales and some consumer companies remain tepid, we expect a broader recovery in the second half of CY 2020.

However, given the valuations in the market,we expect this year to be a moderate year for returns with stock selection being a key determinant of returns.