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Markets likely discounting economic weakness, maintain positive note

Despite the weak economy, the stock markets have been holding up well on the back of the reduced corporate income tax rates leading to higher earnings growth. Moreover, this step is expected to trigger an investment cycle.

Equity markets in November 2019

● Equity markets continued to trend on the positive side since the recent lows seen in September. The Nifty closed the month on a strong note, up 1.5% for the month.

● The mid-caps has been trailing the large caps by a wide margin in the current year, however they finished stronger than large-cap stocks in November. 

● The S&P 500 (US Markets) was up by 3.5% in USD terms and by 4.5% in rupee terms


Debt markets in November 2019

● Median returns of the Top 10 liquid funds averaged 5.4%, down from the past year as interest rates have been coming off.  

● Overall interest rates have been trending down and it is important for investors to keep this in mind. The RBI has been keen to bring down interest rates. 


Factors affecting markets

1. The economy has been on a weak path, with GDP growth coming down to 4.5% pa over the past few months. Though the government has announced several measures to bring the economy back to its long term expected growth trajectory, experts believe it will take a few more months before growth is restored to normalcy. 

2. Despite the weak economy, the stock markets have been holding up well on the back of the reduced corporate income tax rates leading to higher earnings growth. Moreover, this step is expected to trigger an investment cycle. This optimism is currently out weighing the concerns over the economy. 

3. In such a scenario, it is important for investors to remember that equity markets tends to start trading well ahead of the curve and start to discount the future into its prices.   

4. One of the concerns with the lower tax rates and a weak economy is the higher fiscal deficit. If this issue is not addressed, it can lead to higher inflation and higher interest rates. In order to handle this, the government is focussing on large scale divestment in Public Sector Units – and some of these actions would have been difficult in normal times. History suggests a period of crisis is a good time to push through reforms which have a long term positive impact. 

5. With most of the weakness in the economy being discounted, and hopefully the worst behind us, it is a good time for investors to continue investing in equity markets. Moreover, alternatives like fixed income and real estate indicate lower expected returns.  

Summary

Optimism currently outweighs concerns over the economy as the stock market stayed up for much of November. With GDP growth down to 4.5% PA, the government is pushing through several measures to restore growth to its earlier pace. Equity investors would be wise to remember that markets trade ahead of the curve and discount the future in their prices. Hopefully, the worst is behind us.

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