Equity Market and fixed income Outlook

Equity markets bounced back in October on hopes of a resolution to the EU crisis and investors found valuations reasonable. Sensex rose almost 12% from the lows it touched on October 5. Markets may give back some of these gains on concerns about global and domestic macro environment. News flow from Europe would continue to drive sentiments for the time being. While higher volatility may persist for some time, investors should take advantage of it by increasing allocation to equities in a gradual manner as long term prospects remain intact.

Bond yields rose after the government increased the borrowing amount for the 2nd half last month. Markets may remain volatile but these levels should be used as an entry opportunity as medium term outlook has turned positive. Policy rates have almost peaked out and global environment is positive for the bond market. We expect RBI to absorb a part of excess government borrowing to support the reserve money creation and ease liquidity pressure. We recommend dynamic bond fund for investors with risk appetite and an investment horizon of at least up to an year. We also recommend short term fund with horizon of at least 6 months as money market and short term yield curves are attractively priced.