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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
DISCLAIMER: The analysis, comments, views, opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. The information provided is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is prohibited or which would subject the AMC or its affiliates to any registration requirement within such jurisdiction or country. It shall be the sole responsibility of the viewer to verify whether the information expressed herein can be accessed and utilized in their respective jurisdictions. The comments, opinions and analyses are rendered as of the date and may change without notice. The viewers should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. The AMC does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
DISCLAIMER: The analysis, comments, views, opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. The information provided is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is prohibited or which would subject the AMC or its affiliates to any registration requirement within such jurisdiction or country. It shall be the sole responsibility of the viewer to verify whether the information expressed herein can be accessed and utilized in their respective jurisdictions. The comments, opinions and analyses are rendered as of the date and may change without notice. The viewers should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. The AMC does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
DISCLAIMER: The analysis, comments, views, opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. The information provided is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is prohibited or which would subject the AMC or its affiliates to any registration requirement within such jurisdiction or country. It shall be the sole responsibility of the viewer to verify whether the information expressed herein can be accessed and utilized in their respective jurisdictions. The comments, opinions and analyses are rendered as of the date and may change without notice. The viewers should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. The AMC does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

February 2020

Macro Economic Review
 
 

February saw volatility return to global markets and Indian markets were not immune from it. The key catalyst for the volatility was spread of COVID-19 through other countries and drastic actions being taken by governments and private sector to limit the spread of virus. Nifty decreased by 6.4% for the month. 10- year government bond yields declined by 23 bps on back of FPI inflows, LTRO (Long Term Repo Operation) conducted by RBI and sustained high liquidity in the banking system. INR depreciated 0.9% vs USD. Equities saw $400 mn inflows and debt saw $44 mn inflows.

India’s GDP grew by 4.7% in Q3FY 20, down 0.9% yoy. The economic growth during the quarter was lower on account of subdued consumption and investment activity. While most of the sectors were under pressure, the only driving factor has been the government expenditure. The investment activity, as measured by Gross Fixed Capital Formation (as a % of GDP) has declined to 26.1% in Q3FY20 compared with 29.1% in previous year.

Industrial output (as measured by IIP (Index of Industrial Production)) contracted by 0.3% in December 2019, notably lower than 2.5% in previous year. The growth during the month has been dragged down by manufacturing and electricity both of which registered contraction during the month. Services PMI (Purchasing Manager’s Index) reached a 7 year high to 55.5 in January 2020 on the back of strong domestic demand. Manufacturing PMI for January 2020 moderated marginally to 54.5 from a 8 year high of 55.3 in the previous month.

Exports and imports both witnessed sustained contraction in January. Exports contracted for the 6th successive month by 1.7% while the imports declined by -0.8% for the 8th month in a row. The contraction in imports was largely on account of lower oil imports on back of fall in crude oil prices. The negative growth in exports for the previous 5 months can be attributed to global economic slowdown weighing on demand from other countries. Trade deficit widened in January to US $ 15.2 billion compared with US $ 11.3 billion a month ago. Current account deficit however narrowed from 2% of GDP in Q1-FY20 to 0.9% of GDP in Q2-FY20 on the back of lower trade deficit and higher FPI inflows and ECB borrowings. Foreign exchange reserves rose from US $467 billion in January 2020 to US $476 billion in February 2020 with sustained FPI inflows during the month.

February GST collections amounted to INR 1.05 lakh crore, 8% higher than a year ago. During April’19 – February’20, total GST collections aggregated INR 11.25 lakh crore, 5% higher yoy. During Apr’19-Jan’20, the fiscal deficit was 128% of the revised estimate. The government expects the fiscal deficit to be 3.8% of GDP, 0.5% higher than the budget estimate. Revenue expenditure for 2019-20 has been revised lower by INR 0.98 lakh crores from the budgeted estimate. 85% of the estimated expenditure has already been incurred for the fiscal year. This is a 2.4% increase from the revised estimate for the comparable period a year ago. Capital Expenditure has been increased by Rs. 0.10 lakh crore in the revised estimate. 77% of the capital expenditure as per the revised target has been incurred in the first 10 months of the fiscal year.

January CPI (Consumer Price Index) rose to near 6 year high at 7.6%. This is the second successive month when the retail inflation breached RBI’s upper bound of inflation target at 6%. During the month, inflation has been pressured on account of elevated food prices, pick up in fuel and light and telecom sector. WPI rose to 9 month high of 3.1% in January, 0.3% higher from a year ago. The rise in wholesale inflation during the month can be attributed to increase in fuel and power component to a 9 month high coupled with prices of manufacturing components rising to a 7 month high.

On the global front COVID-19 fears spread through rest of the world with more countries reporting virus cases. This caused many governments and private sector to curtail travel which in turn will impact economic activity. Equities market sold off aggressively and bond yields reached new lows with US 10 year bonds dropping 36 bps to 1.14%. Gold reached fresh highs and volatility index jumped up significantly.

Overall macro data on domestic as well as global front continued to show slow-down across manufacturing and services. COVID-19 driven slump in activity is being seen globally and will cause growth to dive. With high volatility in markets due to growth uncertainty, Central Banks may be forced to ease globally and governments may have to start thinking of fiscal alternatives. RBI is expected to cut rates in its March meeting and is likely to continue to provide adequate liquidity.

  
Equity Market

 

  

Nifty remained volatile during Feb and fell ~7% during the month, as India continued to face a weak macro exacerbated by headwinds to global growth due to risks presented by evolving corona virus situation. India’s perceived limited vulnerability to the virus led to a short-lived bump in Nifty early-Feb, but Indian markets soon fell in line with global cues as the increase in new confirmed cases outside China led to a WHO warning of a possible global pandemic. Back home, US President Donald Trump made his maiden state visit to India but departed without delivering on a trade deal despite years of high-level negotiations. India’s supreme Court rapped telecom companies and government officials for not complying with its order to deposit the statutory dues by January 23, but news of government unlikely to invoke Vodafone Idea’s bank guarantees provided some comfort to investors.

In terms of India’s domestic economic activity indicators, barring consumer credit growth, most other indicators like auto sales (wholesale), consumer durable production continues to remain weak. Both FIIs (Foreign Institutional Investors) and DIIs (Domestic Institutional Investors) remained net buyers to the tune of $0.7bn and $2.3bn each in February taking their YTD totals to +$2.1bn and +$2.7bn respectively. DMFs (Domestic Mutual Funds) were net buyers of $0.7bn whereas Domestic Insurance cos. also bought $1.7bn. All sectors, except Telecom (largely supported by Bharti Airtel), closed lower, with Realty seeing the biggest fall (down 16%).

Our outlook is still for a modest cyclical economic recovery over the next 12-18 months led by moderately better global growth, steady domestic and improving global liquidity and probable incremental rural tailwinds. This recovery currently however is hostage to the corona virus situation. For now we would like to run with the assumption that while global and local economic activity will stay disrupted, it would settle down in the next 2-3 months. In the very near-term how the Government/RBI handles the Yes bank reconstruction exercise and the resolution of the telecom imbroglio remains critical for the normalization of the financial sector and will likely induce short term market gyrations. The resultant adverse market reaction in the interim would give investors an opportunity to buy decent businesses as they turn more attractive on valuations.

As the economic cycle improves, market opportunities are likely to widen and investment opportunities may favour mid/small caps during the course of 2020. Mid/Small caps after a considerable underperformance have meaningfully outperformed the frontline index over the past 3-6 months. While we do take a more constructive stance on the economy and markets as a whole, we remain measured in our conduct with regard to portfolio choices. We keep our growth expectations measured while simultaneously increasing the bar on quality of businesses and balance sheets that attract us.

 

 

 
 
Fixed Income Market
 
 

There was a sense of relief in the bond market post the union budget in early Feb’20. It was due to announcement of :

• No additional borrowing for FY20 (It was earlier widely expected that there would be additional borrowing for FY20)
• Lower than expected market borrowing for FY21
• No more than a 50bps slippage in fiscal deficit for FY20 and FY21 and well within the FRBM (Fiscal Responsibility and Budget Management) corridor

The bond yields started to soften post the budget and has continued even post the monetary policy review in the first week of Feb’20. The policy added to the positive sentiment due to

• No change in the monetary policy stance from ‘accommodative’ despite the rise in headline CPI (ascribed as temporary due to the rise in prices of vegetables primarily Onion)
• RBI’s forecast in headline CPI to drop closer to 3.2% by 3QFY21
• Announcement of 1 year and 3-year LTRO (Long Term Repo Operation) for upto Rs 1 lakh crore

These factors led to build up of positive sentiment amongst debt marked investors and the bond yields softened by approx. 20-40bps across the curve. The yields of shorter bonds fell more than the yields of longer bonds.

The banking sectors credit disbursement growth remains low at around 7%, compared to a 20-year average growth of 18.15%. Such low levels of credit growth were last seen during the period right after demonetisation in 2016 for a very short period. This low credit disbursement growth reflects both lack of demand for loans and poor risk appetite of the lenders.

We do expect RBI to continue to the play the role of an enabler and keep pumping surplus liquidity in the hands of the banks and bring down the cost of loans. In the absence of any credit risk appetite we expect the bulk of the surplus liquidity to chase the risk-free sovereigns followed by blue chip AAA credits.

The marked slowdown in growth in the COVID-19 affected economies is expected to prompt the central Bankers to ease monetary stance and maybe in a coordinated manner. The yields of bonds on DMs have started ever since and the US treasury yields are trading at historical low levels.

Strong net positive foreign flows helped in building India’s foreign exchange reserves. RBI’s intervention in the currency market has built up the forex reserves and now stands at a historical high of $ 476 bn. The dollar purchases by RBI ensured that the rupee didn’t appreciate sharply and also enabled injection of liquidity to the tune of Rs. 2-3 trillion over the last 6-7 months. The excess liquidity has been slowly building up from June’19 onwards. However, absence of any risk appetite amongst the bankers has failed to reallocate this excess liquidity into any other form of lending nor helped in pricing the lending at a cheaper rate. The transmission of lower rates into the economy has got halted due to absence of risk appetite amongst the bankers.

Outlook

We are broadly in agreement in the direction of the CPI projections of RBI. However, we feel, incase the present trend of the vegetable prices normalize, our projections are lower than the RBI’s forecast by about 20-50bps at various points of CY20. More so, after the recent softening of the prices of most vegetables.

The advent of the COVID-19 is expected to affect growth and lead to some supply shocks. This may prompt the MPC members to soften the monetary policy rates sooner. It has been acknowledged in the last policy document about space available with the MPC for future action. We do expect them to move swiftly considering the further slowdown in the domestic economy. The Non-government portion of GDP growth for Dec’19 has been under 4%.

The message in the Feb’20 policy document and the media interview of Governor Das later suggests focused attention by RBI towards ensuring transmission of policy rates into the economy and also ensuring that banks are able to price loans at a cheaper rate.

The LTRO is a targeted effort to ensure availability of liquidity for a period of 1 year and 3 years for upto a total amount of Rs. 1 lakh crore at the repo rate, which is being viewed as a powerful tool being used by RBI to ensure that the transmission eventually happens.

The availability of liquidity for long period of 3 years will now first ensure that the yields of sovereign bonds and blue-chip AAA credits move lower in line with the move.

The decline in yields of bonds till the 3-year point ideally should eventually push down yields for long bonds (bonds greater than 3 years maturity) as well. While the decline in the yields of sovereign bonds and AAA bond yields do not ensure transmission of this decline in borrowing cost to credits below AAA, but eventually the banks are expected to move in their commercial interest and price loans and borrowings of other credits at a lower rate.

In this environment we urge investors to select funds longer than their investment horizon and depending on their individual risk appetite and of high credit quality. Its important to invest in high credit quality funds particularly during this period of volatile credit environment and 3-decade slow banking sector credit growth.

 
 
 
 

 

 




 

 

 
DISCLAIMER: These views have been expressed by the fund managers of Invesco Asset Management (India) Private Limited. All opinions included in this article constitute the authors’ views as of this date and are subject to change without notice. The stocks referred in the above content, if any, are for the purpose of explaining the concepts and should not be construed as recommendations from Invesco Asset Management (India) Private Ltd. (Invesco Asset Management (India) / Invesco Mutual Fund). The Fund may or may not have any present or future positions in these stocks. The commentary is for information purposes only and not an offer to sell or a solicitation to buy units of Schemes of IMF. All figures, charts/graphs, estimates and data included in this article are as of this date and are subject to change without notice. The data used in this material is obtained by Invesco Asset Management (India) from the sources which it considers reliable. Neither Invesco Asset Management (India) nor any person connected with it accepts any liability arising from the use of this information or in respect of anything done in reliance of the contents of this information. While utmost care has been exercised while preparing this content, Invesco Asset Management (India) does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. This information alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. The recipient of this material should exercise due caution and/or seek independent professional advice before making any investment decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Important Information: The views contained in this section are for information purposes only and should not be construed as an investment advice to any party. The views contained herein may involve known and unknown risks and uncertainties that can differ materially from those expressed/implied. The viewers should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. Invesco Asset Management (India) Private Limited does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.

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