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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.
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.

July 2019

Macro Economic Review
 
 

July continued to see a weaker global growth back-drop and continued slow-down in India. US Fed cuts rates by 25 bps, the first time in 10 years as inflation remained subdued and growth outlook deteriorated. FPI flows were reflective of caution with equity outflows of $1.9 bn and bond inflows of $0.8 bn. Sensex moved down by 4.9%, 10 year G-sec yields rallied sharply by 50 bps and INR showed modest appreciation of 0.4% vs the USD. 

Liquidity conditions within the banking system continued to remain surplus on back of government spending, FX inflows and seasonal inflows in currency in circulation. 3 - year Corporate bond yields came down by 50 bps for the month with marked credit spread dispersion as caution in NBFC sector continues whereas PSUs and AAA corporate paper benefits from flight to quality.

Headline CPI (Consumer Price Index) for the month of June came in at 3.18% vs expectation of 3.13% and previous month at 3.05%. Primary contributor to the uptick was food inflation, which increased from 2.03% to 2.37% and was at its highest level over the last 9 months. Core inflation remained low at 4.1% and is showing signs of a slow economy.

IIP (Index of Industrial Production) steadied in May at lower levels with a print of 3.1% vs 3.4% growth in the prior month. However, manufacturing PMI (Purchasing Manager’s Index) of 52.1 and services PMI of 49.6 continued to edge down and point towards meaningful growth slow-down. 

Oil prices remained range bound for the month, albeit with lower global demand forecast by EIA (Energy Information Administration) off-set with supply cuts. Trade deficit for May was largely flat at $15.28 bn vs $15.35 bn in May 2018. Exports sharply decreased by 9.7% y-o-y while imports decreased by 9.1%. FX reserves have climbed steadily over the past six months and, at US$430bn, are at all-time highs.

The government’s fiscal position for the first three months of the 2019-20 shows that 61.4% of the budgeted fiscal deficit has been used, 7.3% lower than the comparable target of year ago. This decline can be attributed to lower capital expenditure incurred. Revenue collections at 14.4% of budget target have been 1.1% lower than the comparable target of year ago. Tax revenue collections have been lower so far this fiscal.

On the global front, US Fed cut rates for the first time in 10 years citing weak inflation / inflation expectations and weaker global growth outlook. Global yields continued to move down with entire yield curve in Germany, Switzerland Denmark now below zero upto 30 year point. The downward move in global yield curves means now nearly $14 trillion worth of fixed income securities are yielding below zero. Global PMIs continue to come down sharply. 

Overall July has seen a big rally in fixed income as markets price in further rates cuts by RBI. Positive systemic liquidity and global rally in yields have helped Indian fixed income markets and kept the currency in check. Growth continues to slow-down and all focus in August will be on RBI and its monetary policy meeting.

 
 

 

  

 

Equity Market

 

  

Indian equities were down 4.9% (Sensex) logging one of the worst July in recent years. The full Budget (FY20) presented on 5th July-19, chose fiscal prudence and stuck to the path of fiscal consolidation as it did not announce any major stimulus measures to arrest the slowing economy. Some budget proposals like the hike in the surcharge for the super-rich (non-corporate), and government's proposal asking SEBI to evaluate increasing the minimum public float for listed companies from 25% to 35%, were taken negatively by the FPI’s (Foreign Portfolio Investors). On the global front, US Fed cut rates but disappointed the street by the quantum (25bps) and fairly hawkish commentary. India’s domestic economic activity indicators, barring consumer credit growth and electricity consumption, most other indicators like auto sales, consumer durable production continued to weaken sharply. On the monsoon front, after a poor start, the southwest monsoon gathered pace and have delivered above-average rainfall, reducing the shortfall to 11% (from 35% at the end of June). As of 30th July, more than 2/3rd of the country had received normal or excess rainfall, a continuation of which, should bode well for the Agri/Rural economy.

IT and Infotech were the only sectors in the green, whilst Consumer Durables, Auto, Metals, Cap goods fell sharply during the month. After buying consistently for 5 consecutive months, FIIs (Foreign Institutional Investors) turned sellers in July as the proposed increase in the surcharge on non-corporate FPIs created anxiety amongst foreign investors. DIIs (Domestic Institutional Investors) increased buying in July turning them net buyers YTD. Capital market activity remained muted.

Budget FY20: FM Nirmala Sitharaman in her first budget speech stuck to fiscal consolidation and lowered fiscal deficit target to 3.3% of GDP. The budget fell short of expectations that the government will try to revive the subdued consumption environment. Key Highlights –

  • Proposed increase in the surcharge (from 15% to 25% for taxable income between Rs. 20 mn and Rs 50 mn and to 37% for those earning more than Rs. 50 mn) on super-rich non-corporate entities. On the other hand, threshold for applicability of lower corporate tax rate of 25% increased from Rs. 250 crores to Rs. 400 crores
  • It proposed a one-time 6-month partial credit guarantee to PSU banks for purchase of high-rated pooled assets of financially sound NBFCs
  • Thrust on Infra capex +12% YoY with allocations to Rail +24% YoY, Defense +10% YoY
  • Some boost to affordable housing segment through additional tax incentives for home loan borrowers while there was no major incentives for Autos except some push to Electric Vehicles.

 

The current Sino-US trade stand-off does create additional global headwinds in addition to the challenges of slowing domestic growth. Medium-term, our positive outlook for the market is premised on improving macro factors - controlled inflation, stable commodity prices and currency, improving asset quality and credit growth cycle and likely moderation of interest rates. Moreover, recent improvement in monsoons also goes well for a potential rural demand recovery. Since the last 6-8 months, we have been constructive on the Indian equity market from an opportunity standpoint; particularly in the mid and small cap segment given meaningful valuation corrections in several good-quality  businesses. Recent growth challenges seen across few sectors of the market are however, unlikely to abate in a hurry and hence may keep earnings growth subdued for a few more quarters.

From a portfolio management standpoint, we continue to restrict ourselves to a bottom-up approach to stock selection and portfolio construction until stronger evidence of more broad-based growth emerges. Given the extent of the slowdown across various sectors of the domestic economy, we keep our outlook on growth recovery muted for the next 2-3 quarters. We prefer to evaluate investment propositions based on flat to weak growth assumptions for the ensuing future and resultant price to intrinsic value equation. We maintain a high sense of alert overall and remain wary of balance-sheet related risks to businesses.

 

 
 
Fixed Income Market
 
 

The bond market was in a grip of a strong rally tracking the slowing economic conditions and the rate environment in other economies. The decline in yields was in the range of 35-40 bps. The rally in the sovereign bonds continued due to:

  • Expectations of steeper repo rate reduction from RBI, particularly as the economy slows further
  • Benign inflation environment
  • Softening international oil prices
  • Improved sentiment amongst foreign investors leading to positive foreign inflows
  • Addressing the fiscal through potential transfer of revaluation reserves of RBI to Government (Bimal Jalan committee, the final report is awaited)
  • Slowdown in global growth particularly in US and drop in US treasury yields by about 65bps YTD

The weakening inflation pressures globally and domestically have opened up reasons to believe successive rounds of rate reductions and QE across the globe. The Fed’s mid cycle 25bps rate reduction and the historical low yields in European bonds have led to rally in bonds across the globe, including India. Additionally, Indian policy makers also seem to be preparing for front loading the easy monetary policy action to support the revival of growth whilst the NBFC and HFC deal with problems of lack of investor appetite in the capital market and lack of liquidity. These actions might not entirely address the trust deficit and wide ALM (Asset and Liability Management) position within the distressed NBFCs. In fact, the investors are looking forward to redressal of defaulting credits before any additional exposure to the second-tier credits from this sector. At the least, we expect the MPC members to push through higher doses of rate reduction and infuse liquidity in order to address the deficit liquidity within the Banking sector (addressed, to some extent), NBFC and housing finance companies as well.

This anticipated action of RBI is expected to work towards improving the surplus liquidity within the banking system and eventually help in the transmission of the lower rates for the borrowers. But for now, this transmission might just be limited to the top-tier  credits. The drop in interest rates should also help in balancing the overall leverage across sectors over a period of time and ideally may help in attracting equity capital as costs of savings and investments move lower. However, it remains to be seen whether this cycle follows in India in this environment.

Restraining of the fiscal target at 3.3% for FY20 and proposal to move overseas for part government borrowings has been cheered by the debt investors and has now shredded the fears of excessive government borrowing. However, the confusion around this about the size, timing and certainty has led to sharp bear moves in the bond market.

Outlook –

We reason that the slowing domestic growth is due to both slowing global growth and slowing domestic consumption.  Headline CPI (presently at 3.18%) for CY20 is expected to be comfortably well within 4% due to benign oil prices, drop in core inflation and soft food prices.  The drop in core inflation in India to sub 4.5% levels in the recent months after staying at over 5.5% for the last few years highlights the slowing domestic consumption. Thus with slowing growth and high real interest rates, RBI is likely to continue the rate reductions and attempts to push the lower rates into the economy. However, drop in repo rate do not always guarantee lower borrowing cost, and hence we feel RBI may take additional actions and infuse liquidity so as to help lower the deposit rates of the banks and enabling them to price their loans cheaper.

In this environment, we urge investors to start selecting funds in alignment with their investment horizon and marginally longer depending on their individual risk appetite. Some additional fund duration over investors investment horizon should work favorably, as the risk return matrix is tilted towards lower rates. We expect the actions of RBI to create additional demand for gilts and bonds in this environment.

The risks to this view emanate from a higher government borrowing calendar of FY20. However, it may get neutralized through creation of higher demand for gilts and bonds by infusing liquidity into the system by RBI, OMO and or from higher demand for Indian bonds from foreign investors amidst low rates globally.

 
 
 
 

 

 




 

 

 
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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