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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.

April 2020

Macro Economic Review
 
 

As Covid related shut-downs continued in most parts of the world in April, global central banks and governments continue to support financial markets with unprecedented amounts of liquidity and stimulus. Investors tracked positive global cues following receding new infection cases in the US and Europe leading to preparations for partial re-opening of countries. Domestically, various liquidity infusion measures announced by the RBI to support NBFCs and Mutual Funds, expectations of further rate cut by the RBI and stimulus package by the central government further aided investors’ sentiments. Nifty saw a sharp 14.7% rise in April whereas bond yields came down by 3 bps to 6.1%. INR appreciated by 0.7% against USD. FIIs were net sellers worth $150 mn in equities and $1.6 bn in debt. Brent Oil was extremely volatile in April with a high of $35 per barrel and a low of $16 per barrel to finally end the month at $27 per barrel.

Retail inflation in March 2020 fell to a 4-month low of 5.9%, down 0.7% month-on-month. However, the inflation during the month was computed on the basis of 2/3rd of price quotations received. Moderation can partly be ascribed to ease in food inflation from the decline in vegetable prices. Retail inflation averaged 4.8% during the fiscal FY20. The wholesale price index (WPI) inflation moderated to 1%, lowest in the past 4 months and was down 1.3% points month-on-month. The fall has been on account of broad-based moderation across various segments due to slump in economic activity.

In March 2020, the production in the eight core industries contracted at a rapid pace with the index down 6.5% after registering persistent growth in the past 4 months. During the month, barring coal all eight sectors have witnessed contractions due to the coronavirus-led lockdown. Services Purchasing Manager’s Index (PMI) declined to 49.3 in March 2020 from 57.5 in February 2020. The manufacturing PMI reached a 15 year low in April 2020 and declined to 27.4 from 51.8 in March 2020. The nationwide lockdown, which lasted throughout April 2020 and brought business activities to a near standstill was the main cause of grim production and services data. Expectations are that as lock-down eases in May, the data should see a sharp jump-back. It will remain to be seen if that is durable or temporary.

Both exports and imports contracted in the month of March 2020 primarily due to global lock-down measures. Exports contracted 34.6% month-on-month while imports declined by 28.7% month-on-month. The trade deficit as a result narrowed to a 13 month low of $9.75 bn during the month. Current account deficit eased to 0.2% of GDP in Q3-FY20 compared with 2.7% of GDP in Q3-FY19 largely on account of lower trade deficit and rise in net services receipts. Foreign exchange reserves increased from $474 bn in March to $479 bn in April.

March 2020 GST collections amounted to INR 97,597 crore, 8% lower y-o-y. In FY’20, total GST collections aggregated INR 12.22 lakh crore, up 4% y-o-y. FY’20 fiscal deficit was 135% of the revised estimate. Revenue receipts at INR 13.8 lakh crore were 74.5% of the revised estimate. The non-tax revenue collections have been higher largely on account of higher dividends. Capital expenditure witnessed a growth of 11.4% during FY20.

On global front, equity markets saw very sharp rebounds in major markets despite extremely poor economic data in most economies. With policy rates at or very close to 0 and record amounts of quantitative easing programmes and fiscal expansion by all major economies markets seems to have recovered for now. Covid 19 cases continue to remain high globally albeit with decline in the exponential growth rates. Most developed countries are planning phased opening of economies from later part of May. Markets will likely remain volatile as the impact of lock-down starts showing up in economic data.

Overall it seems markets are discounting poor economic data and betting on a V shaped economic recovery given the unprecedented monetary measures by central banks and fiscal initiatives from governments. However, it remains to be seen how effective is the opening up of economy given large structural damages. Liquidity will continue to be key and whilst central banks and governments are doing huge amount of heavy lifting, confidence remains fragile. It is expected India will announce its fiscal measures in coming days, the key being size and scope of the measures. March quarter results from corporates will provide important messages on what companies are seeing on demand front and how they plan to restart operations. Whilst Government has provided guidelines for phased opening up of economy, it will be important to see how companies and businesses react. t is expected that activities will be slow to start with, as keeping virus cases under control remains an important priority.

  
Equity Market

 

  

Indian Markets sharply recovered in April with Nifty up ~ 15%, tracking the rally in global indices helped by the narrative that some countries are coming out of lockdown. Due to the sudden collapse in energy demand, and the huge temporary oversupply situation coupled with lack of storage, sent WTI (West Texas Intermediate) oil futures into a negative territory. At the time of writing this piece, the number of Covid cases globally stood above 3.3 mn but the trend of new case addition has stabilized at 80k /day. In India, despite the extension of nationwide lockdown, number of confirmed cases / deaths rose to ~60k / 2k respectively with majority of cases coming from the developed western / northern parts of India. Earlier, the Indian Prime Minister had extended the nation-wide lockdown until May 3, which was subsequently extended for another 2 weeks albeit with considerable relaxations permitted in areas considered less dangerous. During the month, RBI came out with the second round of monetary stimulus wherein they cut Reverse Repo by 25bps to further discourage banks from parking funds with RBI and opened another TLTRO (Targeted Long-Term Repo Operations) window.

In terms of India’s domestic economic activity indicators which were already exhibiting weak trends, were hit significantly in March (towards the end) and April month due to nationwide lockdown. In flow related trends, both FIIs (Foreign Institutional Investors) (-$0.15bn) and DIIs (Domestic Institutional Investors) (-$0.1bn) were net sellers during April. In terms of sectoral indices; during the month, all sectors showed recovery (post a sharp drop in March), with Healthcare, Auto, Oil & Gas and Metals relatively outperforming whereas FMCG, Consumer durables, Realty and Bankex underperforming the BSE Sensex index.

After the sharp correction in March followed by an equally strong recovery in April, Indian markets presently appear to be evenly poised. While it may take materially poor data regarding the progress of the virus globally and within India for market to retest recent lows, it’s a little difficult to argue for significant upside in the near term either, given valuations have very quickly turned fair after having become cheap in March. As of April, the Nifty trades at ~19x trailing earnings, which is a modest discount to its long-term average of 20x. With earnings visibility for FY’21 quite unclear at this stage, market movement in the near future can at best stay confined to a narrow range. Govt fiscal policy support and vigilant monetary authorities, however, may ensure market volatility too stays subdued.

In view of the still developing impact of the pandemic both globally and in India, growth and earning's outlook for the economy and corporate sector remains highly unpredictable and sets back our expectation of a modest cyclical economic recovery by at least two quarters. Markets will keenly watch the extent and nature of the economic recovery as many parts of India gradually emerge from a lockdown of over 40 days.

At present we believe that while global and local economic activity will stay significantly disrupted, it would settle down in the next few months. We are of the opinion that more market and economic stabilization measures will be necessitated to instill economic and market normalcy. Policy measures to support leveraged sectors of the economy such as NBFCs, real estate, telecom etc. are still awaited.

Many earnings-based valuation determinants can likely throw up incorrect conclusions in the near term due to dislocation in earnings. Today, investment decisions that discount near term earnings profile but are justifiable based on long-term intrinsic or franchise value of enterprises attract our attention. For the medium term, we do take a more constructive stance on the economy and markets as a whole, but we remain measured in our conduct with regard to portfolio choices. We keep our growth expectations muted while simultaneously increasing the bar on quality of businesses and balance sheets as our guide to our choice of investments.

 

 
 
Fixed Income Market
 
 

The economy and the financial markets are bearing the uncertainty due to the lockdown. The lockdown has resulted in income and earnings of approximately 80% of the economy to stagnate. The aftereffects of this income and earnings loss is showing up in various forms and the stress is palpable.

It has impacted both the organized and the unorganized sector. The drop-in revenue has led to a sharp drop in the aggregate demand with the economy. Financial positions are getting weaker as borrowers are unsure about their ability to repay a loan when the debt becomes due for repayment.

The announcement of moratorium by RBI in March has been timely. It has pushed the immediate problem of repayment into the future. We will not be surprised if the moratorium gets extended or some variation of the moratorium gets announced. The very announcement of moratorium from the RBI Governor underscores the extent of actual scare in the credit markets. The risk aversion amongst the bankers has slowed down fresh credit disbursement and the moratorium is going to slow it down further. The NPA levels within the financial sector is expected to reflect the growing stress of the economy.

Recently the government has come up with a plan of additional spending of Rs. 4.2 lakh crore on account of Covid 19. What remains to be seen is in what manner the government plans to spend the money and how soon. The economic hardship is slowing down the demand and the overall GDP growth is expected to be sharply moderate. The private consumption has also ebbed.

On monetary side, RBI has been reducing the repo and reverse repo rate and has infused tons of surplus liquidity into the banks.

However, the rate reduction has not transmitted entirely into lower loan rates and bond yields since the banks have not pruned the deposit rates yet to reflect the entire drop in repo rate nor have, they invested the surplus cash in productive assets. Hence the bond prices are still cheaper.

Going ahead, the drop in demand across the economy is expected to soften the headline inflation sharply albeit some disruptions in the supply chain particularly in food and healthcare. The dislocation of migration workers is also expected to lead to disruptions at some point in time leading to some spikes in inflation. However, all of these will be from the supply side and not from demand. Hence the rate reduction cycle is expected to continue till the time there is pick up in loan growth and surpasses deposit growth. Eventually the economy will revive only if the money starts rolling and gets spent.

Foreign investors have been net sellers of Indian debt in April’20 too. They have sold close to Rs 13,000 crore last month (about 1/5th of March’20). The yields have softened by ~20bps in April’20 after spiking up by about 30bps intra-month (due to FPI selling pressure and fears of additional borrowing by government and distress in the credit market leading to forced liquidation of high-quality assets in order to raise cash).

Outlook

• We expect both growth and inflation to slow down sharply over the next few months
• Even after the lockdown is lifted (the date is always a big uncertain) we do not expect the economy to return to its previous rate of growth any time soon.
• It would require a huge fiscal and monetary stimulus to recover. The government recently has announced additional borrowing to address the problems due to the pandemic.
• Infusing liquidity into the banks and expecting the banks to start onward lending at a cheaper cost seems to be a tall ask at this stage. The risk appetite of individual banks is diverse and clearly dissimilar from the expectation of RBI to revive the economy.
• Expect few more rounds of rate reductions and much bigger quantum of liquidity infusion. The OMO(Open Market Operations) and LTRO of much larger quantum may continue.
• After the net selling by FPIs (Foreign Portfolio Investors) slows down, and the market participants overcome the initial shock of the big increase in govt. borrowing, we expect that the demand from the domestic banks (led by huge surplus cash with them) to start pushing the yields lower for both sovereign bonds and blue-chip AAA credits.
• Over the medium term we expect the GDP growth to remain slow and inflation to remain soft. Hence, urge investors to get invested before the yields start to reflect the rate reductions of RBI.
• Investors are advised to invest in high credit quality funds particularly during this period of stressed credit environment.
• Investors ideally should also get invested into debt funds before the foreign inflows pushes down the yields. The March’20 RBI announcement of an additional ‘Fully Accessible Route’ for investment into government securities by non-resident investors without any restriction will help in bringing down the borrowing cost of the government and bridging the fiscal gap. Going ahead, once normalcy returns most of the government’s borrowing requirements can be met from inflows from non-resident investors. Domestic investors should readjust their debt holdings into relatively longer duration funds before yields start to soften due to foreign investor demand.

 
 
 
 

 

 




 

 

 
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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