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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.

August 2020

Macro Economic Review
 
 

India’s economy contracted by 23.9% in Q1-FY21, the lowest level on record. The pain of the lockdown has been felt across both industrial (-38%) and services (-20.6%) sector. The agriculture sector was the only bright spot in the domestic economy during the quarter and recorded growth of 3.4% in Apr-Jun’20. Manufacturing sector growth was -39.3% and the construction sector witnessed the sharpest contraction in growth at -50.3%. The trade, hotel and transport segment registered the second highest contraction in growth after construction during Apr-Jun’20 at -47%. Government sector i.e. public administration, defense and other services saw growth contract by -10.3% during Q1 2020-21. On the other hand, government consumption witnessed a notable increase of 20.2% in Q1 2020-21. Core Gross Value Added (GVA) (excluding agriculture and government) declined to -29.6% in Q1-FY21. Private consumption (57% of GDP) witnessed a sharp decline of -26.7%. Investment rate recorded a steep fall of 19.5%.

Of the 54 countries that have reported their GDP for the period Apr-Jun’20, only China and Vietnam have recorded positive growth yoy. Only Peru (-30.2%) and Macau (67.8%) have reported lower GDP growth numbers for the period compared to India.

Index of Industrial Production (IIP) production for June 2020 continued to remain in the negative territory for the 4th consecutive month and contracted by -16.6% compared with 1.3% growth in June 2019. Barring consumer non-durables, there has been a broad-based contraction across the various sub-components of IIP. Core sector output growth contracted by -9.6% in July 2020. However, on a month-on-month basis, the output recorded an improvement in July 2020. Localised lockdowns continued to weigh on output of the core-sector while the improvement on a monthly basis reflects partial easing of the lockdown. In the month of July 2020, barring fertilizers, all other industries have recorded a yoy de-growth.

Manufacturing PMI rose to 6-month high of 52 in August. The reading points out to the first monthly expansion in the sector since March 2020. Output and new orders expanded at its fastest pace since February. Output prices have declined further due to competitive pressures and efforts to boost sales. Services Purchasing Manager’s Index (PMI) contracted for the 4th consecutive month but improved marginally to 34.2 in July compared with 33.7 in June.

Retail inflation rose to 4-months high of 6.9%, breaching the upper band of RBI’s inflation (4% with +/- 2%) for the 4th consecutive month. The noteworthy increase in inflation has been on account of elevated prices in food, pan, tobacco and miscellaneous segment. Core inflation also scaled a 21-month high at 5.9% for July 2020 and this is the fourth consecutive month of uptick. Wholesale price inflation continued in the deflationary mode for the fourth consecutive month with a rate of -0.6% in July. The negative wholesale inflation in July has been on account of subdued price pressure in manufactured commodities (having the highest weightage of 64%) and negative growth recorded in the fuel component. However, the acceleration seen in July from the previous month is on account of inflation in food articles (especially vegetables) and marginal pickup in inflation in the manufacturing component.

GST collections amounted to INR 87,422 crore in July 2020. The GST collection for July 2020 is 86% of the revenue recorded in the same month last year. The fiscal deficit during April-July 2020 was INR 8.2 lakh crs, 103% of the budgeted fiscal deficit of INR 8 lakh crs for FY21(BE). Lower tax collections have dragged down the revenues of the government. Tax revenues have declined by almost 30% during the four months of FY21. Revenue expenditure grew by 12% during these 4 months (y-o-y), while capital expenditure grew moderately by 4%.

In July 2020, exports and imports continued to record contraction in growth but have seen an improvement from June. Exports growth contracted by -10.2% yoy while imports recorded a decline of 28.4% in July. Trade deficit was $4.8 bn during July compared with a trade surplus of $844 mn in June. 16 out of 30 selected major commodities of exports recorded growth in July. In case of imports, gold imports recorded a notable increase in July. For April-July 20, India’s trade deficit has narrowed to $14 bn, reflective of a weak economy as well as declining world trade levels. Rupee strengthened in August 2020 on the back of accretion in forex reserves following buoyant Foreign Portfolio Investment (FPI) inflows in the economy. Foreign exchange reserves increased to $537 bn as on August 21, 2020.

With lending conditions better and government fiscal spending percolating into the economy, activity levels have started to improve across various sectors. Monsoon season so far has been close to expectations and should aid rural economic growth. Consumption demand and investments continue to be tepid and is unlikely to see a noteworthy improvement during the course of the year. Government spending would have to continue to do the heavy lifting. Although the higher growth in the agriculture sector and consequently rural demand would support the domestic economy, it may, however, not be sufficient to compensate for the decline in urban demand and growth.

  
Equity Market

 

  

Indian equities moved higher (Nifty +2.8%) in August, in line with the region and S&P, with the broader market also participating meaningfully. Dollar weakness, gradual re-opening of the economy and hopes of a vaccine, supported sentiments. While the growth rate / doubling rate of Covid virus spread in India, moderated over August, absolute daily cases scale new highs but death rate continues to be much lower than the world average encouraging the Indian government to give further relaxations under its latest Unlock 4.0 announcement. Geopolitical tensions flared up once again along the India-China border, which led to some sell off in the markets. After an initial bounce, the sequential improvement in some of the high frequency indicators has further moderated in August. On the monsoon front, till August 26, cumulative rainfall was 7.8% above long-term average (LTA) and spatial distribution of monsoon has been normal across most parts of India.

During the month, the RBI kept policy rates unchanged and maintained its accommodative stance in the Monetary Policy Committee (MPC) meet and announced few liquidity measures. In another reform measure towards giving thrust to local manufacturing in defense, the government raised the Foreign Direct Investment (FDI) limit in the defense sector under the automatic route from 49% to 74% and announced banning import of 101 defense items over the next 7 years.

In flow trends, slew of primary capital raises by financials led to a strong Foreign Institutional Investors (FII) net inflow of ~$6bn in August whereas Domestic Institutional Investors (DIIs) continued to remain net sellers ($1.5bn), largely contributed by Domestic Mutual Funds that saw some redemption in net equity flows. In terms of sectoral indices, during the month, Metals, Realty, Bankex, Power and Capital goods outperformed, whereas Infotech, FMCG, Oil & Gas and Heathcare sectors underperformed the BSE Sensex.

The relentless rally in the market of recent months does make investment choices increasingly difficult. Arguably, one can’t but acknowledge that stocks have outperformed businesses near-term. After the initial sharp rally driven by the moderation in the pandemic, massive stimulus and eventually re-opening of economies, the next leg of market performance will have to be propelled by earnings growth, wherein visibility remains quite constrained. Thus, a general market cooling off that provides for potential earnings disappointment will be healthy in our view.

Global and domestic monetary policy remains a key risk in our view and inflation readings of the recent past, though mainly led by supply-side dynamics, can confound policymakers. Recent measures and policy tweaks by the Fed and RBI do provide an assurance of continued easy monetary policy and benign interest rates for the foreseeable future.

Locally, one needs to be vigilant of the recent cooling off in economic indicators in a few pockets of the economy after the initial surge and the continued assertion of the spread of the disease. June quarter earnings reports were perhaps inconsequential due to the lockdown and markets will likely train their attention onto the upcoming result season starting October. Developments around Indo-China geopolitics and trends in the US presidential elections may drive market direction for the next couple of months.

As a fund house, our portfolio positioning while balanced at one level, does tilt towards an eventual cyclical recovery. Important sections of the market such as financials and parts of consumer discretionary still lag the broader market but some degree of risk aversion in the short run can favour defensives such as technology, pharma and telecom. Earnings-based valuation parameters would stay volatile for a while and can likely throw up incorrect conclusions. 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. We continue to adopt the middle path in portfolio construction with regards to sector exposure, market cap bias and balance between growth and value.

 

 
 
Fixed Income Market
 
 

The central government’s decision to open the economy in a phased manner has started to show up in terms of some uptrend in the business index. While the number of positive cases is on the upswing the uptick in the business index suggests lockdown fatigue amongst the people.

The overall GDP contracted by 23.9% YoY in the June quarter and inflation moved higher to 6.9% in July’20. The policy makers are at crossroads.

As the loan moratorium ended in Aug’20 the one-time restructuring opportunity for the banks without the need to classify a restructured loan as Non - Performing Assets (NPA) may be availed by the banks and borrowers alike during this period of credit distress. The distress in the credit market remains high. Although the status of asset quality remains under wraps, we expect the real NPA levels within the banking system to move into double digits and approx. closer to 15%.

While during a period of GDP contraction, the inflation series should ideally remain markedly soft, the headline Consumer Price Index (CPI) has moved higher, prompting the MPC to press the pause on rate reductions for now. The trajectory of northward bound CPI led by higher food (due to supply shocks) and gasoline prices and rising commodity prices.

Going ahead, we do feel that there is a fair chance for the inflation to soften if the supply bottlenecks are addressed by the government. Despite a pause in August policy, RBI Governors decision to stem out the negative movement in bond prices by announcing Open Market Operations (OMOs) (as operation twist) and softening the interest rate volatility concerns of the banks by increasing the HTM category has been welcomed by the market and the yields have started softening ever since the announcement in early Sept’20.

While there is surplus liquidity in the hands of the banks, the surplus cash with the banks has not been invested into productive assets and mostly been invested back with RBI at the reverse-repo rate (presently at 3.35%). We do expect RBI to announce measures to address these concerns at some point in time.

In this FY, the government's ability for additional expenditure appears limited due to drop in tax collections. The increased market borrowings to make up for the revenue deficit has been a negative for the bond market till the recent RBI policy announcements on operation twist. However, high dependence on market borrowings amidst a drop-in economic activity creates a strain on the government's fiscal position.

Outlook

• We expect both growth to remain soft to contracting, and inflation to eventually slow down over the next few months. RBI forecasts a contraction of GDP in FY21.
• For economic recovery the private sector investments and overall consumption needs to recover. Both fiscal and monetary stimulus works as an enabler for pick up in consumption.
• The challenges of the banks (led by rise in NPA, drop in capital adequacy) is the headwind for credit growth.
• Expect rate reductions to restart along with liquidity infusion from RBI. We would expect OMO and Long - Term Repo Operation (LTRO) over the months.
• Yields to remain benign and the steepness of the yield curve to reduce as and when OMO are announced by RBI.

Recommendation

• Recommend investors to get invested before the yields move lower.
• Investors are also urged to invest in high credit quality funds only and remain insulated from the stress in the credit environment.
• Investors ideally should also get invested into debt funds before the inflows re-start from foreign investors. The March’20 RBI announcement of an unrestricted avenue for investment into government securities by non-resident investors has addressed a long-standing demand is expected to improve demand for Indian government securities from foreign investors.

 

 
 
 
 

 

 




 

 

 
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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