Invesco Mutual Fund

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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.

February 2021

Macro Economic Review
 
 

February saw continued strong economic recovery across all sectors. Demand conditions remained buoyant and activity levels have reached pre-covid levels in most industries. High frequency indicators across range of activities continue to show good growth prospects.

The Indian economy came out of recession with a growth of 0.4% in Q3-FY21, a sharp improvement from -24.4% and -7.3% in the preceding two quarters. The gains in the economy were broad based with agriculture growth at 3.9%, manufacturing at 1.6%, electricity, gas, water supply and other utility services at 7.3%, construction at 6.2% and financial, real estate and professional services at 6.6%. Government expenditure grew 7.2% through fiscal measures during lock-down and that helped the revival to a large extent. Private consumption expenditure growth was more tepid at 1%. Investment activities grew at 5.9% as stalled projects were re-started. The investment rate stood at 27.7% during Q3-FY21. Full year GDP estimate for FY21 however, has been revised downwards from the earlier estimate of -7.7% to -8%.

Industrial production, as measured by IIP (Index for Industrial Production), grew by 1% yoy in December 2020 vs -2.1% in previous month. The pick-up has been supported by manufacturing growth at 1.6% and electricity segment at 5.1%. Cumulatively for the year so far, IIP growth has contracted by -13.5% compared with 0.3% in previous year. IHS Markit Manufacturing PMI (Purchasing Manager’s Index) declined marginally to 57.5 in February 2021 compared with 57.7 in the previous month but remains in the expansion zone for the seventh consecutive month. Majority of sub-factors like production, input buying and stocks of purchases, better demand conditions showed positive signs. However, employment has declined to some extent in February while new export orders have expanded at a slower pace in February. IHS Markit India Services PMI expanded to 52.8 in January 2021 compared with 52.3 in the previous month as demand improved and consumer sentiment improved. However, export orders contracted a bit in January and sales prices were softer.

On inflation side, retail inflation eased further to almost 16-month low of 4.1% in January compared with 4.6% in December 2020. Sharp decline in food inflation amidst a high base effect has been the key reason for the decline in overall retail inflation. Core inflation continued to remain sticky and remained steady around 5.5%. Wholesale inflation inched up marginally to 2.03% in January compared with 1.2% in December 2020, primarily on account of notable jump in the manufacturing segment (8 year high: 5.1%) and easing of the deflation in the fuel segment. The firming up of global commodity prices have driven the sharp uptick in the manufacturing segment. However, de-growth in the food basket has limited the upside in the overall wholesale inflation.

GST collections for January increased to all-time high of INR 1.19 lakh crs, up 8.2% yoy and 4.1% month on month. Total GST collections so far this fiscal year (April-January 2021) has been INR 9 lakh crs, -12% yoy. GST collections have now been above INR 1 lakh crs for four consecutive months. April-January 2021 fiscal deficit of the government stood at INR 12.3 lakh crs, up 24% yoy and is at 66.8% of the revised estimate for FY21. Revenue receipts of the government during this period remained almost at the same level as last year with the shortfalls in case of CGST, personal income tax, corporate income tax being off-set by the gains in excise and customs collection. In case of the expenditure, total expenditure rose by 8% during this period, with a growth of 6.3% in revenue expenditure and 20.9% in the capital expenditure. The growth in capital expenditure has been on account of higher government spending towards roads, transport, highways, food and public distribution and higher transfer to states. Total subsidies during this period was INR 2.5 lakh crs, 4% lower yoy with -16% decline in food subsidies being the key factor. For the full year FY21, the government has estimated fiscal deficit at INR 18.5 lakh crs, which is 9.5% of the GDP while the deficit for FY22 is budgeted at INR 15.1 lakh crs, 6.8% of GDP.

January trade deficit came at $14.5 bn, almost 5% lower yoy on back of positive growth in exports, which were up 6.2% yoy. Imports grew slower at 2% yoy. The trade deficit in January has narrowed from the previous month. Exports growth was primarily led by robust growth in electronic goods (16%), engineering goods (18.8%) and drugs and pharmaceuticals (16.4%). Total exports for fiscal 21 (April-Jan) have been around $229 bn, -13.4% yoy. Imports for Jan were $41.9, up 2% yoy primarily on account of higher imports of electronic goods (17.4%), gold (154%), pearls (50%) and coal, coke (10%). Total imports for fiscal 21 (April-Jan) have been $303 bn, -25% yoy. Foreign exchange reserves were at $584 bn as of February 2021.

April 2020 – Jan 2021 bank credit growth was 3.2% compared with 2.8% in the corresponding period previous year. Credit off-take has been robust in agriculture (9.5%) and personal loans (6.7%). Services credit growth has been muted at 1.6% yoy while Industrial segment growth was -4.3%. Deposit growth has been healthy at 8.9% vs 5.2% in the corresponding period previous year.

With easier financing conditions and robust domestic demand, activity levels have improved across almost all sectors. Services growth, which was lagging, has picked up markedly. Manufacturing sector seems to be performing strongly on back of ramp-up in production, strong order book and improving outlook. The budget for FY22 was expansionary with stronger push towards capital expenditure. Key going forward will be job growth and income growth. Inflation and increase in yields will have to be closely watched as commodity prices have seen strong price increases and inflation expectations have been increasing. Abrupt tightening in financing conditions may slow down the pace of growth for FY22, which currently is on a solid footing.

  
Equity Market

 

  

Nifty (+6.6%) had a good run in February as the growth-oriented union budget pushed the index to record all-time high (~15.4k) but a sudden reversal in declining Covid cases trend in India and a global sell-off triggered by rise in US treasury yields pulled the benchmark down from the monthly highs. The budget announcement was cheered by the market as it didn’t raise or introduce any new taxes (as was feared) and at the same time, increased allocation for capital expenditure, improving the outlook for job creation, investment cycle and medium-term sustainable growth. Also, the government’s focus and commentary on privatization / divestments led to renewed interest in PSU stocks. Better than expected 3QFY21 results season also boosted investor sentiment.

High-frequency data points (Composite PMI, E-Way bills, Credit growth, GST collections) for February continue to reflect sustained positive growth in YoY terms, indicating a favourable growth outlook in the near term.

During the month, FPIs (Foreign Portfolio Investments) bought US$3 bn worth of equities in the month while DIIs (Domestic Institutional Investors) sold US$2.3 bn. Deal activity picked up in February with 11 deals worth ~$1.7bn being executed (vs 8 deals worth ~$1.5bn in January). Within sectoral indices, Metals, Power, Realty, Oil&Gas, Bankex outperformed, whereas FMCG, Infotech, Healthcare and Auto underperformed the BSE Sensex.

The recent rise in global and domestic bond yields have been a function of expectations on hardening inflation resulting from a rise in commodity prices and supply chain disruption amidst strengthening demand. On current assessment, it appears that the markets in the short run could remain volatile in trying to resolve the dilemma between growth recovery and higher inflation/rates. We however, expect markets to eventually respond to improving growth rates during 2021 as economies continue to attain normalcy, this time around helped by a faster roll-out of the vaccine around the world.

Given that the monetary stimulus of 2020-21 has its origins in a public health crisis, central banks around the world will likely remain accommodative for longer. Until economic recovery and growth is solid enough, central banks are not expected to hurry into tightening. Moreover, even as near-term inflation expectations may remain high considering supply chain issues, we think there is enough slack in the system for now and thus the probability of a sustained rise in inflation appears low. On the other hand, we reckon corporate earnings are in the early stages of a recovery and further in the Indian context, this can extend into becoming a multi-year growth cycle, which can likely support current market valuations and allow investors to earn growth-based returns even from current levels.

Incrementally, our portfolio positioning does assume acceleration in economic growth, which should favor cyclicals such as financials, industrials, commodities etc. Consumer discretionary and defensive sectors like pharma and IT may find it difficult to perform until the current trend of rising inflation expectations has run its course but they do occupy enough space for the purpose of portfolio balance and a hedge against any reversal of rising yields. At an aggregate level, we continue to adopt a middle path in portfolio construction with regard to sector exposure, market cap bias and the balance between growth and value. In general, our portfolios continue to be positioned for better risk-adjusted return outcomes over a 3-5 year period.

 

 
 
Fixed Income Market
 
 

The Indian economy came out of contraction with a growth of 0.4% in Q3-FY21, a sharp improvement from -7.3% & -24.4% in the preceding two quarters. High frequency indicators across range of activities continue to show good growth prospects. However, recent surge in fresh Covid-19 cases could pose a challenge to the economical recovery.

GST collections for January increased to all-time high of INR 1.19 lakh crs, up 8.2% yoy and 4.1% month on month. Total GST collections so far this fiscal year (April-January 2021) has been INR 9 lakh crs, -12% yoy. GST collections have now been above INR 1 lakh crs for four consecutive months.

Retail inflation eased further to almost 16-month low of 4.1% in January compared with 4.6% in December 2020. Sharp decline in food inflation amidst a high base effect assisted the fall. Nonetheless, Core inflation continued to remain sticky & remained steady around 5.5%.

January trade deficit came at $14.5 bn, almost 5% lower yoy on back of positive growth in exports, which were up 6.2% yoy while Imports grew slower at 2% yoy. The trade deficit in January has narrowed from the previous month.

April 2020 – Jan 2021 bank credit growth was 3.2% compared with 2.8% in the corresponding period previous year on ytd basis. Credit off-take has been robust in agriculture (9.5%) and personal loans (6.7%). Services credit growth has been muted at 1.6% yoy while Industrial segment growth was -4.3%. Deposit growth has been healthy at 8.9% vs 5.2% in the corresponding period previous year.

Amidst the unprecedented economy disruption caused by the Pandemic, Finance Minister delivered a growth-oriented budget specifically targeted towards the sectors like health, infrastructure, and the financials. While it will be a medium term positive, it has also resulted in a substantially higher fiscal deficit for FY21 / FY22 at 9.5% / 6.8% respectively with a fiscal gliding path to 4.5% by FY26. Quality of the fiscal deficit is better with higher spend towards the capex and with part of the food-subsidy taken on its own balance sheet.

In first week of February – RBI’s MPC (Monetary Policy Committee) kept the status quo on policy rates and continued its accommodative stance on policy rates as long as it is necessary, at least during the current financial year and into the next financial year, for growth revival on a durable basis, while ensuring that inflation remains within the target, going forward.

Rates continued to maintain its hardening bias for the consecutive month. Negative surprise on high fiscal deficit & huge Govt borrowing in FY22 as announced in central budget along with the volatility in global market amidst inflation concerns led to steep rise of 25 – 45 bps across the yield curve in 1 – 10 year segment. Corporate bonds underperformed the G-Sec during the period.

Outlook

RBI has again re-iterated its accommodative monetary policy by giving a long-term visibility in to FY22. Additionally, RBI has indicated continued ample systemic liquidity and has delayed the full restoring of CRR (Cash Reserve Ratio) by 2 months. However, the MPC fell short on the market expectations of providing visibility on its OMOs (open market operations) for longer tenor G-Sec, although the Governor assured during the press conference that the FY22 G-Sec borrowing program will be completed in a smooth and a non-disruptive way.

Domestic retail inflation has moderated over past few months. However, it has a threat of sharp pickup in the commodity prices, especially the crude, which can put upward pressure on both the headline as well as core inflation, going forward.

Global paradigm has also seen a shift with market participants now expecting a faster economic recovery led by fiscal stimulus & covid-19 vaccination, which has led to hardening of interest rates across the fixed income market.

In the current fast evolving macro conditions, we suggest investors to look for risk-adjusted return opportunities. In the absence of a concrete action from RBI on absorbing record high G-Sec supply, we expect the yield curve to steepen going forward and the short term rates especially in 1 to 4 year segment to remain more attractive from risk-reward perspective on the back of surplus systemic liquidity and favorable demand-supply dynamics. While we believe that RBI may gradually reduce the excess liquidity in a market non-disruptive way, we expect RBI to continue to maintain surplus liquidity over the medium term to ensure conducive rate environment for borrowers to recover from Covid-19 led disruption. Longer end of the curve will be more dependent on RBI’s OMOs both in terms of quantum and timeliness.

Credit Environment has improved gradually with various measures taken by RBI and opening of economy now. We believe credit dispersion will continue, with very high-quality credits benefitting from this but the lower quality credits continuing to be avoided for the time being.

 

 
 
 
 

 

 




 

 

 
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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