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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.

March 2022

Macro Economic Review
 
 

March saw unprecedented volatility in commodity markets on back of Russia-Ukraine conflict. Oil prices saw a 7% increase on top of the big increase in February as the Russia-Ukraine conflict continued to impact global commodity prices. March also saw US Federal Reserve Bank increase interest rates by 25 bps, its first interest rate increase after more than three years. Domestic demand conditions remain firm as reflected through PMIs, credit growth and high frequency indicators, albeit with rising price pressures.

Headline CPI inflation hardened to an eight-month high of 6.07% y-o-y in February from 6.01% in January. The sequential hardening in the CPI inflation in February 2022 was driven by food and beverages, and clothing and footwear. The inflation for the food and beverages sub-index rose to a 15-month high of 5.9% y-o-y in February from 5.6% in January 2022. This was largely driven by meat and fish, vegetables, eggs, spices and cereals and products. There was a moderation in the inflation for oils and fats to 16.4% y-o-y from 18.7% y-o-y in previous month supported by removal of import duty on some varieties of edible oil. Clothing and footwear continued to chart an uptrend for the tenth consecutive month, reaching a high of 8.9% y-o-y in February 2022 from 8.8% in previous month. While international oil prices have risen rapidly, transport and communication index only increased by 8.1% y-o-y vs 9.3% in previous month. This is because of lack of pass-through of higher oil prices into domestic prices, albeit with pass-through expected in coming month. Pass-through of higher gold prices was visible in personal care and effects index which increased by 5.4% y-o-y vs 3.5% in previous month. Even household goods prices rose by 7.2% y-o-y. Core inflation (excluding food and fuel) was stable at 6% y-o-y. The backdrop of higher international food, oil and industrial metal prices implies upside risk to inflation outcomes in the coming months.

India's fiscal deficit for February came in at INR 3.8 trillion (higher than INR 1.8 trillion in January) driven by higher transfer to states and higher non-capital spending. This puts Apr-Feb 2022 fiscal year to date (FYTD) fiscal deficit at 6.1% of GDP vs revised estimate (RE) of 6.9% of GDP. Through the first eleven months of the fiscal year, the cumulative deficit is only 82.7% of the total budgeted deficit for the full fiscal year, the lowest ratio at this point in the fiscal year in the last 9 years. Direct taxes fell marginally in February to INR 0.7 trillion driven by a decline in corporate tax while income tax remained flat. However, corporate and income tax have held up well compared to last year and compared to pre-Covid levels. Indirect tax collection increased due to higher GST revenues. Net revenue receipt after netting out allocation to states fell sharply from a surplus of INR 1.1 trillion in January to a deficit of INR 0.5 trillion driven by higher tax allocation to states. Total expenditure grew 11% m-o-m, driven by higher non-capital spending (21% m-o-m) while capital spending contracted marginally (-5% m-o-m). The government has spent around 80% of the budgeted allocation on capital expenditure up to February.

Manufacturing Purchasing Managers Index (PMI) declined to 54 in March 2022 from 54.9 in February 2022. Although weaker than the preceding month, the PMI reading for March 2022 marked the ninth consecutive month of expansion. New order inflows continued to increase in March 2022, according to manufacturers. But, the pace of increase in order inflows eased to a six-month low. Production volumes rose for the ninth consecutive month to cater to rising demand. Price indices increased since February 2022, signaling mounting input cost pressures. Inflation concerns dampened business confidence, which fell to a two-year low in March 2022. Services PMI rose to 53.6 in March 2022 from 51.8 in February 2022. This is the highest rate of expansion displayed by the index since December 2021. Strengthening demand conditions, particularly in the domestic market, new business wins and greater consumer footfall due to the relaxation of Covid-19 restrictions led to this upturn in the Services PMI. In March, services companies recorded the fastest expansions in sales and activity in 2022 so far. But, business confidence remained subdued due to inflation concerns. Input costs surged in at their fastest pace in the last 11 years. Services companies have absorbed most of this cost burden.

Core sector growth accelerated to 5.8% y-o-y in February 2022 compared with 4% y-o-y in the previous month due to low base (February 2021, the core industry contracted by -3.3% y-o-y). On a m-o-m basis, core output decreased by 5.3%. On a y-o-y basis, acceleration in core is led by natural gas at 12.5%, refining at 8.8% and coal at 6.6%. Uptick was also visible in steel at 5.7%, cement at 5% and electricity at 4%. During April-February 2022, core sector reported an increase of 11.1% y-o-y. Cement and natural gas have driven the rebound at 22.4% y-o-y and 20.4% y-o-y respectively. Steel output has seen an increase of 18.5% y-o-y.

Trade deficit narrowed in March 2022 to USD 18.7bn vs USD 20.9bn in February. For FY22, trade deficit has widened to USD 192.4bn compared with USD 102.6bn a year ago and USD 161.4bn seen in FY20. Exports reached an all-time high in March to USD 40.4bn from USD 34.6bn in February 2022. During FY22, exports stood at 417.8bn (USD 17.8bn higher than USD 400bn target) displaying an impressive growth rate of 43.2% y-o-y as compared to 7.5% decline in FY21. Over a 2-year period, exports in FY22 were higher by 33.3%. Export growth was broad based led by petroleum products (104.4%), electronic goods (24.3%), cotton (16.8%), organic and inorganic chemicals (15.7%), textiles (16.5%) and engineering goods (12.6%). Whereas rice and pharma exports reported slight moderation. Imports increased on a sequential basis by 6.5% m-o-m to USD 59.1bn in March as compared to USD 55.5bn in February on the back of higher oil (USD 3.1bn) and electronic goods imports (USD 2bn). Gold imports fell significantly in March to USD 1bn from USD 4.7bn in February. FX reserves were lower by USD 14 bn at approximately USD 617.6 bn.

India reported a current account deficit of USD 23 billion in the quarter ended December 2021. The current account deficit amounted to 2.7% of GDP. Current account deficit was 1.3% of GDP in the preceding quarter and 0.3% in the year-ago quarter. Merchandise trade deficit widened to USD 60.4 billion in the quarter ended December 2021 from USD 34.6 billion in the year-ago quarter. Net earnings from services, on the other hand, rose to USD 27.8 billion from USD 23.2 billion in December 2020 quarter. Net outflows amounting to USD 11.7 billion were seen on primary account, while secondary account saw net inflows of USD 21.3 billion. Among financial flows, net foreign direct investment (FDI) inflows dropped to USD 5.1 billion from USD 17.4 billion in the December 2020 quarter. The quarter witnessed net foreign portfolio investment (FPI) outflows of USD 5.8 billion, as against net inflows of USD 21.2 billion a year ago.

March month E-way bill generation for goods transportation came in at 78 million, up 9.7% y-o-y and 13% m-o-m. The increase was largely due to the relaxation of lockdowns introduced in many states in January-February to contain the spread of Omicron virus. The government collected INR 1.42 trillion in GST for March 2022. These are the highest ever monthly collections. GST collections in March 2022 were higher by 14.7% y-o-y and 6.8% m-o-m. Bank credit growth for March 2022 came in at 8.5% y-o-y vs 7.9% in February 2022 and 6% for March 2021.

Whilst domestic demand and activity levels have maintained momentum in March, input price pressures are being felt and will likely keep core inflation high. Global geo-political situation remains tense and volatile with the Russia-Ukraine war. This has caused major commodity prices to jump up significantly. In addition developed market central banks have started to raise interest rates which will likely cause some tightening in global financial conditions. India’s foreign exchange reserves continue to remain strong giving protection from any external spill-overs. Financial sector remains in a strong condition to aid slowly increasing credit growth.

  
Equity Market

 

  

The BSE-30 and Nifty-50 gained 4% each in March while Mid-cap and small-cap indices were up 5% and 6% on optimism about progress in Ukraine-Russia peace talks. On the global monetary policy front, Federal Reserve raised rates by 25 bps, BoE raised its key policy rate by 0.25%, BoJ and ECB maintained status quo on rates. FII selling continued in the Indian stock markets, to the tune of -$5.4 bn in March while DII buying provided strong support to the markets. Among sectoral indices, IT, oil & gas and metals were up 9%, 8% and 8% respectively, while auto and consumer durables ended lower, falling 2% each. Other key developments during the month was BJP winning four out of five states in the recently concluded assembly elections, which reflects strong to the ruling party.

High-frequency data for March recorded improvement from February levels. While some high-frequency industrial activity indicators remained robust, others slowed down marginally. GST collection in Mar (reflecting activity in Feb) rose to an all-time high of INR 1.42tn, even though YoY growth moderated to 14.6%YoY in Mar from 17.6% in Feb. PMI manufacturing continued to expand as it touched 54 in Mar from 54.9 in Feb, albeit the slowest since Oct-21. Power demand rose 5.9%YoY, its highest in seven months. Rail freight and credit growth moderated on YoY basis. Mobility indicators (ex-residential) reached record highs with economic activity continuing to normalize. Air passenger traffic clocked 24.9% growth on a sequential basis in Mar. CMIE's unemployment rate, improved to 7.6% in Mar from 8.1% in Feb. Exports rose to an all-time high of US$40.4bn for Mar and crossed the US$400bn mark in FY2022.

At an aggregate level, the recovery in the local market during March has been surprisingly quick and fairly broad-based, partly reflecting expectations of the conflict being transient besides the cool-off in many commodity prices during the month providing additional relief. Indian equities will likely continue to derive confidence on three main planks: 1) With inflation in an economy at a point in time being more co-related to money supply trends of the recent past, India’s inflation trajectory may not be as daunting in the near-term despite high oil and may be well short of its previous peak. 2) Post pandemic at an aggregate level we see India’s starting point in terms of strength of corporate/banking sector, households and govt balance sheets to be in reasonable shape to withstand external shocks and 3) the continuing benign trends of Covid in India since the start of CY22. India however needs broad basing of its post-pandemic recovery across the income and enterprise spectrum for current valuations to sustain.

What the Russia-Ukraine conflict has clearly brought to the fore is the meaningful under-investment at a global level in traditional hard commodities and that may have to change course in the coming years. This will likely throw up specific long term investment opportunities but tactically necessitate a more balanced distribution in the near-term on portfolio exposures to producers and consumers of commodities until geo-political risks subside. From a medium-term perspective the current situation also throws up contrarian opportunities in specific pockets where excessive pessimism is visible such as autos/industrials, parts of consumer discretionary and domestic commodities like cement.

Over the coming months, equity markets will be razor-focused on potential changes to earnings expectations especially in commodity-sensitive sectors and possibly brace for any indication of downgrades. Post the recovery in March, markets have once again regained their somewhat premium valuations. The volatility seen since the start of 2022 may well continue as markets adjust to normalizing of central bank’s policies, geo-politics and commodity prices. We retain our view that India will likely witness a better economic cycle over the next 3-5 years vs the prior 5-years; accordingly, we overweigh financials, consumer discretionary and industrials. We recommend investors use current market volatility to their advantage in increasing their long-term equity commitments and benefit from the healthy earnings growth cycle expected to unfold over the next 2-3 years, while keeping return expectations moderate and maintaining a sharp focus on risk control.

 

 
 
Fixed Income Market
 
 

Domestic economy gathered momentum buoyed by the relaxation of Covid-19 restrictions but moderated by sharp rise in inflationary pressures. March saw many critical events like unprecedented volatility in global commodity markets on back of Russia-Ukraine conflict hurting the global growth and also US Federal Reserve Bank first rate hike of 25 bps after more than three years. Covid-19 led disruptions are behind us, nonetheless RBI has moderated the projected real GDP growth rate for FY23 from 7.8% to 7.2% factoring in the global developments.

February headline CPI inflation picked up again to 6.07% y-o-y compared with 6.01% y-o-y in January, led by broad-based 0.2% sequential increase & remained above the RBI’s upper threshold for 2nd consecutive month. Core inflation (excluding food and fuel) was stable at 6% y-o-y. The backdrop of higher international food, oil and industrial metal prices implies upside risk to inflation outcomes in the coming months and factoring in surge in global commodity prices, RBI has sharply increased the FY23 average inflation projections from 4.5% to 5.7%.

For the full FY22 – exports, imports and trade deficit reached all time highs. FY2022 trade deficit was at US$192.4 bn compared to US$102.6 bn in FY2021 which can lead to CAD / GDP at ~1.5% in FY22. With uncertainties arising from geo-political risks and higher global commodity prices especially crude, FY23 trade deficit / CAD is expected to widen further.

FPI’s sold off sharply in both debt (~INR 57bn) as well as equity (~INR 371bn) amidst global risk-off sentiment triggered by geo-political risks. FX reserves were lower by USD 14 bn at approximately USD 617.6 bn. INR remained volatile during the month and oscillated between INR 75.71 to 76.97 against USD, as EM currencies came under pressure even as RBI’s intervention smoothened the impact to some extent.

MPC maintained status quo on policy rates, as widely expected. However, with Covid-19 led disruption behind us and still evolving global war situation, MPC has clearly administered a pivotal shift from a non-conventional growth supportive approach to a more conventional data driven inflation targeting framework and has indicated the order of priority as inflation – growth – financial stability, which upto Feb 2022 used to be “growth recovery on sustainable basis and mitigating impact of Covid-19 took precedence over inflation”. MPC has reiterated that its forward guidance on policy signals a shift away from ultra-accommodation adopted during pandemic.

Interest rates remained volatile during the month on the back of many key events – worsening of geo-political risks, US FED rate hike, flare up in global commodities and global rate volatility. During the month, the rate curve moved upwards by 5-10 bps in a parallel move with marginal steepening. 10 year benchmark G-Sec hardened by ~7 bps during the month to close at 6.84% on month end, which also got supported to an extent due to no fresh g-sec auction during the month.

Outlook

Global backdrop has worsened further on account of faster tightening of global monetary policies, worsening of Geo-political risks and surge in commodity prices which it is expected to pose bigger challenges for Indian fixed income market. Another critical factor of huge government borrowings in FY23 also remains negative and can worsen amidst global risk-off. While RBI continues to reassure the completion of G-Sec borrowing in a non-disruptive way, a concrete action in terms of G-Sec purchase will be awaited.

With recent MPC policy explicitly articulating its forward guidance on rate policy and with the current state, we expect MPC to change its accommodative stance to Neutral in next June MPC policy and begin with a gradual rate hike cycle beginning August policy onwards. While the policy actions are expected to be more data driven, without factoring in any tail risk on inflation-growth dynamics, we continue to believe that RBI will undertake ~50 bps rate hike in the 2nd half of CY2022 which is more than factored in already by the market. Having said that, with the pivotal shift of MPC to inflation control, any negative surprise on inflation front can prompt MPC to go for more aggressive rate hikes even at an expense of growth impact, something we don’t expect as of now.

Year 2022 is expected to remain volatile for domestic rates with an upward bias as two factors continuing to pose challenges (global backdrop & fiscal supply) and the third factor (RBI) which so far had remained supportive with growth oriented accommodative stance, gradually turning neutral. Against this backdrop we believe that gradual policy rate hikes by RBI & already steep yield curve provides investment opportunity in the short end of the curve.

We feel that 6 months to 1 year segment of the yield curve provides opportunity to risk-averse Investors. For investors looking at the core allocation, the 1 to 3 year segment of the yield curve remains well placed from carry perspective, given the current steepness of yield curve. To us, it is a sweet spot on the yield curve – neither too short which gets impacted by low gross yields, nor too long that can get impacted by the rate volatility.

Credit environment is expected to continue improving over the medium term. However, current extremely narrow spreads of AA / AA+ over AAA bonds do not provide favorable risk adjusted reward opportunities and we expect illiquidity premium of AA / AA+ segment to increase sharply over a period of time thereby posing mark to market challenges.

 

 
 
 
 

 

 




 

 

 
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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