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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.

January 2021

Macro Economic Review
 
 

India’s economic recovery, which started post lifting of the lock-down restrictions around August 2020, continued to gather pace over last three months of calendar year 2020 and into 2021. Demand conditions remained buoyant across most sectors with activity levels almost close to pre-covid levels.

The Indian economy in Q2 FY21 staged a strong recovery from the record decline of Q1, on back of resumption of economic activity. The GDP growth in Q2 FY21 at -7.5% yoy was a notable improvement from the -23.9% growth of Q1 FY21. The gains in the domestic economy in Q2 FY21 were powered by the manufacturing 0.6%, electricity 4.4% and agriculture 3.4%. The service sectors continued to record a contraction in growth rates both on a yearly and quarterly basis. Consumption demand continued to be weak with private as well as government consumption registering negative growth. Private consumption contracted by -11.32% yoy in Q2 FY21. Government consumption declined by -22.2% yoy. Investments too contracted during the quarter with gross capital formation coming at -7.5% yoy.

In December 2020, the eight core sectors output growth remained in a negative trajectory for the 10th successive month with output contracting by -1.3% yoy. Barring coal and electricity, the other six components of the core index continued to remain in the negative territory. January 2021 Markit Manufacturing PMI (Purchasing Manager’s Index) improved to a three-month high of 57.7, around 1.3 points higher than previous month. Companies scaled up production at the quickest pace in three months in response to increase in sales and export orders. New orders and output rose across each of the three broad areas of the manufacturing sector. Services PMI indicated a softening in the rate of growth. The PMI for services at 52.3 was lower than that in the preceding two months. The moderation is being attributed largely to subdued demand conditions and labor shortages in some segments.

Retail inflation dropped sharply in December 2020 to 4.6% yoy and came within the RBI’s target range after a gap of 8 months. The cooling of inflation during the month was mainly on account of the seasonal easing of food prices viz. of vegetables. High base effect also aided the moderation in inflation. Core inflation (excluding food and fuel) continued to be at elevated levels and witnessed only a marginal decline during the month. Wholesale inflation declined to a four-month low of 1.2% in December 2020 aided by decline in the primary and fuel segments. There was however, a sharp increase in price levels of the manufacturing segment on account of the rise in global metals prices.

GST collections for December rose to INR 1.15 lakh crore, the highest ever since the implementation of GST in July 2017. This is the fourth consecutive month this year, that GST collections have outperformed yoy and is suggestive of recovery from the pandemic led disruptions. The collections were 11.6% higher yoy. However, April-December 2020 total GST collection amounted to INR 7.8 lakh crore, 14% lower yoy.

The fiscal deficit in the first nine months of 2020-21 at INR 11.6 lakh crores saw a 24% yoy increase and is 145% of the budget estimate. The financing of fiscal deficit continues to be primarily met through domestic sources (96% share). Revenue receipts have seen a 5% decline yoy for the nine months of FY21. Barring receipts from excise duties and interest, the collections from all the other major heads of revenues during the first nine months of 2020-21 have been lower than a year ago. Total Expenditure of the central government for the nine months of FY21 has seen a 8% increase yoy. Revenue expenditure accounted for 86% of the expenditure and registered a 6% growth yoy. Capital expenditure of the central government has been 21% higher than a year ago.

December 2020 trade deficit widened to $15.71 billion from $9.8 billion in the previous month. This increase has been on account of a higher growth in imports. Imports in December 2020 grew by 7.5% yoy supported by increase in gold shipments, electronic good and vegetable oil imports. Exports on the other hand witnessed a growth of a mere 0.13% yoy. On back of continued Foreign Portfolio Investment (FPI) inflows, foreign exchange reserves reached a historic–high of $585 billion at end of January 2021.

With easier financing conditions and robust domestic demand, activity levels have improved across various sectors. Rural economic growth continues to be robust and services growth has picked up markedly on back of opening of up Covid-19 related restrictions. Manufacturing sector seems to be performing strongly on back of ramp-up in production, strong order book and improving outlook. Key going forward will be job growth and income growth. The necessary ingredients for a sustained growth momentum remain in place and calendar year 2021 promises to be a strong growth year.

  
Equity Market

 

  

Nifty (down 2.5% during Jan ‘21) touched an all-time high of 14750+ intra-month but fell ~7.5% from the peak, as there was some selling pressure ahead of the Union Budget. The month began on a positive note as the US President announced US$1.9 tn Covid-19 relief plan. In India, 7-day average of new Covid cases fell further to 13.5k even as more than 2.8 mn people were vaccinated within a span of 2 weeks. Many high-frequency data points (E-Way bills, Rail freight, GST collections, Power demand) for January 21 continued to show healthy positive YoY growth trend. The ongoing earnings season also appears to be showing a strong earnings traction, with more companies beating consensus estimates.

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 bn. Deal activity moderated in January ‘21 with 8 deals of ~$1.5bn (vs 14 deals of ~$2.7bn in Dec). Within sectoral indices, Auto, Capital goods, Tech outperformed, whereas Metals, Healthcare, Bankex, FMCG and Power underperformed the BSE Sensex.

Union Budget – Key Highlights

The Government has effectively used the backdrop of the massive economic disruption due to the pandemic, to re-organize its economic priorities. In a growth-constrained world, India has gone down the path of putting in place the building blocks, which are required for accelerating its growth agenda. For the past 6-7 years, India’s extreme focus on controlling the fiscal has had the deleterious outcome of constraining growth, visible in the deceleration of GDP during the same period. We believe that growth is the ultimate panacea for many of India’s problems and the Union Budget 2021 has chosen to prioritize the same while pushing fiscal considerations to the background, atleast for some time. We think the Budget has the ingredients to ignite a fresh investment cycle, which has eluded the economy for many years and gives India a chance to regain its growth momentum. While the budget does project a higher than expected fiscal deficit of 9.5 per cent and 6.8 per cent for FY21/22, we reckon this should be overlooked both by equity and debt market investors, should it improve India’s growth trajectory and boost corporate earnings in the process.

At an aggregate level, the Budget 1) improves the quality of the spending by focusing on infrastructure, which has inherent knock-on effects on other parts of the economy thereby giving it a growth push. Overall capital expenditure has been raised 26% over FY21 and nearly 65% over FY20 levels in roads, railways and urban infrastructure, 2) allows for a more gradual glide path to fiscal consolidation, 3) enhances the quality of the fiscal math by subsuming extra-budgetary allocations to reflect the real fiscal picture and 4) continues to pursue the disinvestment agenda in 2021 and at the margin even ups the ante by enlarging its scope to include two more banks and one general insurance company as well. While the pandemic did dislocate the process in 2020, stronger execution should enable the government to move closer to the target in 2021. The Budget also needs to be commended for eschewing the urge to tinker personal or capital market related taxation. Additionally, there are measures to make the financial sector more robust, including a new development financial institution, an asset reconstruction company, an institution to infuse liquidity into the corporate bond market, a new security market code, higher FDI limit for the insurance sector and liquidity for depositors in banks under duress.

For 2021, we visualise India’s recovery path characterised by return of credit growth after nearly 3 years of deceleration as asset quality pressures wane. We do see a modest pickup in core inflation (noting the higher fiscal deficit for 2021/22) even as food inflation cools off in the early part of this year and a rise in commodity prices, which in the early stages will likely be passed on by corporates, thereby defending profitability amongst others.

As global economic recovery also takes hold with the roll-out of the vaccine, we expect a style reset in global investing with growth/momentum yielding to value/mean reversion trades in 2021. With a Govt agenda which is lot more growth supportive, this sentiment should rub off on India too thereby favoring financials and industrials/cyclicals. A tactical shift has been undertaken by increasing weight in the value component of our portfolio. At an aggregate level, we continue to adopt a middle path in portfolio construction with regards 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 New Year started on a positive note with a successful launch of indigenous Covid-19 vaccination drive. India’s economic recovery continued to gather pace over last three months of calendar year 2020 and into 2021. Demand conditions remained buoyant across most sectors with activity levels almost close to pre-covid levels. The Indian economy in Q2 FY21 staged a strong recovery from the record decline of Q1, on back of resumption of economic activity.

GST collections for December rose to INR 1.15 lakh crore, the highest ever since the implementation of GST in July 2017. This is the fourth consecutive month this year that GST collections have outperformed yoy and is suggestive of recovery from the pandemic led disruptions. The collections were 11.6% higher yoy. However, April-December 2020 total GST collection amounted to INR 7.8 lakh crore, 14% lower yoy.

Retail inflation dropped sharply in December 2020 to 4.6% yoy and lower than the market expectations mainly on account of the seasonal easing of food prices viz. of vegetables & high base effect. Core inflation (excluding food and fuel) continued to be at elevated levels. Wholesale inflation declined to a four-month low of 1.2% in December 2020 aided by decline in the primary and fuel segments. There was, however, a sharp increase in price levels of the manufacturing segment on account of the rise in global metals prices.

The fiscal deficit in the first nine months of 2020-21 at INR 11.6 lakh crores saw a 24% yoy increase and is 145% of the budget estimate. December 2020 trade deficit widened to $15.71 billion from $9.8 billion in the previous month. This increase has been on account of a higher growth in imports.

In order to restore the normal liquidity management framework, RBI conducted a Variable Rate Reverse Term Repo Auction for Rs. 2 lac crs in January, which came sooner than expected. With this, short tenor rates upto 5 year quickly adjusted upwards by 40-50 bps and got anchored with the Reverse Repo Rate @ 3.35%.

Amidst the unprecedented economy disruption caused by the Pandemic, Finance Minister delivered a growth-oriented budget specifically targeted towards sectors like health, infrastructure and 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.

Outlook

RBI’s MPC policy was setup against high expectations post the RBI’s liquidity measure & yet another year of record high Centre & State borrowings announced in the Central Budget. RBI delivered on liquidity stance by indicating continued ample systemic liquidity and also by delaying the 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.

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 2 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. Additionally, we believe global macro conditions with risk-on trade on hopes of Covid-19 vaccination and a benign global liquidity led by central banks have set the stage for a sustained outperformance of emerging market (EM) assets over the next few years. The expected weakening of the US dollar and the relatively higher accrual offered by Emerging Countries like India can create a strong Foreign Institutional Investors (FIIs) demand for domestic fixed income securities. Some allocation at the longer end finds merit on the back of conviction that RBI will manage the yield curve and FIIs demand may support the long-term yields.

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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