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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.

November 2021

Macro Economic Review
 
 

Economic activity showed strong growth for the month of November and continued the momentum from October. Covid-19 vaccination rate has continued to maintain pace with 1.27 bn total doses administered, 57.2% of population having taken one dose as at end of November 2021 (53% end of October) and 33.7% of population fully vaccinated (24% end of October).

India's real gross domestic product (GDP) grew by 8.4% y-o-y in the quarter ended September 2021. GDP has now recovered completely from the -7.4% contraction it had suffered in the September quarter last year. During July-September 2021, private final consumption expenditure (PFCE) grew by 8.6% y-o-y, while government final consumption expenditure (GFCE) grew by a shade better at 8.7% y-o-y. Gross fixed capital formation (GFCF), an indicator of investment demand in the country, grew by 11% y-o-y during the September 2021 quarter. Imports grew by 40.6%, at a much faster clip than exports which grew by 19.6%. Consequently, the country witnessed a trade deficit amounting 3.8% of GDP in the September 2021 quarter as against a trade surplus of 0.2% of GDP in the September 2020 quarter.

CPI inched up 4.48% y-o-y in October compared with 4.35% y-o-y in September. Food inflation increased to 0.85% y-o-y led by vegetable prices which rose by 14.2% m-o-m. Many other food items too saw monthly uptick for eg. oils & fats (up 1.33% m-o-m), sugar and confectionary (up 1.84% mom), cereals (up 0.55% mom) and pulses (up 0.73% m-o-m). On the other hand, categories such as eggs and fruits continued to see monthly declines. Core inflation (excluding food and fuel) remained elevated at 6.17% y-o-y vs. 5.86% in September. The pass-through of higher international oil prices into domestic retail prices has been an important driver of core inflation. In October, transport and communication sub-segment saw an increase of 1.10% m-o-m and 10.90% y-o-y respectively. The impact of higher international energy prices was also visible in fuel and light index. This sub-segment saw an increase of 14.35% y-o-y in October compared with 13.63% in September. Housing index was up by 93 bps vs. a decline of 18 bps last month. Recreation and amusement index saw a moderation in pace of monthly momentum (up by 57 bps vs. 102 bps last month).

Manufacturing PMI rose to 57.6 in November 2021 from 55.9 in October 2021. This is the fifth consecutive month when the index has been in an expansionary mode. November saw an accelerated rise in sales which led to the fastest upturn in production in the last nine months. Inventory re-stocking was the highest in the last 17 years. Purchase price inflation, which had scaled an all-time high in October 2021, remained almost unchanged in November 2021, owing to high transportation costs and demand-supply mismatch. Tentative signs of improvement were seen in hiring activity after three consecutive months of layoffs. Factory orders rose for the fifth successive month and at a pace that was the fastest since February 2021. Underlying data suggested that the domestic market was the main source of sales growth, as new export orders rose at a slight pace that was 2 weaker than in October. Service PMI for November 2021 stood at 58.1, a shade weaker than its October 2021 reading of 58.4. Nonetheless, the index remained in an expansionary mode for the fourth consecutive month. Service providers reported a substantial upturn in new orders in November 2021. The rate of change in services inflation softened in November 2021 from the preceding month despite input costs rising at their quickest pace in the last 10 years. Employment in the services sector remained nearly unchanged in November 2021 compared to October 2021 due to lack of pressure on existing capacities.

Output of eight core industries increased in October 2021 by 7.5% y-o-y vs. 4.5% in September driven by double digit growth in coal, natural gas, refinery products and cement. Lower base also aided growth. Among the core sectors, coal output increased by 14.6% y-o-y in October on a higher base. Pick up in mining activities post monsoon along with higher demand contributed to growth. Crude oil production contracted again and came in at -2.2% y-o-y in October. Natural gas production maintained its traction and grew by 25.8% y-o-y aided by a low base. Consumption of petroleum products registered a high sequential growth of 12.3% in October. Fertilizer production remained flat. Steel production moderated to 0.9% y-o-y in October. The demand for steel is expected to get further push on the back of construction activities and revival of capex cycle. Cement production accelerated to 14.5% y-o-y in October. Electricity generation accelerated in October 2021, printing at 2.8% y-o-y vs. 0.9% y-o-y in September. Index of Industrial Production (IIP) increased by 3.1% y-o-y in September from 12% y-o-y in August. The dip in output was led by electricity output which reported an increase of only 0.9% y-o-y in September from 16% y-o-y in August. Mining output also increased by only 8.6% y-o-y in September from 23.6% in August. Manufacturing output increased by 2.7% y-o-y in September v/s an increase of 9.9% y-o-y in August. The downtick in manufacturing can be explained by lower automobile output.The dip in industrial activity is quite broad-based. Infrastructure and construction goods output decelerated to 7.4% y-o-y in September from 11.1% y-o-y in August. Even capital goods output decelerated to 1.3% from an increase of 19.9% y-o-y. Consumer durables output contracted by -2% y-o-y in September. Durables output is 3.2% above its pre-pandemic level (2-year period). Consumer non-durables production also declined -0.5% y-o-y compared with an increase of 5.2% y-o-y in the previous month. While IIP growth has moderated in September, IIP index is now 4.1% above pre-pandemic level (2-year period). Within this, electricity output is 5.8% above pre-pandemic level and manufacturing is 3.1% more than pre-pandemic level.

On the trade front, India’s trade deficit hit a monthly all-time high of USD 23.3 bn on back of 57.2% y-o-y increase in imports vs a 26.5% y-o-y increase in exports. After touching all-time monthly high figure in October, exports fell sharply on sequential basis by 15.6% m-o-m to USD 29bn. Over a two-year period, exports are higher by 15.9%. During April-November 2021, exports are now at USD 262.5bn, an increase of 50.7% over last year and 24.3% over April-November 2019. Imports moderated slightly on a sequential basis to USD 53.2bn, lower by 4.4% m-o-m led by decline in gold and non-oil-non-gold imports. Oil imports increased 1.7% m-o-m on back of robust demand and higher oil prices. April-November 2021, oil import bill has 3 surpassed USD 100bn compared with USD 44.3bn in same period last year and USD 86bn in April-November 2019. During April-November 2021, gold imports stand at USD 33.3bn compared with USD 12.3bn last year and USD 20.6bn in April-November 2019 period. Gold imports are on their way to surpass USD 45bn this year. Non-oil-non-gold imports, barometer of domestic demand, moderated slightly on sequential basis to USD 34.2bn compared with USD 35.8bn in October. On a y-o-y basis, non-oil-non-non-gold imports increased by 41.7% led by increase in inbound shipments of coal (up by 135.8%), chemicals (63.4%), non-ferrous metal (31.8%) machinery (29.3%) and electronic goods (22.3%). During April-November 2021, non-oil-non-gold imports stand at USD 249.1bn compared with USD 159.2bn last year and USD 203.0bn in April-November 2019. FX reserves were lower by 4.4 bn at end of November at approximately USD 637.6 bn.

Daily average E-way bill generation for goods transportation came in at 19.9 lakh for the first 28 days of November, 12% lower than the daily average for the first 24 days of October, reflecting a moderation after the festival season. GST collections for the month of October (collected in November) rose 1.1% m-o-m to 1.31 lakh crores. Government tax revenues increased by 83% y-o-y in April-October 2021 and now stands at 68% of Budgeted Estimates (BE). While corporate tax collections have increased by 92% y-o-y, income tax collections too have increased by 53.3% y-o-y. Within indirect taxes, custom duty collections have increased by 122% y-o-y to reach INR 1.1 trn. Excise duty collections are up by 27% y-o-y to INR 2 trn (61% of the BE). Going forward, excise duty collections will be lower with the downward revision in taxes on fuel. GST collections have risen by 40% yoy to reach INR 3.9 trn (62% of the BE). Non-tax revenue has increased to INR 2.06 trn (85% of the BE) compared 30% last year led by dividends and profits. Total Government expenditure has increased by 10% in April-October 2021 to reach INR 18.3 trn (52% of BE in FY22). Capital expenditure has increased by 28% y-o-y to reach INR 2.5 trn (45.7% of BE). Revenue expenditure has gone up by 7% to reach INR 15.7 trn (53.7% of BE). Given the underlying buoyancy in tax collections, central government’s fiscal deficit currently stood at INR 5.5 trn (36.3% of BE). During the corresponding period of previous year, fiscal deficit stood at INR 9.5 trn. Despite potentially higher spending on food and fertilizer subsidies, health expenditure and MGNREGA expenses, Government is likely to meet its fiscal deficit target for the year on the back of very strong tax revenues.

Domestic demand and activity levels continued the strong rise in November. Services sector showed good momentum on back of better mobility and festive period whereas the manufacturing sector continues to be well positioned given strong domestic demand. Input price pressures are being which will likely keep core inflation high. Foreign exchange reserves continue to remain strong giving protection from external spill-overs. With the pace and scale of Covid-19 vaccination continuing to improve, growth should continue to remain strong for rest of the fiscal year.

  
Equity Market

 

  

Indian markets ended the month on a weak note amidst global concerns over a new coronavirus variant. The BSE-30 and Nifty-50 fell nearly 4% each, their biggest monthly loss since March 2020. This was caused by several factors ranging from a global risk-off driven by accelerated taper worries / Omicron concerns to disappointing listing of India’s largest IPO. A sharp rally in Dollar index too weighed on the Emerging Market complex, including India which continued to witness FII outflows. Ahead of the crucial state elections in UP and Punjab early next year, PM Modi announced the decision to repeal the 3 contentious farm laws as farmer unions continued to oppose them despite several round of talks. Covid cases during the month in India remained under control (daily sub-15k) and the pace of vaccination remains healthy with India having so far administered over 1.22bn vaccine doses wherein ~55% of the population has received the first dose while ~32% of the population has been fully vaccinated.

High-frequency data showed a mixed trend with some indicators slowing sequentially reflecting the impact of festival-related holidays. GST collections in November rose to INR1.32tn with 2Y CAGR moderating to 12.9% in November from 16.7% in October. PMI manufacturing rose to 57.6 in November, highest since February-2021. Credit growth is showing nascent signs of recovery, with growth improving to 7% YoY in November from 6.8% in October. E-way bills, power demand and rail freight slowed in sequential and 2Y CAGR terms reflecting the impact of festival-related holidays impacting production days.Services PMI remained largely steady at 58.1 in November vs. an all-time high of 58.4 in October. Mobility indicators (ex - residential) remained steadily in the positive zone. Air passenger traffic for November rose sequentially by 24% and is tracking at 124% of February-2021 levels. On the corporate earnings front, 2QFY22 Nifty sales/EBITDA growth were largely in-line at 31%/21% YoY, while PBT/PAT growth came in at 40%/36% YoY. Among the Nifty constituents Ex-Metals and O&G, Nifty profits posted 13% YoY growth which was broadly in line with consensus estimates.

Globally, inflation remained the most important point of debate and concern for the markets followed by Omicron. The strong 6.2% inflation print in the US for the month of October triggered alarm bells politically and forced the US Fed to harden its stance on inflation, to begin treating it as more enduring than before, and also signal faster normalization of the monetary unwind announced last month. This has also led markets to wager on the possibility of interest rate hikes too being brought forward by the Fed towards the end of CY2022. On Omicron, many govts worldwide have swung into precautionary action (travel bans imposed by more than 20 countries) which perhaps is an understandable and predictable response to the emergence of what is regarded as a highly infectious Covid variant. So far it appears that Omicron is far more infectious than it is deadly. Yet, it will be a few weeks before the efficacy of existing vaccines against it will have been established and markets may display intermittent volatility until then. Though we believe markets are unlikely to fall as much as in early 2020, the recent strong gains in cyclical assets suggest that there is room for a decent correction.

At the margin however, the cool-off in recent weeks in commodity prices, freight rates, oil prices etc will likely soothe global inflation trends. We maintain that long-term inflation trends are fundamentally the result of excess money growth and elevated inflation will likely persist in our view, in countries that have seen sharp monetary growth in this period. In India too, we cannot rule out imported inflation feeding through into local inflation (for e.g. fuel prices) though offsets in soft commodity and food prices will likely ensure that India’s headline inflation remains within RBI’s stated comfort band thereby implying no material change in stance to its monetary and interest rate policy in the near-term. India’s strong FX reserves too provide the comfort against reversal of capital flows due to higher interest rates elsewhere around the world. Meanwhile, liquidity reduction measures by global central banks can also lead to a retreat of inflation. Meanwhile, we also move with the belief that peak inflation in this round of global growth will likely be lower than seen in earlier cyclical upswings.

Market risk-reward appears evenly balanced at this stage. We continue with our view that the Indian economy should build on its recovery even beyond 2021. A potential 3rd wave may slow down activity levels but increasing vaccination levels provides comfort against large-scale economic dislocations and pressures on health infrastructure of the type seen in the past. We continue with our pro-cyclical stance with investments in sectors like financials, industrials, consumer discretionary. We remain invested in technology and healthcare as well but have moderated our positions due to sharp run-up in the space off late. Our chosen path to portfolio construction is a measured approach with respect 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.

India is well-positioned to commence on a new economic upcycle over the next few years which can mean broad-based improvement across a variety of industries. This offers equity investors an opportunity to benefit over the medium to long term. We recommend investors use market volatility to their advantage in increasing their long-term equity commitments, while keeping return expectations moderate and maintaining a sharp focus on risk control.

 

 
 
Fixed Income Market
 
 

Domestic demand and activity levels continued the strong rise in November. Services sector showed good momentum on back of better mobility and festive period whereas the manufacturing sector continues to be well positioned given strong domestic demand. Input price pressures are being which will likely keep core inflation high. Foreign exchange reserves continue to remain strong giving protection from external spillovers. With the pace and scale of Covid-19 vaccination continuing to improve, growth should continue to remain strong for rest of the fiscal year.

India's real gross domestic product (GDP) grew by 8.4% y-o-y in the quarter ended September 2021. GDP has now recovered completely from the -7.4% contraction it had suffered in the September quarter last year.

Output of eight core industries increased in October 2021 by 7.5% y-o-y vs. 4.5% in September driven by double digit growth in coal, natural gas, refinery products and cement. Lower base also aided growth.

Manufacturing PMI rose to 57.6 in November 2021 from 55.9 in October 2021. This is the fifth consecutive month when the index has been in an expansionary mode. November saw an accelerated rise in sales which led to the fastest upturn in production in the last nine months. Inventory re-stocking was the highest in the last 17 years.

Service PMI for November 2021 stood at 58.1, a shade weaker than its October 2021 reading of 58.4. Nonetheless, the index remained in an expansionary mode for the fourth consecutive month.

CPI inched up 4.48% y-o-y in October compared with 4.35% y-o-y in September. Food inflation increased to 0.85% y-o-y led by vegetable prices which rose by 14.2% m-o-m. Many other food items too saw monthly uptick. Core inflation (excluding food and fuel) remained elevated at 6.17% y-o-y vs. 5.86% in September. The pass-through of higher international oil prices into domestic retail prices has been an important driver of core inflation.

Purchase price inflation, which had scaled an all-time high in October 2021, remained almost unchanged in November 2021, owing to high transportation costs and demand-supply mismatch.

On the trade front, India’s trade deficit hit a monthly all-time high of USD 23.3 bn on back of 57.2% y-o-y increase in imports vs a 26.5% y-o-y increase in exports.

After touching all-time monthly high figure in October, exports fell sharply on sequential basis by 15.6% m-o-m to USD 29bn. Over a 2 two-year period, exports are higher by 15.9%. During April-November 2021, exports are now at USD 262.5bn, an increase of 50.7% over last year and 24.3% over April-November 2019.

Imports moderated slightly on a sequential basis to USD 53.2bn, lower by 4.4% m-o-m led by decline in gold and non-oil-non-gold imports. Oil imports increased 1.7% m-o-m on back of robust demand and higher oil prices. April-November 2021, oil import bill has surpassed USD 100bn compared with USD 44.3bn in same period last year and USD 86bn in April-November 2019.

MPC in its December 2021 policy review decided to continue with its growth supportive stance by keeping policy rates unchanged and maintaining accommodative stance, for the ninth consecutive policy review. The market was surprised by RBI maintaining the LAF corridor at 65 basis by keeping the reverse repo unchanged at 3.35% (was expected to be raised by 20-25 basis) and repo at 4% (no change was expected).Overall, the policy continues to focus on durable and broad-based growth recovery coupled with the effective liquidity management. With uncertainties arising from the surge in Covid-19 infections in many parts of the world and emergence of Omicron variant, MPC chose to support growth and maintain accommodative stance.

Outlook

Domestically also, RBI is midway of a gradual policy normalization with more steps towards liquidity re-calibration vide Variable rate auctions (most of the liquidity) vs fixed rate reverse repo which was the earlier focus. This will be followed by restoring of the policy rate corridor back to 25 bps (as before the pandemic) likely by early next year.

As inflation remains within MPC’s medium-term target, we believe the direction is – repo rate lower for longer

On the international front - one part of the world believes that we are in a Greenflation Supercycle (green climate and transitions leading to lower supply vs increasing demand causing Commodity prices to rise sharply) and the other believes that sustainable growth is a struggle for the globe post 2008 and therefore commodity prices cannot go up one way and will correct.

Against the backdrop of gradual normalization of policy rate corridor and international commodity price uncertainty, we feel that up to 6 months segment of the yield curve is apt for risk-averse investors. For investors looking at the core allocation of their portfolio, the 2-5 years segment of the yield curve remains attractively placed from carry perspective given the current steepness of the curve. Additionally, recent hardening of interest rates, benign liquidity conditions and favorable demand-supply dynamics also augers well for this segment. This segment is neither too short to be adversely impacted by low yields nor too long to be exposed to high interest rate volatility amidst global uncertainty. Investors with long term horizon & ability to absorb short term volatility may consider longer-end of the curve as a tactical allocation which finds merit on the back of conviction that RBI will manage the yield curve and may support the long-term yields through the tools like Open Market Purchase operations & Operation Twist. Possible inclusion of Indian G-Sec in global bond indices will also provide positive backdrop to the long end of the yield curve.

While the credit environment is expected to improve over the medium term, we believe credit dispersion will continue as of now and one must be cautious when getting onto the credit side. Selective AA / AA+ rated credits backed by strong conviction of improvement on their credit metrics may provide favorable risk-reward opportunities.

 

 
 
 
 

 

 




 

 

 
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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