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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 2021

Macro Economic Review
 
 

Economic activity continued to gain momentum in August as mobility increased. The vaccination rate continues to improve with almost 36.4% of adult population having taken one dose and 10.8% of population vaccinated with two doses (as on August end).

Q1FY22 GDP came in at 20.1% largely due to base effect. Private final consumption expenditure (PFCE), the single largest component of India's GDP grew by 19.3%, after a -26.2% fall during April-June 2020. Gross Fixed Capital Formation (GFCF), an indicator of investment demand, grew by 56.7% as against a steep -46.6% contraction in the year-ago quarter. The government cut its final consumption expenditure (GFCE) by 4.8% during April-June 2021 compared to a year ago. Imports grew at a faster clip (60.2%) than exports (39.1%). The economy witnessed a trade deficit amounting to -1.9% of GDP during April-July 2021 as against a trade surplus of 1.3% of GDP seen in the same quarter a year ago. GFCF’s overall contribution was lower at 27.2% vs 31.2% in previous quarter.

Central Government's gross fiscal deficit (GFD) during April-July 2021 amounted 21.3% of its annual budgeted target for FY 2022, compared to an average 69% attained by July for the period FY14 and FY20. At the same time last year, the government had overshot its annual deficit target by 3.1%. In absolute terms, the deficit during April-July 2021 amounted to INR 3.2 trillion, substantially lower than the last year's INR 8.2 trillion. Government expenditure declined year-on-year by -4.7% to INR 10 trillion during April-July 2021. Revenue expenditure fell by -7% yoy to INR 8.8 trillion, while capital expenditure rose by 14.8% to INR 1.3 trillion. Gross Tax Revenue collection during the first four months of the fiscal came in at INR 6.9 trillion or 31% of full year target. During Apr-Jul 2020, the figure stood at INR 3.8 trillion as revenue collection plummeted during the lockdown. By July 2020, gross tax revenue collection was just 15% of budget estimate and 20% of revised estimate for the year. On an average, gross tax revenue collection during the first four months of the fiscal stands at ~23% of full year collection. This corroborates the fact that revenue collection has been very strong in FY22 so far. Net Tax Revenue also came in at INR 5.3 trillion till July 21 or 34% of full-year target. Non-tax revenue receipts jumped by 468.6 per cent to Rs.1.4 trillion and non-debt capital receipts, which mainly comprise of disinvestment proceeds, too rose by 159.2% to INR 141.5 billion.

The headline CPI for July came in at 5.59% versus 6.26% in June 2021. Food inflation as measured by CFPI came down to 3.96% versus 5.15% in June 2021. Core Inflation came in at 6.02%. The downward movement in CPI was driven by higher than expected softening of food prices, slight moderation in core CPI and favorable base effects. Food inflation moderated across most food categories (except proteins & vegetables). Food inflation may likely moderate further in coming months, due to easing of supply chains and base effects. Core inflation may likely remain sticky.

Services PMI jumped to 56.7 in August 2021 from 45.4 in July 2021. The index rose after three consecutive months of contraction as the Covid-19 pandemic continued to recede and vaccine access improved. Sales and output of service providers improved in August 2021 as several establishments re-opened after the second wave of Covid-19. This boosted business confidence. But, job creation remained muted as firms already had ample capacity to cater to the rising orders. Manufacturing PMI moderated to 52.3 in August 2021 from 55.3 in July 2021. Despite this fall, the August 2021 reading of the index indicates an improvement in overall operating conditions for the second straight month. Survey reported a growth in production for the second straight month amid reports of improved sales and demand. Order books continued expanding and businesses remained optimistic on the future. The Covid-19 pandemic and elevated price pressures remained the main constraints for the growth of manufacturing units. The pause on hiring efforts by the manufacturing units continued in August 2021.

IIP for June 2021 was up 13.6% yoy but was -7.6% vs June 2019 as well as 15.8% lower than March 2021, the month before Covid-19 second wave. Whilst all sectors were soft, weakness was more pronounced in the manufacturing sector and particularly in capital goods and consumer durables. The output of eight core industries grew by 9.4% yoy in July 2021 against a contraction of -7.6% yoy in July 2020, aided by a low base. All the sectors except crude oil have registered a positive growth during the month. On a sequential basis, the core sector output grew by 5.4% mom in July 2021. The sharp improvement in output can be attributed to the gradual resumption of economic activities across states towards the end of Q1 FY2022. Robust coal production coupled with stellar growth of steel and cement production backed by Government’s infrastructure push have driven the growth during the month. Sequentially, all the sectors have witnessed an improvement over the month.

On the trade front, a buoyant global economy meant that exports continued to do well. Merchandise export earnings have remained above the USD 30 billion mark consistently since March 2021. Merchandise exports rose yoy by 45.2 % to USD 33.1 billion in August 2021, as against a 12.2% fall registered in the year-ago month. Non-petroleum exports in August 2021 were 28.58 USD billion, registering a growth of 36.57% yoy of which engineering goods’ exports at 9.6 bn USD was up 58% yoy. India’s merchandise imports in August 2021 were USD 47.01 billion, an increase of 51.47% over USD 31.03 billion in August 2020 and an increase of 17.95% over USD 39.85 billion in August 2019. Non-petroleum imports were USD 35.37 billion in August 2021 with a growth of 43.8% yoy whereas petroleum imports were USD 11.6 bn, up 80% yoy. Gold imports were also up 82% yoy at 6.7 bn USD. The trade deficit in August 2021 was USD 13.87 billion compared to the trade deficit of USD 8.2 billion in August 2020, while it is USD 55.9 billion during April-August 2021 as compared to USD 22.7 billion during the same period of the previous year. The foreign exchange reserves ended August 2021 at USD 633.6 bn – up USD 13 bn for the month.

E-way bills which are an early good indicator of activity levels saw a rebound from 4 crores in May 2021 to 5 crores in July, dipped to 4.6 crores in August. The number remains substantially lower than the high of 7 crores recorded in March 21. GST collections for the month of July (collected in August) remained healthy at INR 1.12 lakh crores down -3.8% mom, but up 29.6% yoy.

Financing conditions continue to remain buoyant with record amounts of IPOs and domestic share sales. Domestic demand and activity levels have continued to improve in August. The services sector continues to improve slowly, but the manufacturing sector continues to be well positioned given strong global growth outlook and resilient domestic demand. Liquidity conditions remain benign and foreign exchange reserves continue to remain strong. With the pace and scale of Covid-19 vaccination continuing to improve, growth should remain good. Any third wave Covid-19 related lock-downs can likely sputter the improving growth trajectory.

  
Equity Market

 

  

The BSE-30 Index and Nifty-50 Index ended at record high levels, gaining 9.4% and 8.7% and India was the best performing market among global markets. Globally, rising Covid cases and consequent restrictions weighed on sentiment but hawkish expectations from Jackson Hole failed to materialize, supporting risk assets. In India, new Covid cases remained under control (30-40k) but worsening situation in the state of Kerala kept authorities on alert. Vaccinations gathered pace (~10mn+ doses on 2 days) and by end-Aug, India had inoculated atleast 50% of adult population with 1 dose and 15% with both doses. Rising regulatory concerns in China and push on “common prosperity” seemed to support other EMs, including India. Resultantly FIIs turned net buyers again (+$ 385 mn) while DII buying (+$1.2 bn) was driven by domestic MFs. In sectoral trends, IT / Energy / Utilities were the top performers while Realty / Metals were the laggards. In sectoral trends, Realty and Metals were the best performers while autos, utilities and energy lagged.

On the global front, the US Federal Reserve kept the benchmark interest rates unchanged, at the record-low level of near zero. Spread of the Delta variant specially in unvaccinated parts of the population in the US is raising concerns of delay in the revival of economic growth and hence job markets – which are still far from full employment. In its most recent policy meet too, the Fed has chosen to maintain a vague stance on the path of evolution of its monetary stance even as some indications are suggestive of a possible exit from monetary accommodation by the end of this year. This is likely to unsettle markets although the degree of weakness will depend on the extent of the Fed’s unwind from monetary accommodation, which presently is running at ~US$120 bn/month.

Back in India, after a brief hiatus, domestic economic activity indicators continue to stabilise. Early data for July’21 indicate that 81.3% of indicators were in the positive territory, up from 69.7% as per early data for June’21. Final data for June’21 indicate that 76% of indicators were in the positive territory. GST collections in Aug’21 stood at INR 1,120bn, above the INR 1trn mark for the second consecutive month, although down 4% month-on-month due to seasonality. On a year-on-year(YoY) basis, collections grew 30%, with domestic GST expanding 27% YoY, and import GST rising by 39% YoY. On a 2-years basis too, Aug’21 collections expanded 7%.

The pace of vaccination has accelerated to over 10mn doses/day. This juxtaposed with various seroprevalence studies indicate India can well achieve herd immunity by the end of CY21. This will help keep a potential third wave under check and enable the economy to stabilise to pre-covid levels earlier than anticipated. Recovery in the manufacturing sector continues to lead the services sector as the latter does suffer due to regional lockdowns and limited social interactions.

Cumulative rainfall deficit has widened to 9% (from Long Period Average or LPA) as of September 2nd, which falls within normal range (±10% from LPA). The rise in deficit reflects weak rainfall in August. However, spatial distribution remains broadly supportive with 53% of the country (area-wise) receiving normal rainfall. Sowing which had a delayed start, is gradually catching-up to last year levels, tracking at -1.8%YoY. We don’t expect kharif output to get impacted as rainfall in key producer states has been normal. That said, if reservoir levels reduce further it could impact rabi crops. Food prices remain moderate though is monitorable from the perspective of inflation expectations.

On the policy front, the key development was the announcement of the National Asset Monetisation Pipeline, a program which is expected to run in parallel with the Govt’s ambitious National Infrastructure Pipeline program envisaging investments of ~US$1.25 trn over the next 4-5 years. This asset recycling in our view further strengthens our belief in India’s ability to kickstart a fresh investment cycle in the coming years.

Equity markets have witnessed quite a comeback during the last 15 months and valuations (basis historic earnings) for the leading indices “optically” seem to be at 30% premium to long-term averages. However, once we adjust the earnings for a normalized 12-month forward earnings and also adjust for the lower cost of capital, valuations are either in-line with long-term averages or at a mild premium.

The primary markets, on the other hand, continue to be vibrant as many new-age businesses get listed offering investors an opportunity to participate in their growth journey. The investors, however, need to exercise caution in valuing these fast growing but cash-guzzling businesses.

Keeping all the above in view, we think risk-reward in the markets are quite evenly balanced at this stage. We continue with our view that the Indian economy should witness a recovery in 2021. The potential 3rd wave may slow down the activity levels, but a high vaccination rate of the population makes us believe that hospitalizations will remain low (as is seen in some of the countries where 3rd wave is underway and where vaccination rates are high). The damage to economic activity, hence, should remain limited. We continue with our pro-cyclical stance with investments in sectors like financials, industrials, consumer discretionary. We continue to remain invested in technology and healthcare as well but have moderated our positions due to sharp run-up in the space.

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 would recommend investors to continue with their SIPs and use any volatility in the equity markets to increase their equity allocation through lump-sum investments. Our chosen path to portfolio construction is a balanced approach regards 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
 
 

Economic activity gathered further momentum in August as Covid-19 cases remained stable & mobility increased. Fast pace of vaccination with almost 36.4% of adult population having taken one dose and 10.8% of population vaccinated with two doses (as on August end) also added confidence. Services PMI jumped sharply in August to 56.7 from 45.4 in previous month as more service establishments re-opened, however, manufacturing PMI marginally moderated to 52.3 from 55.3 reflecting supply side constraints & elevated price pressure. July eight core sector output rose by 9.4% vs 8.9% for previous month as all core industries except crude oil production witnessed y-o-y growth. On a sequential basis, the core sector output grew by 5.4% mom in July 2021. Q1FY22 GDP came in at 20.1% largely due to base effect.

The headline CPI for July came in at 5.59% versus 6.26% in June 2021 and marginally lower than the market expectations. The downward movement in CPI was driven by higher than expected softening of food prices, slight moderation in core CPI and favorable base effects. Food inflation came down to 3.96% versus 5.15% in June 2021 as it moderated across most food categories (except proteins & vegetables). Food inflation may likely moderate further in coming months, due to easing of supply chains and base effects. Core Inflation came in at 6.02%, a marginal moderation from the previous 6.3%.

The August trade deficit further widened to USD 13.9 bn from the previous month of USD 11.2 bn, as the imports normalized more in line of economic momentum. Imports in August increased 51.5% y-o-y and 1.3% m-o-m while the August exports increased 45.2% y-o-y & declined 6.5% on m-o-m basis. For 5mFY22, cumulative trade deficit is at USD 55.9 bn compared to USD 22.7 bn in 5mFY21 & USD 77.3 bn in 5mFY20. With the normalization in activity levels, FY2022 is again expected to slip in to trade deficit after recording a trade surplus in the previous year.

The foreign exchange reserves continue to surge and has reached a record high of USD 633.6 bn on the back of robust FPIs inflow in equity market and provides comfort on external stability. During the August month, FPIs turned net buyers once again in equity segment after reporting outflows in the previous month. Encouragingly in the debt segment, FPIs turned net buyers in August with ~ INR 3,220 cr inflow .after many months of reporting outflows.

July GST revenues (collected in August) remained healthy at Rs 1.12 lac cr, though marginally down from the previous month of Rs. 1.16 lac cr. Gross GST collections in 5mFY22 was at Rs.5.65 lac cr, which is 55% higher than 5MFY21 and even ~10% higher than the pre-pandemic 5mFY20. Healthy gross tax revenues – up by 83% y-o-y in 4mFY22 with marginal decline in expenditure of ~-4.7% in 4mFY22 has helped in containing the Fiscal Deficit in 4mFY22 at ~21.3% of FY22 Budget Estimates and provides more confidence that Central Govt will be able to contain its FY22 fiscal deficit within the budgeted target of 6.8% of GDP.

Rates on highly rated Corporate bonds continued with a downward bias, especially at the short end – 1 to 5 year segment which rallied by 15-25 bps, while the longer end – 6 to 10 year segment rallied by 5 – 10 bps. G-Sec also rallied but underperformed the corporate bonds in 1 to 5 yr segment and outperformed in 6 to 10 year segment. However, 10 yr G-Sec benchmark ended the month 2 bps higher at 6.22%.

Outlook

Amidst the continuing growth uncertainty, we believe RBI will continue to maintain its growth supportive stance through the most of CY2021, while keeping a close watch on inflation. RBI’s upward revision of projected headline inflation for FY22 by 60 bps to 5.70% and still maintaining accommodative policy stance provides clarity in that direction. Having said that, we feel that RBI has taken a gradual approach towards the policy normalisation with the first initial step towards liquidity re-calibration amid massive built-up of surplus systemic liquidity. Second step of policy normalisation could be narrowing the policy rate corridor back to 25 bps by hiking the reverse repo rates in total of 40 bps, which is expected beginning of the next calendar year. Third step – which is to go for outright repo rate hike is still sometime away and would depend on the growth / inflation dynamics in a normal situation which is expected to be achieved only in FY23 or so.

Against the backdrop of gradual normalization of policy rate corridor, we feel that 6-9 months segment of the yield curve is apt for risk-averse investors. At the same time, 2-5 years segment of the yield curve remains attractively placed from carry perspective given current steepness of the yield curve. 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 elevated fiscal supply. Accordingly, debt funds operating in the 2 – 5 year segment can provide the core allocation opportunities for the medium to long term investors. 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 Government Security Acquisition Program (G-SAPs) and secondary market intervention.

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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