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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.
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 2019

Macro Economic Review
 
 

August saw quite a few eventful things with RBI MPC meeting, Bimal Jalan committee report on excess RBI reserves, July inflation print and Q1 2020 GDP figures. Equity markets saw $2bn in FPI outflows whereas Debt markets saw $500mm in FPI inflows. Nifty declined by 0.85% for the month, 10 year G-sec yield increased by 20 bps and INR depreciated 4.3% vs the USD.. 

On 7th August the MPC committee met and cut repo rate by 35 bps to 5.4%. For the first time, repo rate was cut in a multiple other than 25 bps. MPC said the growth has slowed down materially whereas their inflation forecasts remain below 4% for FY 2020. Given the output gaps opening up, focus is to address the fading growth impulse. All 6 MPC members were in favour of atleast 25 bps rate cut with 4 in favour of 35 bps. It is likely that RBI remains dovish by keeping adequate liquidity in system and ready to act with further rate cuts if data continues to show slow-down.  

July’s inflation numbers saw headline CPI at 3.15% yoy vs 3.18% in previous month. Urban inflation eased from 4.3% yoy in previous month to 4.2% yoy whereas rural inflation remained unchanged at 2.2% yoy. Core inflation remains low at 4.1%. Large part of monsoon season is over and overall rainfall is in line with average. Headline inflation has been largely contained as food prices are within range. The concerning figure however, is core inflation which at 4.1% is highlighting serious demand shortfall. This was evident in July auto sales figures across manufacturers, which saw 30% fall in August yoy sales figures

Industrial production figures (IIP) remained at low levels with 2% growth for June vs 3% in May. However, manufacturing PMI (Purchasing Manager’s Index) of 52.5 and services PMI of 53.8 bounced a little from June lows.

All of this set the stage for a weak GDP print of 5% for Q1 2020, which was the lowest real GDP figure for 25 quarters. The 8% nominal GDP growth number was lowest since June 2012. Key to the GDP slowdown has been consumption which has slowed from 7.2% in Q1 2019 to 3.1%. Capital investments have also fallen from 10% in 2019 to 4% in Q1. It has primarily been increase in government spending of 8.8% yoy, which has helped to keep GDP growing. 

Oil prices were down 6% for the month on back of weaker demand. Trade deficit for July improved with a $13bn deficit vs $15bn in previous month. Imports declined by 10% yoy, whereas exports rebounded from -9% yoy in previous month to 2.3% yoy. FX reserves have climbed steadily over the past six months and, at US$429bn, are at near all-time highs.

Liquidity conditions within the banking system continued to remain surplus on back of government spending, FX inflows and benign leakage from currency in circulation.

An important event for the market was former RBI governor Bimal Jalan’s report on transfer of excess RBI reserves. This was a long over-due report and had divided opinions with respect to the amount of excess reserves a central bank has. The report ultimately recommended an amount of INR 52,000 crores to be transferred by RBI to the government as excess reserves for year ended July 2019. In addition, RBI will also pay the government a dividend for 2018-19 amounting to INR 123,000 crores.

To address the slowing growth concerns, Finance Minister Mrs. Nirmala Sitharaman announced a list of sector specific measures but steered clear of any fiscal stimulus. Mrs. Sitharaman reiterated government’s fiscal discipline will continue whilst they work on implementing reforms. The measures touched across taxation for foreign portfolio investors, auto sector, NBFCs, banks and capital markets including repo rate benchmarked lending. Bond and equity markets cheered the measures, albeit in a muted manner.

On the global front Chinese Yuan broke the 7 mark vs USD and quickly settled around 7.14. This was considered as a sizeable move by the market and demonstrates China’s ability to use weak currency for off-setting trade war related slow-down. Bond yields continued to drift down with world now having close to $15 trillion in negative yielding debt, large part of it in Europe.

Overall, August saw continuation of the growth slow-down theme. Aided by benign inflation, RBI cut rates by 35 bps along with continued surplus systemic liquidity. However, lead indictors like auto sales and dropping core inflation continue to show growth challenges. Government is taking measures to address the slow-down through combination of measures. It seems the measures may slowly start working, but the question is will it be enough or will conditions continue to deteriorate and require RBI to provide further rate cuts and liquidity.

Equity Market

  

Amid volatile sessions, the BSE-30 Index ended flat in August. Trade tensions between US and China, US Fed commentary on future rate cut, a global sell-off, Modi government’s revocation of Jammu & Kashmir’s special status and fading hope of any measures to revive the economy weighed on investor sentiment. However, RBI’s higher than expected repo rate cut (35 bps) and additional transfer of excess provisions to the central government, coupled with rollback of surcharge on FPI (Foreign Portfolio Investment) and few other government measures to boost the economy later in the month brought some relief to the market. On Friday (30th Aug) finance ministry’s announcement of mega mergers between few public sector banks, may not have any major near-term benefits on the credit environment, but is a step in the right direction, in-terms of long-term consolidation and keeping public sector banks relevant. GDP growth figures for Q1FY20 at 5% were one of the lowest in 25 quarters. In terms of India’s domestic economic activity indicators, barring consumer credit growth and electricity consumption, most other indicators like auto sales, consumer durable production continue to weaken sharply. Monsoon rainfall continues to remain healthy and water levels in reservoirs have improved significantly, which should bode well for the Agri/Rural economy.

Consumer durables, infotech, auto were the sectors in green, whilst Metals, Bankex, Power and Cap goods fell sharply during the month. After buying consistently for 5 consecutive months, FIIs (Foreign Institutional Investors) continued to be sellers for the larger period of August while DIIs (Domestic Institutional Investors) continued to increase buying in August turning them net buyers YTD. Capital market activity remained muted.

Current issues around the Sino-US trade stand-off does create additional global headwinds in addition to the challenges of slowing domestic growth. Medium-term, our positive outlook is premised on improving macro factors - controlled inflation, stable commodity prices and currency, improving asset quality and credit growth cycle and likely moderation of interest rates. Moreover, recent improvement in monsoons also augurs well for a potential rural demand recovery. Since the last 6-9 months, we have been constructive on the Indian equity market from an opportunity standpoint; particularly in the mid and small cap segment given meaningful valuation corrections in several good quality businesses. Recent growth challenges seen across few sectors of the market are however, unlikely to abate in a hurry and may keep earnings growth muted for a few more quarters. However, measures announced by the Govt to address these challenges are a welcome step and should mitigate some of the anxiety around the same. The Finance Minister has hinted at additional measures likely to be announced to beat the growth slowdown.

From a scheme management standpoint, we continue to restrict ourselves to a bottom-up approach to stock selection and portfolio construction until stronger evidence of more broad-based growth emerges. Given the extent of the slowdown across various sectors of the domestic economy, we keep our outlook on growth recovery muted for the next 2-3 quarters. We prefer to evaluate investment propositions based on flat to weak growth assumptions for the ensuing future and resultant price to intrinsic value equation. We maintain a high sense of alert overall and remain wary of balance-sheet related risks to businesses.


 
Fixed Income Market
 
 

The 35 basis point repo rate reduction by Monetary Policy Committee (MPC) in early August’19 was targeted to address the dwindling economic growth. While not all market participants were expecting a rate reduction of more than 25bps, the data on growth slowdown and ‘inflation deficit’ suggested an immediate action.

In this situation the rally in the bond market should have continued in August, however, it was not visible. The slowing economic growth conditions, the rate reduction by RBI and the rate environment in other economies should have led to drop in bond yields. The pause in the bond market rally may be ascribed to the possible stretch on the fiscal position due to drop in tax revenue collections vis-a- vis budget target due to economic slowdown.

The much awaited Bimal Jalan report on the transfer of reserves was finally accepted last month and Rs. 1.76 lakh crores will get transferred to the government. This news also had limited positive effect on the bond investors’ sentiments as it is being estimated that the ability of RBI to transfer higher dividend to government in the following years seems limited.

However, the sharp drop in the GDP growth of Q1FY20 to 5% has once again increased reasons to believe steeper rate reductions in the coming months.

The reason also gets supported by:

  • Benign inflation environment- The drop in the core inflation data to closer to 4% is being reasoned out as drop in demand and which is now visible across several sectors.
  • Softening international oil prices as growth slows in several other economies.
  • Improved sentiment amongst foreign investors leading to positive foreign inflows into debt
  • The drop in global yields particularly in US and Europe improves the relative attractiveness of the EM bonds

The weakening inflation pressures globally have increased reasons to believe successive rounds of rate reductions and QE across the globe. The Fed’s mid cycle 25bps rate reduction and the rally in bonds in Europe which is pushing the yields to historic low levels seems to be pricing in some probability of recessionary conditions in the globe. This rally in bonds is expected to have a spill over positive effect on Indian bonds as well. Additionally, Indian policy makers also seems to be front loading the easy monetary policy action to support revival of growth whilst the NBFC and HFC deal with problems of lack of investor appetite in the capital market and lack of liquidity. However, the government’s intent to pick up first loss of 10% for upto Rs. 1 lakh crore of NBFC loan is a step in the right direction.

The cumulative rate reduction has been 110bps from the beginning of the year, including the last rate cut of 35bps. However the drop in the bank lending rates has been a fraction of this 110bps. The lack of risk appetite amongst banks and lack of equity capital has been an impediment for the banks to reduce the lending rates.

We also feel that improvement in the liquidity in the hands of the banks will help in transmission of lower rates into the economy.

The eventual drop in interest rates should help in balancing the overall leverage across sectors over a period and ideally may help in attracting equity capital as earnings from savings and debt investments move lower. However, it remains to be seen whether this theoretical cycle follows through in India in this environment.

Restraining of the fiscal deficit target at 3.3% for FY20 and proposal to move overseas for part government borrowings has been cheered by the debt investors and has allayed the fears of excessive government borrowing to some extent. However, the confusion about the size, timing and certainty has led to sharp bear moves in the bond market.

Outlook –

We reason that the slowing domestic growth is due to both slowing global growth and slowing domestic consumption. Headline CPI (presently at 3.15%) for CY20 is expected to be comfortably well within 4% due to benign oil prices, drop in core inflation and soft food prices. The drop in core inflation in India to ~ 4% levels in the recent months after staying at over 5.5% for the last few years highlights the slowing domestic consumption.

Thus with slowing growth and high real interest rates, RBI is likely to continue the rate reductions and attempt to push lower rates into the economy. However, drop in repo rate do not always guarantee lower borrowing cost and hence we feel RBI may infuse liquidity so as to help lower the deposit rates of the banks and enabling them to price their loans cheaper.

In this environment we urge investors to start selecting funds in alignment with their investment horizon and longer depending on their individual risk appetite. Some additional fund duration over an investors investment horizon should work favorably, as the risk return matrix is tilted towards lower rates. We expect the actions of RBI to create additional demand for gilts and bonds in this environment.

The risks to this view emanate from higher government borrowing calendar of FY20. However, it may get neutralized through creation of higher demand for gilts and bonds by infusing liquidity into the system by RBI, OMO and or from higher demand for Indian bonds from foreign investors amidst low rates globally and the recent transfer of higher reserves from RBI to government.

 

 




 

 

 
DISCLAIMER: These views have been expressed by the fund managers of Invesco Asset Management (India) Private Limited. All opinions included in this article constitute the authors’ views as of this date and are subject to change without notice. The stocks referred in the above content, if any, are for the purpose of explaining the concepts and should not be construed as recommendations from Invesco Asset Management (India) Private Ltd. (Invesco Asset Management (India) / Invesco Mutual Fund). The Fund may or may not have any present or future positions in these stocks. The commentary is for information purposes only and not an offer to sell or a solicitation to buy units of Schemes of IMF. All figures, charts/graphs, estimates and data included in this article are as of this date and are subject to change without notice. The data used in this material is obtained by Invesco Asset Management (India) from the sources which it considers reliable. Neither Invesco Asset Management (India) nor any person connected with it accepts any liability arising from the use of this information or in respect of anything done in reliance of the contents of this information. While utmost care has been exercised while preparing this content, Invesco Asset Management (India) does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. This information alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. The recipient of this material should exercise due caution and/or seek independent professional advice before making any investment decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
  • Fund Manager Meet

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Read

    27th June, 2014

  • Webcast

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Play

    27th June, 2014

  • Conference Call

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Read

    27th June, 2014

  • Fund Manager Meet

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Register

    27th June, 2014

    4.30 pm – 6.30 pm
  • Webcast

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Register

    27th June, 2014

    4.30 pm – 6.30 pm
  • Conference Call

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Register

    27th June, 2014

    4.30 pm – 6.30 pm
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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