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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 2022

Macro Economic Review
 
 

Softer than expected CPI in the US for October 2022, driven by declining goods and fuel inflation, seems to be providing evidence of a peak in global inflationary pressures and hence, some softening of financial conditions. The Domestic economy remains robust driven by strong consumer demand and bank credit growth.

The CPI for October 2022 fell to 6.8% YoY from 7.4% in September. Inflation in urban India fell to 6.5% from 7.3% in September, while that in rural India fell to 7% from 7.6%. Food inflation came in at 7%, led by cereals, vegetables, and oils and fats. Fuel and light inflation came in at 9.9% vs. 10.4% in September 2022. Core inflation for October 2022 came in at 6% YoY vs 6.3% in the previous month. Inflation, while softening remains sticky, especially as core inflation remains high.

India's GDP grew by 6.3% YoY in the second quarter of FY23. Private final consumption expenditure grew by 9.7% during the September 2022 quarter. The government final consumption expenditure declined by 4.4% YoY. Gross fixed capital formation grew by 10.4%. Imports grew by25.4% YoY and exports grew by 11.5% YoY.

Manufacturing Purchasing Managers' Index (PMI) inched up to 55.7 in November 2022 from 55.3 in October 2022, seventeenth consecutive month of expansion. Companies reported a strong increase in new orders with declining input price pressures. Services PMI increased to 56.4 in November 2022 from 55.1 in October 2022, on the back of strong new orders and employment. Input cost inflation accelerated, but companies passed over part of the cost increase to consumers. Business confidence also improved.

The index of eight core industries rose by 0.1% YoY in October 2022 vs. 7.8% YoY in the preceding month with increase in electricity generation and coal. Output of crude oil, natural gas, and refinery products fell. Steel production grew whilst cement production fell. The cumulative output of eight core industries during April-October 2022 rose by 8.2% YoY.

Central Government's gross fiscal deficit touched 45.6% of its annual budgeted target by October 2022 vs 36.3% in the previous year. Government expenditure increased by 17.4% YoY, during April-October 2022. Revenue expenditure rose by 10.2% YoY and capital expenditure rose by 61.5% YoY. On the revenue side, net tax collections rose by 11.2% YoY during April-October 2022 with Gross Tax collections up 18% YoY and off-set with higher share to States. Non-tax revenue receipts declined by 13.6% YoY.

The Merchandise trade deficit increased in October to USD 26.9bn from USD 25.7bn in September, with April-October deficit at USD 173.5bn. Exports fell by 16% MoM to USD 29.8bn in October 2022 with broad-based decline. During Apr - Oct 2022, exports have now increased by 12.6% YoY to USD 263bn. Imports fell by 7.3% MoM led by a drop in non-oil-non-gold imports. During April-October 2022, imports saw an increase of 33.1% YoY to USD 436.8bn.

GST collections remained healthy at INR 1.46 trillion, albeit declining 4.1% MoM. Bank credit growth for November 2022 continued to be strong, at around 16.5% YoY. FX reserves as of the end of November 2022 saw a monthly increase of USD 19 bn to end at approximately USD 550 bn.

Overall, domestic demand and activity levels remain robust. Input price pressures whilst being high have softened. Global commodity prices remained benign in November, with a decline in oil prices. Financial conditions eased in November as peak inflation and interest rate expectations started to ease. India’s banking sector remains in a strong position to support consumer demand and likely private sector capex.

  
Equity Market

 

  

The Nifty Index closed at an all-time high level in November. It gained 4.1% to close at 18,758. Mid-cap and small-cap indices underperformed large-cap indices and were up 2% and 3%, respectively. Almost all sectoral indices closed higher than the previous month, except for auto, consumer durables, and power. Metals, Oil & Gas, and IT indices were the top gainers and were up 6.5%, 5.8%, and 5.5%, respectively. Though geo-political tensions and rising Covid cases in China initially weighed on investor sentiment, but subsequently, investors cheered the lower-than-expected US CPI inflation that fuelled hopes that the Fed could tone down its aggressive pace of interest rate hikes and falling crude oil prices. During the month, FPIs bought US$4 bn worth of Indian equities in the secondary market, while DIIs sold ~ US$700 mn.

Q2FY23 Earnings Season: In 2QFY23, NSE500 universe reported sales/EBITDA/ adjusted PAT growth of 29%/3%/-3% YoY. The aggregate earnings were marred by a sharp drag from global commodities (i.e. Metals, Oil and Gas) and also Cement, which posted a sharp earnings decline); Financials continued to drive the performance. The NSE500, excluding BFSI, reported an adjusted PAT decline of 23% YoY. Earnings growth, excluding Metals and Oil & Gas, stood at 33% YoY in 2QFY23.

Growth in domestic high-frequency indicators continues to exhibit healthy trends bolstered by reopening vibrancy, pent-up demand, and festive demand. External indicators remain weak, with exports, in particular, moderating to their lowest since March 2021, due to global headwinds truncating the global growth trajectory. GST collection in November (reflecting activity in October) continued to track above the INR1.4tn mark for the ninth consecutive month (vs INR 1.52tn in October), while YoY growth slowed to 11% in November. PMI manufacturing was largely steady at 55.7 in November vs. 55.3 in October. Services PMI gained momentum as it rose to a 3-month high of 56.4 in November from 55.1 in October. Credit growth remained resilient at 17.2% YoY in November vs. 17.8% YoY in October.

A combined takeaway of what has transpired out of the result season and high-frequency economic indicators described above is that while India’s economy is on a steady growth path relative to probably other global markets, this appears sufficiently baked when translated into corporate earnings expectations and with the earnings upgrade cycle of the last 5-6 quarters now levelling off, India’s valuations multiples may find it challenging to expand further without adequate support from global growth and market recovery. While few central banks have either actioned lower doses of rate hikes or intend to do so going forward, global growth markers seem to suggest a further growth slowdown perhaps coming out of the lagged effect of the strong rate hikes in 2022. We reckon the combined impact of recent and future rate hikes can show up more decisively in the form of slower growth and lower inflation during 2023. For central banks around the world, the threshold for lowering the quantum of interest rates perhaps seems to have been attained, but that for ending rate hikes may have not.

While we remain sanguine about India’s structural growth drivers, the present global macro backdrop can pose headwinds for the near range domestic growth outlook. India's external sector growth can come under pressure even as domestic demand maintains strength. This may restrict the RBI’s ability to move the interest rate curve independent of global considerations. Also, India’s corporate sector growth in the post-Covid world has seen a strong positive influence from gains from the unorganised sector, the pace of which can likely slow in the coming times as the unorganised sector regains strength as supply chains normalise and India’s growth becomes more broad-based. Corporate debt levels too have normalised over the past two years, and it is therefore, imperative for a synchronised strengthening of the private and public investment cycles to commence for India’s future growth trajectory to develop long-term sustainability.

Our preferred portfolio stance has been India-centric growth sectors for much of this year, and this largely stays but pockets of value may have started to emerge in some of the global-oriented sectors such as technology, pharmaceuticals, and commodities. Some of these would also receive support for their earnings from a weak currency. Overall, we stay constructive on India’s improving economic cycle and inherent stability and believe the balance of this year will provide good opportunities for portfolio and investment planning for potential returns during 2023 and beyond.

 

 
 
Fixed Income Market
 
 

Global backdrop turned lesser challenging with many Central banks, especially the US FOMC, hinting to tone down the jumbo rate hikes to a moderated one as the inflation trajectory is expected to moderate, further correction in commodity prices, lowering of global interest rates by 25 – 35 bps and most critically, relatively stable currency market with USD giving up on its strength to an extent.

Domestic interest rates also rallied in line with the global rate movement by ~15-25 bps across the yield curve, with upto 5-year segment performing relatively better. Corporate bonds as well rallied though marginally lower as compared with the G-Sec.

Domestic headline inflation expectedly softened to 6.8% y-o-y from 7.4% in September, largely led by a base-effect led drop in food inflation, especially vegetables. Core inflation remains entrenched at 6% YoY vs. 6.3% in the previous month, with most items witnessing no let-up in m-o-m momentum.

FPI inflows increased considerably to ~INR 390 bn (~INR 35 bn in previous month) led by healthy equity buying, while the debt inflow turned marginally positive during the month. Fx reserves reversed the declining trend of more than 6 months and surged by ~USD 20 bn to end the month at more than USD 550 bn. Pressure on INR eased off, to some extent, during the month as USD gave up its strength on the back of expected moderation in rate hike by US FOMC.

Outlook

As a welcome relief, the FOMC has indicated the possibility of a slower rate hike going forward, although it has also alluded to a higher terminal policy rate than earlier expected as the job market remains tight & on robust private consumption. Few other Central banks have already started with lesser quantum of rate hikes.

In the recent monetary policy, MPC has also moderated the rate hike to 35 bps, which is also the lowest quantum in the current rate hike cycle (40-50 bps rate hikes in last four policies). At the same time, MPC has continued to maintain its caution on inflation, highlighting the sticky core inflation, higher demand-pull factors, and global uncertainties that can pose upside risks to the inflation trajectory.

MPC decision to continue with “withdrawal of accommodation” stance indicates that the rate hike cycle is not over yet. We expect the future rate actions would be data dependent, and they will be watchful of evolving global & domestic environment. Given the current global as well as domestic indicators, we expect MPC to further moderate its rate hike to 25 bps in Feb 2023 to reach a policy rate of 6.5%. This may provide a safety cushion to absorb the global spillovers to an extent. India’s Foreign Exchange (FX) reserve has also improved over the last few weeks, which has also provided some relief.

Any further rate hikes beyond a policy rate of 6.5% would be more determined by global factors than domestic factors.

As the global and domestic rate hike cycle reaches towards the end over next few months, interest rate volatility is also expected to reduce compared to the heightened volatility witnessed over the past few months. At the same time, impact of future rate hikes has already been largely factored in specifically in the 2 – 5 years segment, while the long end may remain under pressure as the fiscal supply overhang is expected to continue for next year as well.

Credit environment remains healthy; however, current narrow spreads of AA / AA+ over AAA bonds do not provide favorable risk adjusted reward opportunities, and we expect il-liquidity premium to increase sharply over a period of time thereby posing mark to market challenges for this segment.






Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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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