Insights

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.

June 2019

Macro Economic Review
 
 

June saw positive moves across fixed income and currency due to host of domestic and international factors. RBI was supportive of markets by cutting repo rate by 25 bps to 5.75% and changing monetary stance to accommodative from neutral. Global growth also showed signs of slowing making Federal Reserve System (FED), European Central Bank (ECB) and Bank of Japan (BoJ) turn dovish and causing yield curves to decline. Foreign Portfolio Investment (FPI) inflows continued in June with $150 mn inflows in equities and $900 mn inflows in fixed income. Sensex moved down by 0.8%, 10 year G-sec yields were down by 26 bps and INR showed modest appreciation of 1% vs the USD.

Liquidity conditions within the banking system continued to improve on back of government spending, FX inflows and OMOs conducted by RBI for INR 27,500 crores. Corporate bond yields came down by 9 bps for the month but spreads remained high as caution in NBFC sector remained order of the month.

Headline Consumer Price Index (CPI) for the month of May came in at 3.05% vs expectation of 3.05% and previous month at 2.98%. Primary contributor to the uptick was food inflation, which increased from 1.38% to 2.03% and was at its highest level over the last 9 months. Core inflation, however, declined sharply from 4.5% to 4.2% and is showing signs of economic slow-down.

IIP rebounded in May with an increase of 3.4% vs a negative growth in prior month. However, manufacturing Purchasing Manager’s Index (PMI) of 52.7 and services PMI of 50.2 continued to be near 7 month lows and pointing towards growth slow-down. 

Oil prices for the month increased by 3% on back of geopolitical tensions between US and Iran. Trade deficit for May was largely flat at $15.36 bn vs $15.33 bn in April 2018. Exports increased by 3.9% y-o-y while imports rose by 4.3 %. Full year Current Account Deficit (CAD) came at 2.1% of GDP. FX reserves have climbed steadily over the past six months and, at US$426 bn, are at all-time highs.

On the global front, yield curves collapsed on back of weakening global growth and dovish ECB, FED and BoJ. The downward move in global yield curves means now nearly $13 trillion worth of fixed income securities are yielding below zero as per Bloomberg. Trade war between US and China seems to be taking its toll on global manufacturing and trade with global PMIs continuing to come down sharply.  Markets are pricing in rate cuts in Europe and US and this has caused the $ to weaken against EMs. Gold price in USD has seen a strong rally in June and has increased by 8%.

Overall June has seen a big rally in fixed income markets on back of repo rate cut and stance change to accommodative by RBI as well as good support from dovish global central banks. Systemic liquidity improved due to government spending and liquidity injection by RBI. Growth continues to slow-down and all focus in July will be on new budget proposals and fiscal deficit.

 
 
 

 

  

 

Equity Market

 

  

In contrast to global markets, India equities were down (Sensex down 0.8%) as Geopolitical tension between the US and Iran, progress of US-China trade talks, retaliatory tariff from India on US goods and slow progress of monsoon were some of the factors that weighed on sentiment. In terms of domestic economic activity indicators, barring consumer credit growth, electricity consumption and cement volumes, most other indicators like auto sales, consumer durable production and air passenger growth continue to remain subdued. Lower growth momentum and inflation trajectory remaining below the 4% mark prompted the MPC (Monetary Policy Committee) to deliver the third consecutive rate cut of 25 bps in June.

Metals, Utilities and consumer durables were the only sectors in the green, whilst Pharma, Energy, Auto and Cement were the top laggards in the month. FPIs continued to invest in the Indian market with US$225 mn inflows in June (US$11.4 bn in CYTD19) while Domestic Institutional Investors (DIIs) bought US$497 mn worth of equities while capital market activity showed some pick up, as the elections were over.

Even as global markets are reflecting anxiety on US growth prospects, our global in-house view remains that of steady expansion with low inflation leading to lesser market volatility than in 2018. Since the last 6-8 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. 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. Recent growth challenges seen across few sectors of the market are however unlikely to abate in a hurry and hence may keep earnings growth subdued for a few more quarters.

As we go to print, the Govt today has laid down its Union Budget for FY20, the first in the second term of the Modi Govt. On initial examination, the key focus of this Budget is to continue on the path of fiscal consolidation and widen sources of revenue generation. While some signals of relief to address recent stress of non-banking finance companies were announced, the Budget stopped short of providing concrete plans to resuscitate the recent growth slowdown.

From a portfolio management standpoint, we continue to largely confine ourselves to a bottom-up approach to stock selection and portfolio construction until stronger evidence of more broad-based growth emerges. We maintain a pro-cyclical stance and some portfolio shifts to capture a potential industrial/manufacturing recovery have been undertaken. Cyclicals with comfortable balance sheets and attractive valuations or companies with strong franchise value but presently facing growth headwinds do attract our attention.

 
 

 
 
Fixed Income Market
 
 

The drop in the bond yields continued over the previous month. The decline in yields was in the range of 15-20bps. The reasons for the drop in bond yields were mostly unchanged:

  • Repo rate reduction of 25bps and change in monetary policy stance to accommodative from neutral
  • OMO announcement by RBI
  • Resounding political mandate for the existing government leading to an improvement of investor confidence
  • mproved sentiment amongst foreign investors leading to continuation of foreign inflows
  • Slowdown in domestic growth leading to expectations of higher doses of rate reduction and liquidity infusion from RBI in the coming months
  • Slowdown in global growth particularly in US and drop in US treasury yields by about 65bps YTD

The weakening inflation pressures globally and domestically has opened up reasons to believe successive rounds of rate reductions and quantitative easing (QE) across the globe. It’s a quick 360 degree change for advanced economies from the beginning of the year. This has led to markets reacting positively in favor of bonds across the globe including India. Additionally Indian policy makers also seems to be gearing up for a full-fledged easy monetary policy action to support the revival of growth whilst the NBFC and housing finance companies (HFC) deal with problems of lack of investor appetite in the capital market and lack of liquidity at this time of trust deficit and widening Asset & Liability Management (ALM). Hence we expect the MPC members to push through higher doses of rate reduction and infuse liquidity in order to address the deficit liquidity within the Banking sector (addressed to some extent), NBFC and HFC as well.

This anticipated action of RBI is expected to work towards improving the surplus liquidity within the banking system and eventually help in the transmission of the lower rates for the borrowers. The drop in interest rates should also help in balancing the overall leverage across sectors and help in attracting equity capital as costs of savings and investments move lower.

Restraining of the fiscal target at 3.3% for FY20 and proposal to move overseas for part government borrowings has been cheered by the debt investors and has now shredded the fears of excessive government borrowing.

Outlook

We reason that the slowing domestic growth is due to both slowing global growth and slowing domestic consumption.  Headline CPI (presently at 3.05%) 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 sub 4.5% 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 the lower rates into the economy. However, drop in repo rate do not always guarantee lower borrowing cost and hence we feel RBI may take additional actions to infuse liquidity so as to help lower the deposit rates of the banks and enabling them to price their loans cheaper.

As the market reposition to a strong political mandate at the Centre and chances of steep repo rate reduction, amidst widespread slowdown, whilst there will be challenges on the fiscal front due to slowing tax collections, we urge investors to start selecting funds in alignment with their investment horizon and marginally longer depending on their individual risk appetite. Some additional duration over the 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 through rate reductions and additional liquidity.

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.

 
 
 
 

 

 




 

 

 
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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