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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.

October 2020

Macro Economic Review
 
 

Economic recovery continued to gather pace over last three months as post lock-down easing measures along with easier financing conditions continue to bear fruit.

Industrial output growth in August, although negative, witnessed an improvement for the 6th month in a row across key industrial sectors. The Index of Industrial Production (IIP) growth for August at -8% was better than the -10.8% recorded in July. There has been a broad-based improvement across the 3 main segments of the IIP i.e. mining, manufacturing and electricity as well as consumer durables and infrastructure products.

Eight core sector output grew -0.8% in September, an improvement from the -7.3% in August. Higher coal, electricity and steel output boosted overall core sector output. September figures were partly aided by low base of previous year (-5.1% growth in Sep 19).

The Manufacturing Purchasing Manager’s Index (PMI) in October rose to 58.9, from 56.8 in September. This was the highest increase in company output in 13 years amidst robust sales. Growth was led by the intermediate goods category, but there were improvements in the consumer and investment goods sub-sectors as well. Although firms increased their purchase of inputs, employment component declined.

The Services PMI rose further in September to 49.8, to the highest level since February. It was 8 points higher than the reading in August 20 (41.8). Whilst the headline number is encouraging, the details were mixed with new business and weak employment components, while input costs rising at a quicker pace.

Retail inflation rose further to a 8 - month high of 7.3% in September, supported by the sustained high price levels in the food segment as well as miscellaneous items components of the Consumer Price Index (CPI). Core inflation for September stood at 5.7%. Wholesale inflation in September 2020 rose to a 7 - month high of 1.3%. The rise in wholesale inflation was largely due to the elevated price levels of food components viz. vegetables as well as the rise in prices of manufactured products.

GST collections totaled INR 1.05 lakh crores in October, the highest collections since February and 10% higher than that in September. However, part of the increase in collections is due to payments of prior months being done now. April-October, GST collection amounted to INR 5.59 lakh crore, which are 20% lower than the corresponding period of last year.

The central government’s fiscal deficit for the first half of 2020-21 at INR 9.1 lakh crore is 115% of the budget estimates and 40% higher than that of H1 2019-20. Revenue receipts in H1 2020-21 have declined by nearly 32.5% and are only 27% of the budget estimate. Only 3% of budgeted receipts from disinvestment have been collected in the first 6 months of the financial year. Revenue expenditure accounted for 89% of the total expenditure incurred in H1 2020-21 and registered a 1% growth y-o-y. The capital expenditure incurred in H1 2020-21 was 40% of the budget estimate and 12% lower than that in H1 2019-20.

On the trade front there are encouraging signs with pick-up in exports as well as imports. Exports in September were 6% higher y-o-y and 21% m-o-m. There has been a fairly broad-based pick up in exports across major commodities in September. Barring marine products and gems & jewellery, the other major commodities have registered positive growth. On a monthly basis, export gains were led by the manufactured products – with petroleum products witnessing the highest growth followed by chemicals. Imports in September were 20% lower y-o-y but 3% m-o-m. There was a notable improvement in the import of transport equipment, iron &steel as well as pearls and precious metals. Imports of precious metals –gold and silver however was sharply lower than that in August.

The sharp rise in exports coupled with tepid imports saw the trade deficit fall to a 3 - month low of $2.72 bn in September. The Rupee was largely stable, supported by higher foreign capital inflows and low trade deficit. Foreign exchange reserves increased to a fresh record high of $561 bn in October.

With better lending conditions and government fiscal spending percolating into the economy, activity levels have started to improve across various sectors. A good monsoon season has aided rural economic growth where demand continues to be strong. Whilst the upcoming festive season has provided an uptick in consumption demand, investments continue to be tepid and are unlikely to see a noteworthy improvement during the course of the year. Government spending has supported the non-urban economy and is expected to remain strong. Green shoots of economic growth have turned greener and need to become self-sustaining. Key going forward will be job growth and income growth, which can help repair consumer balance-sheets and in turn corporate balance sheets.

  
Equity Market

 

  

The BSE-30 and Nifty-50 indices gained 4.1% and 3.5% in October in local currency terms. On the global front, focus shifted to the upcoming US Elections and lockdowns returning across Europe while on the domestic front, monthly indicators suggested a fast return to normalcy of economic activity even as both Covid cases & positivity rate continued to decline in India. The domestic recovery gained further strength with most high frequency indicators like GST collections, Power demand, E-Way bills (trucking activity), Rail Freight volume, Auto sales etc. all showed further improvement. The Monetary Policy Committee (MPC) kept the repo rate unchanged at 4% but retained the ‘accommodative’ stance. Second round of fiscal stimulus worth ~0.4% of GDP was announced by the FM which comprised of mix of consumption nudge primarily focused on govt. employees and an infra push but most of it being in the form of advance or already budgeted expenditure meant smaller additional cash outgo for the govt. With respect to the ongoing quarterly result season, earnings so far, have been largely better than expectations as sequential growth and cost controls led to beat for most Nifty companies who have reported results. MSCI (Morgan Stanley Capital International) announced that it will implement changes in Foreign Ownership Limits (FOL) in its indices containing Indian stocks with the November rebalance, which could potentially trigger foreign inflows of >$2bn. In flows, Foreign Portfolio Investors (FPIs) bought US$2.7 bn worth of equities in the month while Domestic Institutional Investors (DIIs) sold US$2.4bn. Within sectoral indices, Bankex, Realty, Infotech and Power outperformed, whereas Healthcare, Auto, Metals, FMCG and Oil & Gas underperformed the BSE Sensex.

At the time of writing this piece, the US election is entering its final stages and current trends point to a close finish. However, the US and global markets appear to be steadily shifting focus to post-election events, key among which is govt’s ability to regain control on the second wave of the pandemic observed in some of these economies and agreeing upon the next round of fiscal support that may be necessitated.

For India, we have been highlighting the importance of underlying earnings support for market valuations to hold up and in that regard the current result season has been very enthusing. A broad-based improvement by bulk of corporate India in a quarter, wherein activity levels are still short of the pre-covid peak and material street upgrades to earnings is comforting. Additionally, the distinct trend of reduced leverage and improving balance sheet strength seen in multiple sectors including banks and financials is creditable. Even as earnings expectations may remain fluid for a few quarters, qualitatively we would expect them to trend positively hereon.

Global and domestic monetary policy remains a key risk in our view and inflation readings of the recent past, though mainly led by supply-side dynamics, can confound policymakers. However, with Govt’s borrowing calendar for 2HFY21 largely unchanged v/s earlier and RBI’s continued dovish messaging, we expect interest rates and liquidity to remain supportive for the foreseeable future.

As a fund house, our portfolio positioning, while balanced at one level, does tilt towards an eventual cyclical recovery. Presently, we are incrementally inclined to gradually add to segments of the market such as financials, parts of consumer discretionary and industrials that are probable beneficiaries of a strengthening economic cycle and which still lag the broader market. Earnings-based valuation parameters would stay elevated for a while but need to be seen in the context of benign interest rates and depressed earnings cycle else they may throw up incorrect conclusions. Yet, investment choices of today require to be adequately justified on long-term intrinsic or franchise value of enterprises for them to attract our attention. We continue to adopt the middle path in portfolio construction with regard sector exposure, market cap bias and balance between growth and value.

 

 
 
Fixed Income Market
 
 

Ever since the economy has started to open after 4 months of strict lockdown the economic indicators have started to showcase some revival. While initially it appeared to be a quick ‘V’ shaped recovery it was plateaued out soon after. The last month seems to be a strong recovery for the automobiles and two wheelers.

Notwithstanding the recovery of the economic indicators in the last few months, the Q1 GDP shrank by a historic 23.9% and is expected to be an ~10% shrinkage for the whole FY21. Governments efforts to revive the economy and control the spread of the virus remained highly challenged due to a variety of reasons. While there have been few economic stimulus announcements the monetary policy measures from RBI possibly remained more relevant in these times. Now in the last few weeks the active number of positive Covid cases have started to drop, igniting some positivity across the country and encouraging the government to open up restaurants, trains and allowing more people for commercial activity.

The monetary policy actions of RBI along with the liquidity infusions from RBI has pushed bond yields lower and helped soften both deposit and lending rates. The headline Consumer Price Index (CPI) data has posed hurdle for RBI and MPC members to potentially continue with the easy monetary stance. While last month RBI Governor did mention that the rise in inflation will be looked through, it remains to be seen if continued rise in inflation or a protracted long period of high inflation doesn’t dissuade the Governor. High CPI inflation along with growth contraction has been perplexing for the policy makers.

Deteriorating asset quality within the banking system seems to be delaying the credit growth despite surplus liquidity within the banking system. We expect the real non - performing assets (NPA) levels within the banking system to move into double digits and approx. closer to 15%.

Going ahead, we do feel that there is a fair chance for the inflation to soften if the supply bottlenecks are addressed by the government. However, the persistent strong food prices over the last few months seems to be refusing to moderate. The spillover of higher food prices into non-food articles may cause rise in the core inflation and slowdown any possible moderation in the headline CPI. Continued open Market Operations (OMO) in both central govt. bonds and now state govt bonds did soften the bond yields over the last few weeks. However, yields have remained volatile and there has been some retracement in yields too. However, the drop in bond yields has been short-lived since the tax revenue of the government has remained benign. However, it’s expected the bond yields may start to move south in case the tax collections pick up over the months due to opening up of the economy and the governments steadfastness to hold on to the original borrowing calendar.

Outlook

• We expect growth to remain soft to contracting, and inflation to eventually slow down over the next few months. However, it would depend on food prices. RBI forecasts a contraction of GDP in FY21.
• For economic recovery the private sector investments and overall consumption needs to recover. Both fiscal and monetary stimulus works as an enabler for pick up in consumption.
• The challenges of the banks (led by rise in NPA, drop in capital adequacy) is the headwind for credit growth.
• Expect rate reductions to restart along with liquidity infusion from RBI. We would expect OMO and Long Term Repo Operation (LTRO) to continue over the months.
• Yields to remain benign and the steepness of the yield curve to reduce as and when increased OMOs are announced by RBI.

Recommendation

• Recommend investors to remain invested.
• Investors are also urged to invest in high credit quality funds only thereby remain insulated from the stress in the credit environment.
• Investors ideally should also get invested into debt funds before the foreign inflows re-start.

 

 
 
 
 

 

 




 

 

 
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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