Invesco Mutual Fund

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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.

May 2021

Macro Economic Review
 
 

Covid-19 cases due to second wave in India continued to cause disruptions and lock-downs in month of May. Given the wide-spread nature of cases in second wave, most states imposed severe lock-downs till end of May. Vaccination drive lost a bit of momentum in May due to shortage of vaccine availability, although measures have been taken to ensure supply potential increases significantly over coming months. Activity levels across the economy have fallen sharply over the last few weeks.

India’s economic recovery continued to strengthen in the last quarter of FY21 before the onset of Covid-19 second wave. GDP grew by 1.6% in the fourth quarter of FY21 from a year ago, an improvement over the 0.5% growth in third quarter and the negative growth of -24.4% and -7.4% in the first two quarters of FY21. Economic growth for full year FY21 came at -7.3%, slightly better than the -8% growth projected in the second advance estimate. The growth in output in Q4 FY21 was broad-based across sectors. Agriculture, industry and services sector witnessed positive yoy growth during the quarter. The industrial sector grew by 8% in Q4FY21 aided by the higher output in manufacturing (+6.9% yoy), electricity, gas, water & utility services (+9.1% yoy) and construction (+14.5% yoy). The favourable base effect also benefitted the growth numbers. Mining and quarrying sector recorded negative growth during the quarter (-5.7% yoy). Agriculture sector grew by a strong 3.1% in Q4 FY21, over a high base of 6.8% growth in the same period last year. The services sector returned to growth in Q4 FY21 after three quarters, with a growth of 1.5% yoy. This improvement was led by finance, real estate & professional service (+5.4% yoy) along with public administration (+2.3% yoy). Contact intensive hotels, transport, trade and communication continued to witness lower levels of activity and this dragged down the output of the service sector.

Q4 FY21 saw a notable pick- up in investment and consumption compared with the preceding three quarters. Private consumption witnessed a growth of 7% yoy. Government consumption witnessed a sharp increase, growing by nearly 25% yoy in Q4 FY21. Investments too picked with Gross Fixed Capital Formation (GCFC) growing by 18% yoy. On an annual basis, private consumption in FY21 was -6% yoy, investments were down -9% yoy. Only government consumption rose in FY21 by 8% yoy due to the various fiscal measures undertaken.

The CPI inflation moderated to 4.3% yoy in April from 5.5% in March, marginally above consensus expectations of 4.1%. Favourable base effect of April 2020 played a part in the low print. Food & beverage price inflation moderated to 2.7% yoy from 5.2% in previous month, in part due to a favourable base. Fuel price inflation picked up to 7.9% yoy vs 4.4% in March. Core inflation moderated to 5.2% yoy in April vs 5.76% in March 2021. Within the core inflation basket, price pressures were broad-based and are indicating that supply-side constraints and rising commodity prices are driving underlying inflation.

The services PMI (Purchasing Manager’s Index) fell into the contraction zone of 46.1 in May from 54 in April, while the manufacturing PMI moderated to 50.8 from 55.5. Both their performance is far better than the sharp crash seen during the first wave in 2020, but a key area to keep a watch this time around is building input cost pressures for both sectors.

Robust global growth and base effects saw exports rising strongly. But the slowdown in domestic demand led to a sharper fall in core imports to 2pp below their pre-pandemic levels. May trade deficit declined from $-15 bn in April 2021 to $-6.3bn. Exports were up 67% yoy largely due to base effects. Imports rose by 69% yoy to US$45.5 bn. Month over month however, imports registered a sharp fall of 16% owing to lockdowns. While non-oil imports grew 51% yoy, it registered a fall of 16.6% mom. Non-oil, non-gold imports were flattish over last month. YTD FY22 trade deficit is at US$21.4 bn (vs US$10.4 bn previous year). The foreign exchange reserves ended May 2021 at USD 593 bn – up USD 9 bn for the month.

Industrial production (IP) growth picked up sharply to 22.4% yoy in March from an upwardly revised -3.4% in February. Favorable base effect from March 2020 was largely responsible for the sharp increase. However, the underlying sequential monthly momentum remained strong and strengthened further with 1.7% mom increase vs 1.3% mom increase in February. Manufacturing growth came in at 25.8% yoy - driven by machinery and petroleum manufacturing.

The eight core sectors registered a double-digit output growth of 56.1% yoy in April compared with 11.4% yoy growth in March 2021. The high growth in output can be attributed to a low base effect (-37.9% in April 2020) as the nation-wide lockdown imposed last year brought production activities to a standstill resulting in huge output losses. The expansion in April has been led by very strong growth in output of steel and cement. All sectors, except crude oil have witnessed positive growth during the month. However, the core sector output has been lower by 15.1% mom in April vs March with a broad-based contraction across all segments.

E-way bills which is a good early indicator of activity levels saw a sharp drop from 7.1 crores in March 2021 to 5.9 crores in April 2021 and 3.8 crores for the month of May 2021.

Whilst financing conditions have continued to remain benign compared with last year, domestic demand and activity levels have softened across many sectors. Service’s sector have suffered sharper slow-down given lock-downs. Manufacturing sector, whilst also contracting, seems to be slightly better positioned given improving global growth outlook. The RBI announced liquidity and loan restructuring measures across retail, SME and MSME sectors, which will likely help to soften the pain for financial institutions. Liquidity conditions remain benign and with strong foreign exchange reserves, any spill-over risks can be better managed. The pace and scale of Covid-19 vaccination remains an important driver of growth for rest of FY22.

  
Equity Market

 

  

Indian markets touched another high in the month of May with the BSE-30 Index closing at 51,937 (+6.5%) almost matching Feb highs while the Nifty-50 Index ended at a new peak at 15,583. The BSE Mid-cap. and BSE Small-cap. indices also recorded new highs, gaining 7.1% and 8.9% respectively. Key driver of this move seemed to be the rapid decline in daily new infections which at ~150k were down ~60% from Second Wave peak. Despite this fall, several states cautiously decided to extend restrictions by another fortnight, albeit with some relaxations. India’s vaccination drive continues at a healthy pace of ~2-3mn/day, taking total adult population inoculated to ~17%/5% with single/both doses.

During the quarter the Reserve Bank of India unveiled a series of liquidity measures to help banks support the healthcare infrastructure and small borrowers impacted by the second Covid wave. 4QFY21 Earnings were largely along expected lines with materials having the most significant beats while Consumer Discretionary and Financials reported modest misses. In terms of flows, both FIIs (Foreign Institutional Investors) and DIIs (Domestic Institutional Investors) were net buyers during the month with FIIs buying US$37 mn of Indian equities while DIIs also brought US$283 mn in the month of May. In sectoral trends, most defensive sectors underperformed while other sectors saw a broad-based rally.

Market confidence continued to build during the month of May as the second wave of the pandemic continued to subside, with daily cases now down more than 60% from peak (albeit still 35% above the peak scaled in Wave 1). The governments in key states like Maharashtra, Delhi, Gujarat and UP are seen indicating passive opening of the economy although cautiously and in phases. India’s vaccination trends also gained ground rising from nearly 1.5m doses/day to 3m/day during this month. While expectations of a possible Wave 3 are alive, we think a combination of higher symptomatic and asymptomatic cases, improving vaccination drive and better administrative preparedness of the Govts would likely lessen its severity and allow for normal economic activity to prevail. The market has largely ignored the short-term negatives of the pandemic but the longer-term implications of and lessons from the pandemic are still up for debate.

Markets have also taken their strength from the March 2021 earnings season and subsequent management commentaries so far, that depict reasonable resilience of earnings to commodity inflation and better preparedness of corporates to manage the inevitable impact on business during the upcoming quarter, due to the second wave. We reckon strong earnings contribution from commodity cyclicals and global businesses like pharma and technology may well compensate for shortfall in earnings caused by the second wave on domestic economic activity.

The outlook for developed economies, particularly the US remains sanguine led by 1) the fast pace of vaccinations, 2) USD 1.9tn fiscal Stimulus and counting, 3) strong household savings and 4) planned infrastructure push. While the Fed’s actions on monetary policy will be the most important topic of debate during CY21, its tolerance for higher inflation through average inflation targeting, unclear labour market conditions, its preference to action based on real data than anchoring to market expectations etc., all suggest present accommodative conditions to prevail for longer. However, Joe Biden’s order on May 26 to US Intelligence agencies to renew focus on the source of the Corona virus has the potential to trigger a further serious deterioration in US-China relations, and indeed China’s relations with the West in general. While it is going to be hard to prove this issue definitively, unless Beijing cooperates, investors should prepare themselves for a lot of noise on this issue in coming weeks and months.

We retain our view that the Indian economy should witness a recovery in 2021, albeit of a slightly lower intensity than before the onset of the second wave, but accelerate thereafter. Based on current assessment, globally oriented businesses, cyclicals and industrials, healthcare and technology will likely dominate most part of 2021 even as consumer sentiment gradually repairs itself from the impact of the second wave during this period. We accordingly configure our portfolios to tactically reflect preference for cyclicals such as financials, industrials, commodities etc. in the near-term. India, however, is well-positioned to commence on a new economic upcycle over the next few years. Our chosen path to portfolio construction is a balanced approach with regards to 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
 
 

India’s economic recovery strengthened further in the last quarter of FY21 to 1.6% y-o-y, an improvement over the 0.5% growth in third quarter and the de-growth of -24.4% and -7.4% in the first two quarters of FY21. Economic contraction for full year FY21 came at 7.3%, slightly better than the 8% contraction projected in the second advance estimate. The growth in output in Q4 FY21 was broad-based across sectors.

However, the start of FY22 has been impacted by a sudden 2nd wave of Covid-19, which has forced many States to enter into lockdowns to contain the spread. While the 2nd wave has peaked in early May 2021 and is witnessing a steady tapering since then, 1QFY22 growth is still expected to be adversely impacted, although to a lesser extent, as compared with 1QFY21 when national level lockdowns were in place. Sharp contraction in services PMI (Purchasing Manager’s Index) of 46.1 in May’21 from 54 in April’21 and manufacturing PMI to 50.8 from 55.5 reflects the economic disruption.

The CPI inflation moderated to 4.3% yoy in April from 5.5% in March, primarily driven by a favorable base effect and marginally above consensus expectations of 4.1%. Food & beverage price inflation moderated to 2.7% yoy from 5.2% in previous month, largely led by disinflation in vegetables, while fuel price inflation picked up to 7.9% yoy vs 4.4% in March. Core inflation (ex-Food, Fuel & Light) moderated to 5.2% yoy in April vs 5.76% in March 2021 benefitting from a base effect. Within the core inflation basket, price pressures were broad-based, indicating that supply-side constraints and rising commodity prices are driving underlying inflation.

Trade deficit in May fell sharply to $-6.3bn from $-15 bn in April 2021, largely on account of lesser imports (fell 16% m-o-m) due to lockdowns, which moderated the domestic demand & crude consumption. Exports remained healthy on the back of global economic recovery and increased by 5% over April 2021. While FY21 is expected to witness a current account surplus of ~0.9% of GDP, FY22 is again expected to slip in trade deficit as the economy returns to normal leading into high imports. The Foreign Exchange reserves has reached a record high of USD 598 bn and provides comfort on external stability.

Systemic Liquidity continues to remain in surplus, although the average systemic liquidity in May 2021 moderated to ~Rs. 4.6 lakh crores from the previous month of ~Rs. 5.4 lakh crores.

RBI in its June MPC (Monetary Policy Committee) policy continued with the accommodative policy stance & benign liquidity as long as necessary, to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target, going forward. RBI also announced the 3rd tranche of G-SAP (G-Sec Acquisition Programme) 1.0 of Rs. 40,000 cr (including SDL (State Development Loans) for Rs. 10,000 cr) and G-SAP 2.0 of Rs 1.2 lakh crore for 2QFY22.

Rates largely remained flat with a downward bias in few segments like 2 to 5 years supported by continued dovish MPC policy and also, as the market concerns on RBI’s unwinding of policy measures got pushed back amidst Covid-19 led disruption. During the month, 2 to 5 yr G-Sec rallied by 10 – 20 bps while the 10 yr G-Sec benchmark remained in narrow band of 5-6 bps during the month, before settling at 1 bps lower @ 6.02% on month end.

Outlook

Covid-19 2nd wave has delayed and posed the downside risk to nascent economic growth recovery. Downward revision of 1% in FY22 growth projection by RBI reflects the uncertainty on growth outlook due to pandemic, unless a large part of population is vaccinated. Amidst the growth disruption, RBI is expected to continue with the similar approach of lose monetary policy through accommodative policy stance, as well as, benign systemic liquidity as adopted last year to mitigate the impact of Covid-19 on economy. We expect RBI to give prime importance to the economic growth recovery & financial stability as of now, while ensuring that inflation remains within the inflation targeting framework, going forward. RBI’s recent measures on Covid-19 2nd wave & readiness to act swiftly further through various tools, reassurance of surplus systemic liquidity and G-Sec Acquisition Programme 2.0 points in the same direction.

On inflation front, the MPC estimates average inflation to remain ~5.1% for FY22, with risks balanced on either side. Inflationary risks can emanate from supply side disruption & rise in global commodity prices while normal south-west monsoons & comfortable buffer stocks can keep the food prices contained. Even as inflationary pressures persist as of now, RBI is expected to take comfort as long as the inflation remains within the inflation targeting framework of 2% to 6% and is not led by the demand driven factors.

Overall, given the uncertainty regarding economic outlook due to the impact of pandemic led state-wide lockdowns and the fears of subsequent Covid-19 waves, we expect MPC will give precedence to growth and thus the earlier fears of RBI’s policy unwinding measures are expected to be pushed further to next calendar year amid second wave of Covid-19 and will remain a function of growth revival, vaccination pace and inflation trajectory. RBI’s continued accommodative policy & liquidity stance, coupled with the G-SAP 2.0 programme is expected to reduce the volatility across the curve and ensure the orderly evolution of the yield curve by addressing the market concerns.

The policy stance to maintain ample liquidity is positive for short end of the yield curve, while the long end also gets supported by the active yield management by RBI through the G-SAP 2.0 and regular OMOs (Open Market Operations). We feel that 1-5 years segment of the yield curve continues to provide attractive opportunity from risk-reward perspective and should be a part of core fixed income allocation. Current yields at longer-end provides the benefit of high accrual, given the steepness of yield curve and some allocation at the longer end finds merit on the back of conviction that RBI will manage the yield curve.

Any broad - based recovery in Credit Environment is expected to be further delayed with some of the sectors like services, hospitality, retail, transportation etc. getting severely impacted by state lockdowns. Absence of RBI’s moratorium facility, like last time is also expected to put pressure on debt servicing capabilities of weaker credits. We believe dispersion between high quality & low quality credits will widen again and one has to be very careful & selective in going down the credit curve.

 

 
 
 
 

 

 




 

 

 
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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