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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.

December 2023

Macro Commentary
 
 

The global economy continued to meander along in December with certain pockets of strength. Consumption in the US continued to be steady as declining inflation improved consumers' real disposable income. In addition, the jobs market continues to remain robust with low jobless claims, steady hours worked, and positive real income growth. China continues to be soft as consumer confidence remains fragile after the bursting of the real estate bubble. Europe, too, continues to be weak as exports remain tepid. The Indian economy continues to demonstrate strength across many areas as resilient urban consumption, strong government spending, and strong bank lending support growth.

The CPI for November increased to 5.55% from 4.87% in the previous month. This was primarily due to higher vegetable and cereal prices causing food inflation to remain high at 8% YoY. However, there was further moderation in core inflation, which softened to 4.1% vs 4.25% in the previous month.

Manufacturing Purchasing Managers' Index (PMI) for December declined to 54.9 from 56 in November. Factory orders saw steady growth with an easing in pricing pressures. Services PMI came strong at 59 vs 56.9 in November. The index of eight core industries rose by 7.8% YoY in November 2023 vs 12% in the previous month. The electricity sector saw output increase by 5.6% YoY, and steel industry output increased by 9.1% YoY increase. Cumulative output for the period April-November has increased by 8.6% YoY vs 8.1% in the previous year.

India’s merchandise trade deficit settled back to USD 20.6bn in November vs. the high of USD 32bn in the previous month as the festive season-led demand faded. Exports fell 2.5% YoY largely on back of softer external environment causing non-oil exports to decline. Imports were down 4.3% YoY on the back of an across-the-board decline in imports. Net services surplus remained steady at USD 15 bn. FX reserves at the week ending 22 December were USD 620bn, up USD 23 bn from the end of November 2023.

Central Government’s gross fiscal deficit (GFD) till November 2023 touched 50.7% of its annual budgeted target. At the same time last year, the government had exhausted 58.9% of its annual deficit target. Expenditure increased by 8.6% YoY during April-November 2023 on the back of a 31% increase in capital expenditure spending. On the revenue side, net tax collections increased by 17.2% YoY vs. April-November of last year. The government collected INR 1.6 trillion GST in December 2023 vs. INR 1.65 trillion in the previous month. Bank credit growth for December 2023 has continued to be robust at ~15.5% YoY.

Overall, domestic demand and activity levels remain healthy as the urban consumption and investment cycle remain firm. Core inflation has been trending down steadily, and the government continues to take pro-active steps to control food inflation. Oil prices remain volatile and need monitoring for any impact from global geo-political risks. Global growth continues to be mixed and needs to be monitored closely for any spill-over to India.

  
Equity Market Commentary

 

  

In December 2023, the Nifty closed with strong gains and was up 8%. The Mid-cap Index and Small-cap Index were up around 7% each. Sector-wise, all sectoral indices ended on a higher note; Power, PSU and Oil & Gas gained 18%, 15%, and 12%. Globally, Indian markets emerged as the best-performing market in December, followed by Australia (+7%), Mexico (+6%) and Singapore (+5%). Russia and Shanghai declined 2.8% and 1.8%.

Other key developments: (1) the RBI maintained the status quo on rates and kept the stance unchanged, (2) BJP won by a significant majority in the state elections of Rajasthan, Madhya Pradesh and Chhattisgarh. Since these states, which are part of the Hindi-speaking belt, account for a large proportion of Lok Sabha seats, the probability of a BJP victory in the 2024 general elections has increased, (3) the Fed held rates at 5.25%-5.5% for a third straight time and laid out the timeline for rate cuts in 2024 and beyond, (4) Net FDI into India touches 21-month high at USD 5.9bn in October. For the December month, FPIs bought a staggering US$ 7.8 bn Indian equities in the secondary market, whereas DIIs bought US$1.5 bn.

High-frequency data slowed sequentially after a festival-related surge in previous months. However, overall trends remain healthy on an absolute basis. India's GST collections rose 10.3% to reach Rs 1.65 lakh crore in December but exhibited some moderation from the previous month’s numbers. The banking system’s non-food credit (ex-HDFC merger) grew ~15.9% YoY as of 15 Dec’23 (~20.3% YoY including HDFC Ltd), while deposit growth was healthy at ~13.3% YoY (ex. HDFC merger). PMI manufacturing softened to 54.5 in Dec from 56 in Nov due to reflecting seasonality but continued its expansionary path since Jul-21. The banking system’s non-food credit (ex-HDFC merger) grew ~15.9% YoY as of 15 Dec’23 (~20.3% YoY including HDFC Ltd). The auto industry clocked weak sales (wholesales) in Dec-2023 as players rationalized the high-channel inventory, with domestic two Wheelers being the only exception. Two wheelers grew ~20% YoY, supported by strength in the recent festive season, and a low base (inventory destocking in Dec-2022). Vaahan registration growth (a proxy for retail sales of autos) also showed moderation. HSBC India Services PMI index shows that business activity expanded at a faster rate of 59.0 in December, after having softened to a one-year low of 56.9 in November. At these levels, the growth momentum in India’s services sector is higher than its long-term-average of 53.8. Three points stood out: 1) domestic demand for services stood out, 2) Corporate margins for service providers are rising and 3) future expectations out of the service sector are buoyant.

The overall macro-picture for India continues to display strength led by a confluence of public and private sector investments unfolding simultaneously and additionally supported by strong sentiments in the residential real estate market. India’s households are witnessing a slow but confident transition from a savings orientation to higher spending towards physical and financial assets, which in turn is driving overall economic growth. We expect this momentum to strengthen further in 2024 as the interest rate cycle becomes more comfortable and inflation turns benign. Meanwhile, we enter 2024 with a view that growth in key developed economies like the US/China/EU may moderate from the lagged impact of sharp interest rate hikes of 2023 and as strong govt spending of the past two years begins to wane. At the margin, this may have a softening effect on India’s external sector growth as well.

As highlighted in our previous communication, while India’s economy basks in a healthy mix of micro and macro factors that favor strong overall growth outcomes, equity markets may possibly overshoot and likely front-end returns, with large gains coming in the early part of 2024. Equity investors may have to pace their investments accordingly regarding timing and product choices. Flexicap strategies are preferred under current market conditions even as investors with higher risk appetite and a 2–3-year horizon continue with their SIPs. Our over-arching view is that India is at the cusp of seeing a much better economic growth cycle in the coming few years relative to its recent past, which in turn would make its equity markets one of the most attractive investment destinations on a 3–5-year scale, remains unchanged.

 
 
Fixed Income Commentary
 
 

The global fixed income market took a sharp turn. FOMC maintained a status quo on policy rates and quantitative tightening, but in a surprise move, it pivoted with dovish guidance with an acknowledgement of easing inflation, rebalancing of the jobs market, and slowing down growth. Policy rate projections through dot plot removed any additional rate hikes & also indicated a possibility of 3 rate cuts in 2024, up from 2 earlier. In contrast, the ECB & BOE delivered a hawkish pause on policy rates keeping their guard high against inflation. BOJ maintained a negative interest rate regime, against the tightening expectations.

Global rates continued to rally for a second consecutive month. The US 10-year treasury yield rallied by ~50 bps and fell below 4% after almost five months, as the market factored in steep rate cut expectations of ~150 bps in 2024 after FOMC’s dovish tilt. The Dollar index weekend sharply from 104+ levels to ~101.33. Other Developed market rates also rallied by 40-60 bps, and Emerging market rates, though to a lesser extent. Indian rates rallied by 10-20 bps across the curve with a steeping bias. Corporate bonds underperformed vis-à-vis G-Sec on high supply pressure. Domestic systematic liquidity deficit increased further with advance tax outflow, keeping the money market rates elevated.

Outlook

2024, in all probabilities, will prove to be a Pivotal year for Global Fixed Income market. FOMC has peaked on policy rates as the US economy is expected to enter a soft landing & inflation to moderate further in 1HCY24, prompting FOMC to start a rate cut cycle in CY2024. ECB has sounded hawkish as of now but is soon expected to pivot as Europe growth struggles even more. Other DMs are also expected to follow suit, and EMs as well, although the extent of rate cuts is expected to be lesser than DMs. BOJ on the other hand, may gradually start phasing out the ultra-loose monetary policy.

Indian fixed income market is placed in a sweet spot-on various count. FY2025 inflation is expected to moderate further to 4.5% - 4.75% from ~5.4% in FY2024 on the back of global growth slowdown and broad-based moderation in the domestic core inflation basket. Still food inflation is expected to be better addressed by fiscal measures. India is also expected to embark upon the rate cuts, possibly in 2HCY24. Current policy rate at 6.5% leaves the positive real policy rates at an elevated 175 – 200 bps, giving room to MPC to cut down the policy rates by ~75 bps over time. MPC is expected to precede the rate cuts with a stance change from “withdrawal of accommodation” to “Neutral” and maintain relatively better systematic liquidity conditions, thereby reversing the stealth 25 bps rate hike undertaken by RBI through liquidity tightening. INR is expected to remain well supported as USD loses strength with FOMC rate cuts. Healthy Fix reserve at ~USD 620 bn provides meaningful cover to absorb global volatilities to an extent. The inclusion of Indian sovereign bonds in JP Morgan global debt index will be the icing on the cake, with the expected inflow of ~USD 20-25 bn in FY25, which can absorb close to 15% of fiscal supply in FY25. This makes the Indian Fixed Income market far better placed on demand-supply dynamics than many others, which are still struggling with elevated fiscal supply pressures.

Risk factors to watch out for are global energy prices & supply side disruptions led by geo-political risk, which can change the expected course of inflation moderation and thus the monetary cycles, any aggressive tightening by BoJ and US’s fiscal policies, as it goes into a presidential election in 2024.

Overall, risk-reward has turned favorable at the current juncture with benign fundamental & elevated yields across the yield curve. While the near-term volatility may remain high, mainly due to global factors, any large upside on yields is expected to be limited on the back of India’s inclusion in global bond indices and healthy buying at current absolute levels.

Permitting risk appetite, it is a prudent time to go long on duration with increased allocation toward funds like Gilt fund, Dynamic bond fund, Medium duration fund, Corporate bond fund, Banking & PSU Funds etc. Markets, being forward looking will react much in advance to the expected policy stance change followed by a rate cut cycle, thereby upfronting the returns through spread compression over the policy repo rate. Active fund management is critical as uncertainties may emanate from domestic inflation, fiscal supply, and global backdrop, which may influence various yield curve segments differently.







 

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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