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.

September 2021

Macro Economic Review
 
 

Economic activity maintained its momentum in September on back of continued improvement in mobility. Covid-19 vaccination rate has seen sharp improvement with almost 47% of adult population having taken one dose as at end of September 2021 (36.4% end of August) and 17.2% of population vaccinated with two doses (10.8% end of August end).

Retail inflation eased to 4-month low of 5.3% in August 2021, down from 5.6% in the preceding month and 6.7% in August 2020. Average inflation in the first five months of FY22 now stands at 5.5%. Of the 30bps sequential decline in headline inflation during August and July 2021, base effect shaved off 50bps whereas uptick added 20bps. Food inflation also fell to 4-month low of 3.8% y-o-y in August 2021, down from 4.5% in the preceding month and 8.3% in August 2020. While prices of almost all food items declined during the last twelve months, the main drivers of lower food inflation were cereals and vegetables. Cereals inflation fell to -1.4% in August 2021 from 5.9% in August 2020 while vegetables inflation fell to -11.7% from 11.5% during the said period. However, items like eggs, oilseeds, fruits, non-alcoholic beverages and prepared meals increased during August 2021. Oilseed prices continued increasing due to rising international prices of the food item. Fuel and light inflation came in at 12.9%, the highest reading for the category. Since May 2021, fuel and light inflation has been printing over 10%, averaging 12.4% during May and August 2021. Services inflation fell to 6.4% in August 2021, mainly driven by lower personal care costs. Core inflation moderated slightly from 6.01% at end of July to 5.89% at end of August 2021.

Services PMI for September 2021 was 55.2, slightly below the August reading of 56.7. Nonetheless the reading looks strong and reflects the increased demand for services following easing of lock-downs across the country over the last few months. Manufacturing PMI increased from 52.3 in August to 53.7 in September 2021 and highlighted a stronger expansion in overall business conditions across the sector. Consumer goods was the brightest spot in September, posting strong readings amid substantial accelerations in growth of new orders and output. There was also a faster upturn in international sales and an improvement in business confidence. Price pressures, which receded in each of the prior two months, intensified in September due to lingering shortages of raw materials as well as higher fuel and transportation costs.

IIP grew 11.5% y-o-y in July 2021 on low base. All subcomponents i.e. mining 19.5%, manufacturing 10.5% and electricity 11.1% posted strong growth driven by low base. From the use-based perspective, capital goods 29% posted strongest growth followed by consumer durables 20%, and intermediate goods 14%. The index of eight core industries rose by 11.6% y-o-y in August 2021. Electricity generation rose by 15.4% and output of coal, which is a key input for thermal power generation, increased by 20.6%. Among other energy sources, output of crude oil fell by 2.3%, but that of natural gas and refinery products rose by 20.7% and 9.1%, respectively. Steel production grew by 5% and cement production grew by 36.3%. Production of fertilisers fell by 3.1% in August 2021.

On the trade front, trade deficit rose to a high of USD 22.9bn in September 2021, from USD 13.8bn in August, led by a sharp increase in oil imports. Exports meanwhile, remained largely steady. Exports for month of September ‘21 increased 21.3% to USD 33.4 bn but were down -1.9% m-o-m. Non-oil exports at USD 28.5 bn increased 18.7%. Exports have been range bound over the past few months between USD 33 bn and USD 35 bn. Imports increased sharply in September led by higher oil (+92% y-o-y and +69% m-o-m) and electronics imports. Foreign exchange reserves ended September 2021 at USD 638.6 bn – up USD 5 bn for the month.

E-way bills improved 3% month on month to 6.79 crores in September. The number is only slightly lower than the high of 7.1 crores recorded in March ‘21 but has improved significantly from the low of 4 crores in May ‘21. GST collections for the month of August (collected in September) improved 4.5% m-o-m to 1.17 lakh crores. Government’s gross tax revenues for 5 months of FY22 have grown 70% yoy while the net tax collections grew by 127% largely on back of increase in customs and excise duty receipts. The net tax collection is now at 42% of FY2022 budgeted estimate. Total expenditure remains weaker till now and is currently at 36.7% of FY2022 budgeted estimate. Given strong revenue receipts and muted expenditure, gross fiscal deficit for FY22 may likely come below government’s estimates of 6.8%.

Financing conditions continue to remain buoyant with record amount of IPOs and domestic share sales. Domestic demand and activity levels have continued to improve in September. Services sector continues to improve on back of better mobility and resumption of normality and the manufacturing sector continues to be well positioned given good global growth and resilient domestic demand. Liquidity conditions remain benign and foreign exchange reserves continue to remain strong. With the pace and scale of Covid-19 vaccination continuing to improve, growth should remain good for rest of the fiscal year.

  
Equity Market

 

  

Nifty (+2.8%) outperformed both emerging markets / developed markets in September as insulation from a potential China slowdown (sparked by China’s property giant Evergrande default) and steady trends on pandemic front (daily cases sub-30k) placed India in a relatively better position than other economies. During the month, the Indian government announced a slew of reforms—cabinet approved Production Linked Incentive (PLI) schemes for auto, drone and textiles sectors, announced a relief package for telecom sector and further steps towards formation of a bad bank. Global markets remained under pressure likely as September Federal Open Market Committee (FOMC) turned out to be more hawkish than street expectations, which led to a rally in yields.

Economic activity in India inched closer to normal levels with most indicators like GST collections, Purchasing Manager’s Index (PMI) manufacturing as well as service, E-Way bills, mobility indicators in positive territory. After disappointing in July and August, monsoon activity picked up in September, with rainfall deficit at 1% as of 30th Sept (end of season), and overall sowing, closing the season with a minor deficit of 0.4%. FIIs turned net buyers again (+$ 1.7 bn) while DII buying (+$ 0.8 bn) was driven by domestic MFs. In sectoral trends, realty, consumer durables and power were top gainers while metals and healthcare indices ended in red.

While the Evergrande issue in China dominated headlines during the month, our global view on the matter maintains that the company is attempting to restructure and meet its obligations, while Chinese regulators remain focused on ring-fencing Evergrande, ensuring that there is no contagion; both of which are welcome news. Global markets have also been recently grappling with the issue of inflation seen across energy commodities and the associated disruptions in their supply chain. We reckon this will likely feed into India inflation as well in the coming times and impact corporate margins. However, offsets in soft commodity and food inflation will likely ensure that India’s headline inflation remains within RBI’s stated comfort band thereby implying no material change in stance to its monetary and interest rate policy in the near-term. Equity markets worldwide are expected to maintain a razor-sharp focus on the US Fed’s exit policy from monetary accommodation in the coming months. While this can unsettle markets and induce quick, sharp corrections from current levels, we do not foresee deep corrections as, we expect the monetary unwind to be slow and orderly besides the overall improving course of the global economy and corporate earnings.

Equity markets have witnessed quite a comeback during the last 15 months and valuations (basis historic earnings) for the leading indices “optically” seem to be at 30% premium to long-term averages. However, once we adjust the earnings for a normalized 12-month forward earnings and also adjust for the lower cost of capital, valuations are either in-line with long-term averages or at a mild premium. The primary markets, on the other hand, continue to be vibrant as many new-age businesses get listed offering investors an opportunity to participate in their growth journey. The investors, however, need to exercise caution in valuing these fast growing but cash-guzzling businesses.

We maintain that risk-reward in the markets are evenly balanced at this stage. We continue with our view that the Indian economy should witness a recovery in 2021. The potential 3rd wave may slow down the activity levels, but a high vaccination rate of the population makes us believe that hospitalizations will remain low (as is seen in some of the countries where 3rd wave is underway and where vaccination rates are high). The damage to economic activity, hence, should remain limited. We continue with our pro-cyclical stance with investments in sectors like financials, industrials, consumer discretionary. We remain invested in technology and healthcare as well but have moderated our positions due to sharp run-up in the space.

India is well-positioned to commence on a new economic upcycle over the next few years, which can mean broad-based improvement across a variety of industries. This offers equity investors an opportunity to benefit over the medium to long term. We would recommend investors to continue with their SIPs and use any volatility in the equity markets to increase their equity allocation through lump-sum investments. Our chosen path to portfolio construction is a balanced approach regards 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
 
 

Economic activity maintained its momentum in September as Covid-19 cases moderated and mobility increased. Fast pace of vaccination with almost 47% of adult population having taken one dose and 17% of population vaccinated with two doses (as on September end) also added confidence. Services PMI as well as manufacturing PMI remained in expansionary mode at 55.2 & 53.7 respectively indicating expansion in overall business conditions across the sector. August eight core sector output rose by 11.6% vs 9.4% for previous month as most of core industries except crude oil & fertilizer production witnessed y-o-y growth.

Headline CPI inflation for August surprised positively, easing to 5.30% y-o-y from 5.59% y-o-y in July and much lesser than the market expectations, primarily driven by moderation in food prices and favorable base effect. While prices of almost all food items declined during the last twelve months, the main drivers of lower food inflation were cereals and vegetables. Fuel & light inflation continue to impart pressure, in line with global crude prices. Core inflation, though still elevated, also eased to 5.89% y-o-y from 6.01%.

The September trade deficit further widened to a record high USD 22.9 bn from the previous month of USD 13.9 bn largely led by sharp rise in crude imports and as exports remained steady. Imports in September increased 84.7% y-o-y and 19.7% m-o-m while the September exports increased 21.3% y-o-y & remained flat on m-o-m basis. Sharp surge in crude import could have been led by the clearing of previously held up contracts due to lock-downs & inventory stock up by firms, and is likely to normalize. With the normalization in activity levels, FY2022 is again expected to slip in to trade deficit after recording a trade surplus in the previous year.

Foreign exchange reserves continue to surge and has reached a record high of USD 638.6 – up USD 5 bn for the month on the back of robust FPIs inflow and provides comfort on external stability. During the September month, both – equity as well as the debt segment witnessed healthy net FPI inflows of INR 8,348 cr & INR 10,246 cr respectively.

August GST revenues (collected in September) remained healthy at INR 1.17 lac cr & improved from the previous month INR 1.12 lac cr on the back of sustained economic momentum. Gross GST collections in 6mFY22 stood at INR 6.8 lac cr which is 50% higher than 6mFY21 and even ~13% higher than the pre-pandemic 6mFY20. Healthy gross tax revenues and moderate expenditure so far has helped in containing the fiscal deficit in 5mFY22 at ~31.1% of FY22 Budget Estimates. Central Government kept its 2HFY22 borrowing calendar unchanged at INR 5.03 lac cr (net borrowing of INR 3.78 lac cr) even after factoring the GST shortfall payout of INR 84,000 cr to States, which reflects comfortable fiscal situation.

Interest rates remained volatile in last month with upward bias as few of the large Central Banks indicated a higher likelihood of tapering of asset purchase program, sharp jump in crude oil prices and higher than expected 14 day VRRR cut-off in domestic market. Impact was largely felt in short end of the curve up-to 5 years, which hardened by 5-20 bps, while the longer end rallied by 2 – 5 bps. Corporate bonds under-performed the G-Sec in 1 to 4 years segment, which hardened by 15 – 35 bps and outperformed in the longer segment with a rally of 5 – 10 bps.

MPC in its October policy review decided to continue with its growth supportive stance by keeping policy rates unchanged and maintaining accommodative stance, for the consecutive eighth policy review. RBI maintained the GDP projection for FY22 at 9.5% while reduced the CPI projection by 40 bps to 5.3%.

Outlook

Amidst the continuing growth uncertainty, we feel that RBI will prioritize growth and will continue with its accommodative stance while keeping repo rates lower for longer. Recent moderation in headline inflation & expected further moderation in inflation over next few months will provide comfort to RBI to stay accommodative. However, imported inflation especially through higher crude prices can impart upward pressure and needs to be closely watched.

Within accommodative policy framework, we feel that RBI has taken a gradual approach towards the policy normalisation with the first initial step towards liquidity re-calibration amid massive built-up of surplus systemic liquidity which may be later followed by restoring of the policy rate corridor back to 25 bps (as before the pandemic) likely by early next year.

Against the backdrop of gradual normalization of policy rate corridor, we feel that upto 6 months segment of the yield curve is apt for risk-averse investors. For investors looking at the core allocation of their portfolio, the 2-5 years segment of the yield curve remains attractively placed from carry perspective given the current steepness of the curve. Additionally, recent hardening of interest rates, benign liquidity conditions and favorable demand-supply dynamics also augers well for this segment. This segment is neither too short to be adversely impacted by low yields nor too long to be exposed to high interest rate volatility amidst elevated fiscal supply. Investors with long term horizon & ability to absorb short term volatility may consider longer-end of the curve as a tactical allocation which finds merit on the back of conviction that RBI will manage the yield curve and may support the long-term yields through the tools like Open Market Purchase operations & Operation Twist.

While the credit environment is expected to improve over the medium term, we believe credit dispersion will continue as of now and one must be cautious when getting onto the credit side. Selective AA / AA+ rated credits backed by strong conviction of improvement on their credit metrics may provide favorable risk-reward opportunities.

 

 
 
 
 

 

 




 

 

 
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.

Submit Your Details

Close ×
Request for Literature
We will send the Literature requested by you by post. Please provide the following details to process your request:
Subscribe with Us
I would like to subscribe for the . Here are my details:
Thank You
Thank you for providing your details. Your request will be processed in the next 2-3 working days.
X
Quick Email
Send Document(s) As:
Links
Attachment

Enter ARN Code :
(e.g. ARN-000000-0)
Thank You
Thank You for submitting your details.\nOur representative will get in touch with you shortly.
Email sent successfully
The fund has been added in the watchlist.