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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.

September 2023

Macro Commentary
 
 

September was a subdued month for the global economy. China and Europe continued to exhibit soft growth despite directed stimulus in China, which underwhelmed market expectations. Consumption in the US continued to be solid, aided by a resilient labour market. Headline inflation in large, developed countries has been lower, but with the recent increase in oil prices, it may start to move up over the next few months. Indian economy continues to demonstrate strength across many areas as resilient urban consumption, strong government spending, and strong bank lending support growth. Weather-related challenges, however, have caused inflation to increase on the back of a spike in cereals and vegetable prices. But with supply-side measures being taken by the government, expectations are for food inflation to gradually come down.

CPI for August decreased to 6.83% from 7.74% in the previous month. This was primarily due to a sequential decrease in vegetable inflation on the back of lower tomato prices. Cereal prices, however, continue to be firm and increased by 11.8% YoY. Core inflation softened to 4.83% vs 5% in the previous month as housing and transportation/communication sub-categories remained benign. Whilst overall inflation has been volatile due to vegetable prices, core inflation has continued to come down and is below 5%.

Manufacturing Purchasing Managers' Index (PMI) for September declined slightly to 57.5 vs 58.6 in August. Factory orders continued to see robust growth, and the employment component also picked up. Services PMI remained strong at 61 vs 60.9 in August. Sustained growth in domestic demand helped the service providers despite the increase in input prices. The index of eight core industries rose by 12% YoY in August 2023 vs 8% in the previous month. This was on the back of a strong increase in the output of the steel sector, which increased by 11% YoY, and output of the electricity industry which rose by 15% YoY.

India’s merchandise trade deficit increased to 10 months high of USD 24.2bn in August vs. USD 20.7bn in July. Goods exports increased by USD 2bn from the previous month, whereas goods imports increased by USD 6bn due to higher Oil and Gold imports. Net services surplus remained robust at USD 13.6bn in August 2023 vs. USD 12.3bn in July. FX reserves at the week ending 22 September were USD 590bn, down USD 5 bn from the end of August 2023.

Central Government’s gross fiscal deficit (GFD) till August 2023 touched 36% of its annual budgeted target. At the same time last year, the government had exhausted 32.6% of its annual deficit target. Expenditure increased by 20.3% YoY during April-August 2023 on the back of strong capital expenditure spending. On the revenue side, net tax collections increased by 14.8% YoY vs. April-August of last year. The government collected INR 1.63 trillion GST in September 2023 vs. INR 1.59 trillion in the previous month. Bank credit growth for September 2023 has continued to be robust at ~13.5% YoY.

Overall domestic demand and activity levels remain healthy. Headline inflation will start coming down as government measures to bring down food inflation start to show an impact. Core inflation has been coming down, albeit a little slowly. Oil prices have increased sharply in the last month due to supply cuts, and this needs watching for any impact on the current account deficit. Global growth continues to be mixed and needs to be monitored closely for any spill-over to India.

  
Equity Market Commentary

 

  

The Nifty Index rose 2% in September. Mid-cap and small-cap indices continue to outperform large-cap and were up 3.6% and 4.1%, respectively. Sector-wise, PSU (+11%), Power (+7%) and Metals (+6%) gained the most. None of the sectors closed in the negative. Globally, India (2%) was among the top-performing markets, along with the UK and Philippines, which were up 2.9% and 2.4%, respectively, while Thailand, Russia, and S&P 500 declined 6%, 5%, and 4.6%, respectively. September FOMC hawkishness saw US yields breach the 4.6% mark (10Y), and Crude touched $95/bbl, the highest it has been this year, Dollar index (DXY) also made fresh highs of 107. Despite global challenges, India’s Bond index inclusion supported sentiments. FPIs sold US$1.8 bn of Indian equities in the secondary market, whereas DIIs bought ~US$ 2 bn worth of shares. After some lull, September rainfall activity improved, and cumulative rainfall during monsoon season 2023 so far was 94.0% of its long-period average (LPA).

High-frequency data for September held on to the gains and improved a tad on a sequential basis. GST collection for Sept (reflecting activity in Aug) grew by 10.2% YoY. PMI manufacturing moderated somewhat to 57.5 in September from 58.6 in August. Credit growth remained largely steady at 15.1% in Sept vs. 14.9% in August (adjusted for HDFC merger). Growth in rail freight moderated, while power demand clocked double-digit growth for the second consecutive month. In autos, two-wheeler sales rose while passenger vehicle sales decelerated. Services PMI accelerated yet again to a 13-year high of 61 in September from 60.1 in August. Air passenger traffic continued to improve sequentially. Vaahan Registration (proxy for retail sales) rose by 20.4%YoY in September from 7.7% in August. The CMIE unemployment rate dipped to a 4-month low of 7.1% in Sept.

Risk-off sentiments in the global market increased materially in September thanks to the uncertainty on the direction of interest rates amidst the US Fed’s continuing ‘higher for longer’ narrative, concerns about the US Govt shutdown, and labor unrest in the form of strikes by the UAW and the US healthcare workers and rising oil prices. Fixed income market weakness was palpable as yields across the curve moved up sharply. As we write, oil prices have cooled off and the US Govt shutdown has been averted for now. Notwithstanding, our inference of incoming data suggests continuing disinflation and moderation in inflation expectations in the US and Eurozone, which are currently being overlooked in the context of recent Fedspeak that seems to have convinced markets of elevated interest rates for longer. Besides, even the Chinese economy appears quite resilient in the face of continuing headwinds from the property market. However, there is likely to be a prolonged wait period for more data that supports the disinflation narrative in the developed world, and for more signs that suggest slowing economic activity in the US that will help dictate when rates will begin to be cut next year and by how much. We also await a possible re-defining of the target inflation band by the US Fed.

On the domestic front, India’s inflation picture saw improvement as headline inflation eased to 6.8% in Aug from 7.4% in June as food inflation moderated and core inflation remained steady. We expect inflation prints to come down further until the end of CY23, driven by a more broad-based reduction in food inflation. This is likely to hold RBI in a pause mode for longer with interest rate cuts, if any, likely to be synchronous with global rate cuts in 2024.

While broader market returns have been considerably strong in the recent few months, and that can open up the possibility of a modest pullback, we choose to not lose sight of the unfolding economic cycle and its strength in India, which, in our view has just taken roots in the past 12 months. Broader market returns (small and midcaps) of the past 2 years is 15-16% compared to >20% CAGR returns in past cycles of economic expansion. We therefore advise investors with a 2–3-year horizon, to stay the course and deploy incremental capital gradually, noting the sharp surge in recent months. We reckon conditions are also gradually building up for a probable recovery in consumption demand as the drag of inflation and interest rates recess, leading to better affordability.

On balance, our conviction on a strong economic cycle unfolding in India, therefore, over the next 4-5 years stands. We believe this will widen investment options in the market. We maintain that India equity is clearly emerging as one of the most attractive investment destinations when seen from a 3–5-year time scale.

 
 
Fixed Income Commentary
 
 

The Global backdrop remained challenging during the month. US FOMC paused on policy rates but sounded more hawkish than market expectations as it guided for “Higher rates for Longer. ECB delivered a dovish 25 bps rate hike with a low likelihood of further rate hikes. Elevated food prices on El Nino fears and crude oil prices crossing USD 95 per barrel due to tight demand-supply dynamics stoked inflationary fears. The huge fiscal supply in the US remained an overhang. The dollar strengthened sharply against major currencies, as reflected in the Dollar index crossing 107.

Global rates remained highly volatile and further hardened, with many developed countries witnessing multi-year highs. US 10 yr G-Sec hardened by more than 50 bps and crossed 4.70% levels as the expectations of a fast rate cut cycle unwounded. Emerging market rates also witnessed a rise in market yields, though to a lesser extent.

Domestic rates were relatively less impacted on the back of positive sentiments as Indian sovereign bonds got included in the first ever global bond indices of JP Morgan Emerging Markets Bond. G-Sec borrowing calendar for 2HFY24 also came in line with market expectations with a borrowing program of Rs 6.55 trn (FY2024BE borrowing of Rs15.4 trn).

Outlook

Global factors have worsened over the last month as market rates in many developed countries remain on an upward trajectory, putting pressure on currencies. Elevated crude prices have further added to the concerns. US FOMC future policy action is data dependent, and incoming data on growth/inflation/jobs continues to stow mixed trends. The domestic rate environment has also become relatively more challenging with inflation concerns led by volatile food prices, incrementally higher current account deficit, and a slowdown in FPIs inflow due to global uncertainties.

Amidst a challenging backdrop, MPC, in its October policy, maintained a pause on policy rates while still retaining its stance as “withdrawal of accommodation” to keep its guard high against any domestic inflation worries. Indication of G-Sec Open Market Operations (OMO) Sales for liquidity management has spooked the market and clearly indicated MPC’s resolute to reach a 4% inflation target. 1QFY25 projected inflation at 5.2% points to a delayed rate cut cycle. While the MPC was more hawkish than expected, we believe the MPC will maintain a long pause at current policy levels as Inflation is expected to maintain its downward trajectory over the next few months. Instead, MPC may actively use its liquidity tool, including OMO sales, to anchor inflation expectations.

With the negative market reaction of 10-15 bps across the yield curve post MPC due to OMO sale overhang, domestic rates have surged back to the 2023 beginning levels with 5 – 10 year G-Sec now in the range of 7.35% - 7.40%. We believe India’s current fundamental situation is much better than that in early 2023, and the recent surge in market rates provides an attractive entry point to investors, especially in 2 to 5 year duration segment. While the near-term volatility may remain high as the market waits for a direction on RBI’s liquidity management coupled with global factors, any large upside in yields is expected to be limited on the back of India’s inclusion in global bond indices. Inclusion in the JP Morgan index alone can prompt an inflow of more than USD 25 bn over the next 2 years, thereby lowering market yields and also supporting the currency. It may also open doors for inclusion in other global debt indices. The timing couldn’t have been better as the global backdrop has become more challenging with elevated rates, surge in crude prices, and currencies under pressure. Nonetheless, 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. The credit environment remains healthy, and selective AA / AA+ rated exposure can be explored at fair credit spreads.







 

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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