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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 2021

Macro Economic Review
 
 

Economic activity showed strong growth for the month of October in run up to the festive period. Covid-19 vaccination rate has continued to maintain pace with India crossing 1 bn doses of vaccinations so far. 53% of population has taken one dose as at end of October 2021 (47% end of September) and 24% of population is fully vaccinated (17% end of September).

CPI inflation of 4.3% for September came in lower than the previous month (5.3%) and the reading was at a five month low. Much of it was driven by a sharp fall in food inflation both annually (due to a favourable base) as well as sequentially. Food and beverages inflation eased to 1.6% in September vs August at 3.7% led primarily by fall in prices of meat and fish, eggs, fruits and vegetables. Notably, vegetable prices fell by 11.7% y-o-y. Fuel and light inflation picked up further to 13.6% vs August at 12.9%. Services inflation inched down to 6.38% y-o-y vs previous month at 6.40%. Within the group, recreation and amusement index saw a m-o-m uptick of 96 bps (vs. 52 bps previous month). Household goods and services index remains steady (higher by 51 bps m-o-m vs. 58 bps previous month), while personal care and effects index remains muted. Health and education also saw modest increases. Urban inflation moderated to 4.57% but remained higher than rural inflation at 4.13%.

Services PMI for October 2021 jumped to 58.4, highest reading over last 24 months and above the 55.2 for previous month. The reading looks very strong and reflects the increased demand for services following easing of lock-downs across the country over the last few months and leading into the festive period. Manufacturing PMI increased to 55.9 in October 2021 from 53.9 in September 2021. The index was in the expansion territory for the fourth month in a row. It pointed towards strongest improvement in overall operating conditions since February 2021. Respondents reported improved market confidence, rising requirements among clients and successful marketing. Substantial increase in new orders and strong growth in both sales and production was reported. Overseas demand for manufactured products also reported an improvement. On the input cost front, the price pressure intensified in October due to lingering shortages of raw materials as well as higher fuel and transportation costs.

August Index of Industrial Production (IIP) grew 11.8% y-o-y vs previous month growth at 11.5% y-o-y led by a favorable base. Compared to August 2019, IIP was higher by 3.9%. On a sectoral basis, mining activity grew by 23.6% y-o-y, electricity production grew by 16% y-o-y and manufacturing by 9.7% y-o-y. Based on use-based classification, all categories registered positive growth with capital goods (19.9% y-o-y), primary goods (17% y-o-y) and infrastructure/construction (11.1% y-o-y) leading the way. While a gradual pickup in activity is anticipated, supply-side disruptions and power sector raw material shortages may temper the sequential momentum in the near term. The index of eight core industries rose by 4.4% y-o-y in September 2021. Seven of the eight core industries reported a rise in production while one reported fall in output. Cumulative output of eight core industries during April-September 2021 rose by 16.6% y-o-y, as against a 14.5% y-o-y fall registered during the same period a year ago.

On the trade front, trade deficit narrowed marginally to USD 19.9bn in October vs USD 22.9bn in September 2021. India’s merchandise exports remained strong and reached USD 35.5 bn in October 2021, up 42.3% y-o-y. In absolute term, exports are at an-all time high now. The surge in merchandise exports was led by both oil and non-oil exports at 231.6% y-o-y and 29.6% y-o-y respectively. Within non-oil exports, engineering goods (up by 50.7% y-o-y), gems and jewellery (44.2% y-o-y), organic and inorganic chemicals (41.9% y-o-y) electronics (39.5% y-o-y), cotton (46.2% y-o-y), and textiles (6.4% y-o-y) recorded a positive growth while drugs and pharmaceuticals (-0.9% y-o-y) saw momentum easing. For the period April-October 2021 exports are at USD 232.6bn, an increase of 25.4% over April-October 2019. Imports moderated on a sequential basis by 1.8% m-o-m to 55.4 bn in October 2021 led by decline in oil imports. Gold imports remained at par with levels seen in September. Non-oil-non-gold imports, barometer of domestic demand, increased by USD 2 bn on sequential basis to USD 35.8 bn vs USD 33.8bn in September 2021. Oil import fell by 17.2% on a m-o-m basis to USD 14.4bn in October, after peaking at USD 17.4bn in September. Foreign Exchange reserves were largely flat for the month at approximately USD 640bn.

E-way bills increased 8.2% m-o-m to 7.35 crores in October, highest level since records began three years ago. The number has improved significantly from the low of 4 crores in May 2021 this fiscal. GST collections for the month of September (collected in October) rose 11.2% m-o-m to 1.3 lakh crores. India's fiscal deficit for September came in at INR 0.6 tn (lower than INR 1.5 tn in August 2021) driven by robust tax collections while spending remained relatively contained. This puts April-September 2021 fiscal deficit at 5.0% of GDP vs budgeted estimate (BE) of 6.8% of GDP. Through the first half of the fiscal year, the cumulative deficit is only 35% of the total budgeted deficit for the full fiscal year, which is the lowest ratio for first half of any fiscal in the last 10 years. Direct tax collection for September 2021 increased 18.5% m-o-m. Spending growth was relatively contained compared to tax revenue growth. While capital spending grew (38% FYTD y-o-y), non-capital spending improved to (6% FYTD y-o-y).

Financing conditions continue to remain buoyant with record amounts of IPOs and domestic share sales. Domestic demand and activity levels showed strong rise in October over a strong September. Services sector showed sharp growth on back of better mobility and festive period whereas the manufacturing sector continues to be well positioned given good global growth and resilient domestic demand. Foreign exchange reserves continue to remain strong giving protection from external spill-overs. With the pace and scale of Covid-19 vaccination continuing to improve, growth should continue to remain strong for rest of the fiscal year.

  
Equity Market

 

  

The BSE-30 and Nifty-50 hit all-time high levels in the middle of the month, but gains couldn’t sustain, and both the indices ended almost flat amidst concerns over rising commodity prices, inflationary pressure and liquidity normalization signals by the central bank and high valuations. Covid cases during the month in India remained under control (daily sub-20k) even as vaccine doses crossed the 1 bn mark. RBI MPC decided to keep policy rates and accommodative stance unchanged. On the global monetary policy front, the minutes of the FOMC’s September meeting highlighted that the Federal Reserve could begin reducing asset purchases as soon as mid-November.

High-frequency indicators in India showed strong acceleration in economic activity. GST collections in Oct rose to INR1.3 tn (second highest ever) with 2Y CAGR growth improving to 16.8% from 12.8% in Sep. E-way bills rose to the highest in Oct. with 2Y CAGR growth of 17.9%. PMI manufacturing rose to an eight-month high of 55.9 in Oct. Power demand – 2Y CAGR improved to 7.5% in Oct from 2.7% in Sep despite Autos sector, which remained weak due to supply-side disruptions. Consumption, Services PMI accelerated to 58.4 in Oct (vs. 55.2 in Sept) marking the highest reading since April 2011. Mobility indicators (ex-residential) remained steadily in the positive zone. Air passenger traffic for Sep. is tracking at 102% of Feb-21 levels. Export growth on a two-year CAGR basis has grown at double-digit levels for the last five months. India witnessed 99% of its long period average rainfall (normal) in 2021, although with significant variations across regions. During October, FPIs sold US $1.8 bn of Indian equities while DIIs bought US$ 0.6 bn. In terms of sectors, autos, banks and utilities outperformed while FMCG, Pharma and Realty underperformed.

The 2QFY22 earnings season currently in progress is running marginally ahead of expectations, as companies benefited from a) strong revenue growth in the technology sector b) steady recovery in loan growth, as well as recovery and upgrade in the asset quality of most private sector banks, c) higher commodity prices and volume growth in the energy and metal sectors, and d) opening up of the economy, which boosted consumer and retail growth. 34 out of the 50 Nifty companies that announced their results, have reported a Sales/Operating Profit/PAT growth of 34%/17%/22% YoY v/s broad street estimates of 27%/14%/13% YoY. Margin pressure led primarily by elevated material costs and incomplete pass-through of the same, has clearly been the key area of concern this season.

The post-pandemic world has been facing a series of dislocations due to large, abrupt shifts in spending patterns. After a move to spending on goods rather than services during lockdown, consumers are now reversing their spending from goods back to services. In addition, shortages of items such as electronic chips have played havoc with the production of cars and trucks, which has had further effects down the supply chain. Significant delays have occurred at the ports and container freight rates have soared. These examples and many others suggest that supply chain disruptions are the central issue facing policymakers today. At the margin however, the cool-off in recent weeks in commodity prices, freight rates etc. will likely soothe global inflation trends.

However, we continue to believe that long-term inflation trends are fundamentally the result of excess money growth over a sustained length of time say 2-3 years prior, and not supply chain disruptions. Elevated inflation will likely persist in our view, in countries that have seen sharp monetary growth in this period. Current supply-side issues will gradually morph into demand-side problems and the actions of central banks in such economies will have a strong influence on financial markets therein. In India too, we cannot rule out imported inflation feeding through into local inflation (fuel prices for e.g.) though offsets in soft commodity and food prices 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.

In this context, as we write this note, and on expected lines, the US Fed has announced its intention to gradually unwind its monetary accommodation starting November. As highlighted in our earlier communications, while this can unsettle markets and induce quick, sharp corrections, 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.

We maintain that risk-reward in the markets are evenly balanced at this stage. We continue with our view that the Indian economy should build on its recovery even beyond 2021. A potential 3rd wave may slow down activity levels but increasing vaccination levels provides comfort against large-scale economic dislocations and pressures on health infrastructure of the type seen in the past. 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 off late. Our chosen path to portfolio construction is a measured approach with respect 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.

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 recommend investors use market volatility to their advantage in increasing their long-term equity commitments, while keeping return expectations moderate and maintaining a sharp focus on risk control.

 

 
 
Fixed Income Market
 
 

Economic activity gained further momentum during the month as Covid-19 cases continue to decline thereby supporting the increased mobility and as the festival season led preparation also boosted the activity. Covid-19 vaccination program continued at a fast pace and crossed a milestone of 1 bn doses of vaccinations which also added to the confidence. Further expansion in Services / Manufacturing PMI index to 58.4 / 55.9 in October 2021 from 55.2 / 53.9 in the previous month reflected an overall improvement in business sentiments.

Headline CPI inflation surprised positively yet again with September print easing to 4.35% from the previous month of 5.3% and came in at much lesser than the market expectations, primarily driven by sharp fall in food inflation both annually (due to a favorable base) as well as sequentially. Moderation in food inflation was largely led by sharp contraction in vegetable prices while edible oil, sugar & confectionary items witnessed some hardening. Fuel & light inflation, however picked up further to 13.6% vs August at 12.9% as the Crude prices continued to inch up. Core inflation remained elevated at 5.75% and is a concern especially as the demand picks up & global commodity prices remain high.

The October trade deficit narrowed marginally to USD 19.9bn in October vs the record high USD 22.9bn in September 2021. While the Exports in October picked up by 42.3% to US$35.5 bn, it has largely remained in a narrow range of US$33 to US$35 bn over past few months. Imports in October increased by 62.5% to US$55.4 bn led by festive season demand in non-oil imports. 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.

FX reserves increased marginally to US$ 642 bn – a record high and provides comfort on external stability. During the October month, both – equity as well as the debt segment witnessed net FPI outflows of INR 17,034 cr & INR 3,358 cr respectively.

GST collections for the month of September (collected in October) rose 11.2% m-o-m to INR 1.3 lakh crores and improved substantially from the previous month of INR 1.17 lakh crores, led by festive demand and improved compliance. The GST revenues for October have been the second highest ever since the introduction of GST, second only to that in April 2021. Centre’s fiscal health remains sound with net tax collections having grown by ~101% in 1HFY22 while the total expenditure has picked by much lesser ~10%.

The Central Government cut excise duty on petrol and diesel by Rs5/liter and Rs10/liter, respectively. Additionally, 22 States and UTs have announced further cuts on VAT. Cumulatively, it can benefit the headline inflation by 25 – 30 bps in the subsequent months. While the revenue loss to the Govt could be ~ INR 450 bn in FY22E, excise duty collection is still expected to exceed the budgeted estimates.

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%.

Interest rates remained volatile in last month with upward bias with elevated crude oil prices and higher than expected 14 day VRRR cut-off in domestic market. Impact was felt across the yield curve in 1 to 10 year segment which hardened by 10 – 20 bps. 10 year benchmark G-Sec hardened by 17 bps to close at 6.39% on month end. Corporate bonds also hardened along with the G-Sec, however corporate bonds marginally outperformed the G-Sec in 5 to 10 yr segment.

Outlook

Many Key Central Banks across the World have started or indicated to start a gradual withdrawal from lose monetary policy adopted during the time of pandemic. While the global economic recovery is still uneven across the countries, global inflation continues to remain in upward trajectory. The US FOMC in its recent meeting announced the tapering of its asset purchase program by US$15 bn starting later this month.

Domestically also, RBI has started with a gradual policy normalization 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. However, amidst the continuing growth uncertainty, we believe that RBI will prioritize growth and will continue with its accommodative policy stance while keeping Repo rates lower for longer. Recent moderation in headline inflation and expected relief in inflation from Govt’s tax cuts on diesel & petrol will provide comfort to RBI to stay accommodative. However, imported inflation especially through higher crude prices can impart upward pressure to the already elevated core inflation and needs to be closely monitored.

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 augurs 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 global uncertainty. 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. Possible inclusion of Indian G-Sec in global bond indices will also provide positive backdrop to the long end of the yield curve.

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.

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