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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.

June 2022

Macro Economic Review
 
 

Inflationary concerns continue to take centre stage locally as well as globally causing financial markets and economy to adjust in face of hawkish central banks. June month saw a steady growth in demand for goods and services, albeit with higher inflation and input cost pressures.

May CPI remained high at 7.05% YoY, though down from the 7.79% in April 2022. The moderation in May CPI inflation was led primarily by a favorable base and sequential slowdown in core inflation, which declined from 7.24% y-o-y in April 2022 to 6.41% in May 2022. Food inflation, on the other hand, at 8% (April 2022 at 8.3%) remained high and was the main contributor to headline inflation due to sequential surge in vegetables, meat and fish, spices, and oils & fats. While the fuel & light index rose by 1.4% MoM, lower than the 3% rise in April 2022 and Transport & communication CPI also eased to 0.3% MoM vs 3% in April 2022, prices of vehicles, tyres, public transport fares, air tickets – all showed strong upward price pressures. Housing CPI rose by 0.36% MoM.

Manufacturing Purchasing Managers' Index (PMI) declined to 53.9 in June 2022 from 54.6 in May 2022 and remained expansionary for the twelfth consecutive month. However, the expansion in June 2022 is the weakest reported since September 2021 as inflation concerns continued to dampen business confidence. Production of manufactured products, factory orders, stocks of purchases and employment reported softer growth in June 2022 compared to the preceding month. On the other hand, Services PMI rose to 59.2 in June 2022 from 58.9 in May 2022, highest level since April 2011. New order intakes by the services companies touched an 11-year high in the June 2022 quarter even as the input costs continued to rise in June 2022.

The index of eight core industries rose by 18.1% YoY in May 2022. The growth was broad-based with all eight industries reporting rise in production. Electricity generation rose by 22%, steel production by 15 % and cement production by 26.3% YoY. Cumulative output of eight core industries during April-May 2022 rose by 13.6% YoY.

Core sector growth accelerated to 5.8% y-o-y in February 2022 compared with 4% y-o-y in the previous month due to low base (February 2021, the core industry contracted by -3.3% y-o-y). On a m-o-m basis, core output decreased by 5.3%. On a y-o-y basis, acceleration in core is led by natural gas at 12.5%, refining at 8.8% and coal at 6.6%. Uptick was also visible in steel at 5.7%, cement at 5% and electricity at 4%. During April-February 2022, core sector reported an increase of 11.1% y-o-y. Cement and natural gas have driven the rebound at 22.4% y-o-y and 20.4% y-o-y respectively. Steel output has seen an increase of 18.5% y-o-y.

The merchandise trade deficit widened to a high of USD 25.6 bn in June 2022, driven by relatively weaker exports and higher imports. Export growth moderated to 16.8% YoY in June from 20.6% in May. Oil exports remained elevated, while other exports moderated sequentially to 4% YoY in June from 13.1% in May. Import growth remained elevated at 51% YoY in June with crude oil imports growing by 94.2% YoY, gold by 170 % and coal imports by 240%, the latter reflecting the power crunch. India’s current account deficit narrowed in Q4 FY2022 to -1.5% of GDP from a 36-quarter high in Q3 FY2022 of -2.6% of GDP. FX reserves as at the end of June 2022 decreased by USD 8 bn at approximately USD 593 bn.

GST collections were higher by 2.2% MoM at INR 1.44 trillion. Bank credit growth for June 2022 continued to be strong at around 13.2% YoY vs 12.1% YoY in May 2022.

Overall domestic demand and activity levels remain robust but input price pressures are being felt in manufacturing as well as exports, which will likely keep core inflation high. Whilst global commodity prices softened in June, they continue to remain at elevated levels with high volatility. As global central banks continue to raise interest rates, financial conditions have tightened. India’s banking sector remains in a strong position to support growth through stable credit growth.

  
Equity Market

 

  

The BSE-30 and Nifty-50 indices declined around 5% each in June, as the markets remained concerned amid monetary tightening due to elevated inflation levels and recession concerns. Brent Crude was extremely volatile and touched ~$125/ barrel before correcting ~$110/ barrel. Mid-cap and Smallcap indices underperformed large-cap and fell 6.5% and 8.3%. All sectoral indices closed negative except auto index. Metals, Consumer Durable and Realty indices were the biggest losers, declining 14%, 9% and 6% respectively.

High-frequency data for June was mixed, with expansion in service’s consumption, a mixed trend in industrial activity while external demand moderated. About the ongoing monsoon season, the IMD’s forecast for rainfall over northwest India is likely to be ‘normal’ this year, which is 92% to 108% of the Long Period Average. In June, the Central Government, hiked the minimum support price (MSP) for 14 kharif crops, ranging from 4% to 8%. On the taxation front, Govt has levied export tax on petrol, diesel, and windfall tax on domestic crude oil production. During the month, FPIs sold US$ 6.4 bn worth of Indian equities in the secondary market while DIIs bought US$5.9 bn.

Globally, economics continues to influence investor behaviour across markets and the battle to tame inflation dominates the agenda of most authorities and central bankers. From an India perspective, the sharp decline seen in various soft and hard commodity prices in the past few weeks along with continuing intervention of Indian policy makers would accelerate the process of inflation normalization. Inflation expectations in India can also be expected to moderate with improving trends in the progress of the monsoon. India’s monetary and fiscal policy co-ordination will likely allow the RBI to reach neutral much sooner, thereby taking the risk of structurally higher inflation and/or significant deterioration in the growth outlook, off the table.

However, the battle on inflation in developed markets may be quite prolonged though recent trends in commodity prices should bring relief there as well. This may also delay the eventual recovery of the domestic markets until peak inflation in developed markets is decidedly behind, and growth slowdown/recession concerns have fully played out. At a broader level, a portfolio tilted towards domestic growth stories will likely work out better relative to global sectors. After a brief hiccup due to the Russia-Ukraine conflict, our long-favoured preference towards sectors and companies that are users of commodities v/s producers of commodities is now starting to play out strongly and is expected to extend itself for some more time. While globally exposed sectors like IT and metal/oil commodities have now turned lot more palatable in recent weeks on valuations, we remain watchful and wait for probable moderation in earnings expectations.

The upcoming result season for 1QFY23 will likely hold important clues with regards to growth and profitability trends across a swath of industries and will be the cynosure of the market for the coming month. We continue to believe that India’s overall profit pool has reasonable resilience to the current inflation shock and should not see material downgrades hereon. Market valuations are now at or marginally below its 5-yr average and not too far out even from 10-yr averages. The ongoing uncertainty, particularly around the world economy will keep equity market returns on leash for most part of 2022. However, we stay constructive on India’s improving economic cycle and inherent stability and believe the balance of this year will provide good opportunities at portfolio and investment planning for potential returns during 2023 and beyond.

 

 
 
Fixed Income Market
 
 

Global Financial markets witnessed wide oscillations during the month as the market participants struggled to weigh the inflationary pressures vs the recession fears in few developed economies. Domestic interest rates also saw high volatility, though to a lesser extent with 15-20 bps hardening in first half of the month before cooling off almost entirely in 2nd half as the global metal commodities corrected sharply on the back of global recessionary fears.

Domestic inflationary pressures remained high as reflected in May CPI inflation at 7.04%, though it moderated from 7.79% in the previous month on account of favorable base effect and sequential slowdown in core inflation.

RBI further hiked the policy repo rate by 50 bps in continuation to its focused shift from growth supporting policy to an inflation controlling one. Elevated inflationary pressures led by global commodity price surge including food items prompted RBI to sharply revise the inflation projections upwards to 6.70% for FY23, from 5.70% projected in April’2022 and 4.50% projected in February’2022.

FPI’s continued to sell off in both debt (~INR 24bn) as well as equity (~INR 495bn) amidst global risk-off sentiment triggered by elevated inflation fears and aggressive monetary tightening. INR depreciated sharply during the month to close at 78.97 on month end against USD, as EM currencies came under pressure as USD strengthened on expectations of aggressive US FED rate hikes.

Outlook

CY22 is expected to remain volatile as globally the Central banks go for aggressive rate hikes to rein in inflationary pressures, which may also raise the recessionary fears forcing Central banks to slow down later and settle at lower than currently expected terminal policy rates. We believe that inflation trajectory is uncertain on geo-political risks and quantum of the rate hike by US FED and as such is expected to remain elevated, especially over next few months on energy prices. On the domestic front, notwithstanding the recent correction on metal commodities and benign monsoon outlook, next few months remain very critical for inflation trajectory.

MPC has clearly articulated a pivotal shift away from ultra-accommodation adopted during pandemic and with inflationary pressures still remaining elevated, we expect MPC to continue with rate hikes over next few policies to reach ~5.75% to 6% Repo rate by April 2023. Further rate hikes, if any will depend upon the expected inflation trajectory in FY24, which is still evolving and dependent on geo-political uncertainty.

Besides the inflationary pressures, incremental drag on Balance of Payment due to high Current Account Deficit and FPI’s sell off can add to the complications for RBI for maintaining healthy Forex Exchange cushion and currency stability.

With challenging global backdrop as many Central Banks tightens the monetary policies to tame inflationary pressures, huge fiscal supply and RBI’s expected fast withdrawal of ultra-accommodative policy, we expect interest rates to remain volatile with an upward bias.

We feel that 6 months to 1 year segment of the yield curve provides an opportunity to risk-averse investors amidst uncertainty going forward. For investors looking at the core allocation, the 1 to 3 year segment of the yield remains well placed from carry perspective as it has already priced in more aggressive rate hikes. This segment is a sweet spot on the yield curve – neither too short which gets impacted by low gross yields, nor too long that can get impacted by the rate volatility.

Credit environment remains healthy; however, current narrow spreads of AA / AA+ over AAA bonds do not provide favorable risk adjusted reward opportunities, and we expect illiquidity premium to increase sharply over a period of time thereby posing mark to market challenges for this segment.

 

 
 
 
 

 

 




 

 

 
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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