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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.

March 2024

Macro Economic Review
 
 

Global economy recovered in March 2024 on back of pick up in manufacturing growth as well as continued strength in services. Consumption in the US slowed a little but remains robust as declining inflation supports real disposable income. US jobs market continues to remain solid with low jobless claims and positive real income growth. Chinese economy seems to be recovering from slower growth of last year as stimulus measures slowly start to show. Indian economy continues to demonstrate strength as strong government spending, a renewed real estate cycle and strong bank lending continue to support growth.

CPI for February came at 5.09% vs 5.1% in the previous month. Higher food inflation was offset by lower core inflation. Food inflation continued to remain high at 7.8% YoY led by high vegetable and pulses inflation. Core inflation continued to soften and came at 3.4% vs 3.6% in the previous month.

Manufacturing Purchasing Managers' Index (PMI) for March came at 16 year high of 59.1 vs 56.9 in previous month. New orders saw fastest growth over three years and price pressures remained benign. Services PMI also came strong at 61.2 vs 60.6 in February. New orders and exports showed strong growth. The index of eight core industries moderated a little with growth coming at 3.6% YoY vs 3.9% YoY in the previous month. Cumulative output of eight core industries for the period April-February has increased by 7.7% YoY vs 8.2% in previous year. Bank credit continued its strong growth in March growing by ~15.5% YoY.

India’s merchandise trade deficit increased to USD 18.7bn in February vs. USD 16.5bn in previous month. Exports were up 11.9% YoY as global goods demand continued to improve. Imports were up 12.2% YoY on back of higher gold and non-oil imports. Net services surplus reached highest levels at USD 16.8 bn for February, up almost 34% YoY. FX reserves at the week ending March 29, 2024 were USD 645 bn, up ~USD 27 bn from the end of February 2024.

The Q3FY24 current account deficit (CAD) narrowed to US$10.5bn (-1.2% of GDP) vs US$11.4bn (-1.3% of GDP) in Q2FY24. The reduction in CAD was led by higher services surplus and transfers, which more than balanced rise in trade deficit. Services surplus remained robust at US$45bn in Q3 vs US$40bn in Q2FY24, led by software services and professional services. Remittances inflows continue to rise, at US$29.3bn in Q3 vs US$24.9bn in Q2. BoP surplus rose to US$6bn in Q3 vs US$2.5bn in Q2, reflecting pick-up in capital inflows and moderation in CAD. On the flows front, there was a rise in banking capital inflows and FPI inflows.

Central Government’s gross fiscal deficit (GFD) at end of February touched 87% of its FY24 Revised Estimate (RE). In absolute terms, the deficit during April 2023-February 2024 amounted to INR 15 trillion. Government expenditure increased by 7.3% YoY during April 2023-February 2024. Revenue expenditure rose by 1.3% YoY and capital expenditure rose by 36% YoY. On the revenue side, net tax collections rose by 6.8% YoY. Non-tax revenue receipts increased by 45 % YoY.

Overall domestic demand and activity levels remain healthy as investment and capex cycle remains firm. Strong bank lending is providing good support to growth. Core inflation has been trending down steadily helping to keep inflation within range. Global growth seems to be improving providing a positive macro back-drop.

  
Equity Market

 

  

The Nifty Index recorded a gain of 1.6% in March 2024. The mid-cap (-0.5%) and small-cap (-4.4%) indices underperformed the Nifty Index and there was a lot of volatility especially in the mid and small cap space. Sector-wise, capital goods, auto and metals were up 6.1%, 5% and 5%, whereas IT, realty and FMCG declined 7.2%, 1.2% and 0.7% in March 2024.

Most of the global equity markets ended on a positive note. Taiwan (+7%), Germany (+4.6%) and the UK (+4.2%) were the major gainers. Other key developments in India: (1) the Lok Sabha elections in 2024 have been scheduled to be conducted in seven phases, commencing from April 19, 2024, and concluding on June 1, 2024. The results will be announced on June 4, 2024, (2) the Union Cabinet approved a 4% increase in Dearness Allowance (DA) for Central Government employees and Dearness Relief (DR) for pensioners starting January 1, 2024,(3) Centre notified 3-10% hike in MGNREGA(Mahatma Gandhi National Rural Employment Guarantee Act) wage rates for FY25 ahead of polls , (4) Oil marketing companies cut petrol, diesel prices after 22 months of gap (5) Moody’s Ratings raised India’s GDP growth forecast for FY24 to around 8% from 6.6% on the back of strong domestic consumption and capital expenditure. During the month, FPIs brought US$4.2 bn of Indian equities in the secondary market, whereas DIIs also bought shares worth US$ 6.8 bn.

High-frequency data for March 2024__ were strong and improved on a YoY basis. Goods and Service Tax collection in the month of March 2024 rose 11.5 % on an annual basis to Rs 1.78 lakh crore, the second highest since the regime came into force in July 2017. India's manufacturing activity continued to expand in March 2024 as the HSBC Purchasing Managers’ Index or PMI climbed to a 16-year high of 59.1 in the same month from 56.9 in the month of February this year. Similarly, India’s services PMI at 61.2(March 2024) were one of the strongest in over 13-and-half years. Credit growth (adjusted for the HDFC merger) remains buoyant as it rose by 16.5% YoY in March 2024. The Auto industry, in March 2024, saw continuation of the trend from preceding months, with growth in B to C segments (PV, 2W), and weakness in CVs + Tractors.

India’s households are also transitioning savings towards physical and financial assets. While this is driving growth in certain sectors like real estate and capital markets, it is also leading to slower growth in non-discretionary consumption products. Besides, this at the margin is creating the incremental challenge of inadequate liquidity for the banking system due to slower growth in bank deposits. We expect the RBI, in conjunction with the Government, to address overall system liquidity to ensure continuity in the current credit cycle. Simultaneously, we also see the central bank being highly vigilant of any credit excesses developing, particularly in the segment of unsecured retail credit. Overall, India’s growth dynamic in 2024 is likely to be dominated by the strength in the government-led investment cycle even as we continue to run with the expectation that the consumption economy could make a cyclical comeback on the back of lower inflation and interest rates.

Regarding developed economies like the US/China/EU, we expect moderation from the lagged impact of sharp interest rate hikes of 2023 and as strong government 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. We, however, do not expect strong recessionary conditions even as this may invite stronger policy action on interest rates by global central banks. Meanwhile, the path of global interest rates during the course of 2024 has turned a little uncertain given continued strength of labor markets and the recent recovery in oil prices that threaten a comeback of inflation.

Overall, Indian markets continue to hold up well when seen from a 12-month perspective. The broader market which had weakened the previous month reflecting regulatory headwinds, reversed much of their recent losses. This reflects the earnings growth visibility for mid/small corporates in the economy. In the near-term, markets attention will be focused on upcoming result season to ratify earnings strength, initial assessments on the monsoon season and the general elections.

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 itself. Risk control will form an essential part of equity allocations for investors hereon, and ensuring diversity of exposure will likely be crucial in our view for 2024. Investors with a 2–3-year horizon can continue investing in a staggered manner. 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 Market
 
 

The US Federal Open Market Committee FOMC maintained status quo in March 2024 but reiterated three rate cuts in CY2024, despite tight jobs market data & elevated inflation. FOMC also hinted on tapering of Quantitative tightening soon. The ECB(European Central Bank) & BOE(Bank of England) maintained a pause, while indicating the rate cut expectations over next few months. Switzerland Central bank delivered a surprise rate cut. Further, BoJ(Bank of Japan) finally ended the negative interest rate regime and yield curve control. Domestically, the Monetary Policy Committee (MPC) maintained a status quo on policy rates and stance as “withdrawal of accommodation”, on expected lines.

RBI released the borrowing calendar for G-Sec for 1HFY25 at Rs 7.5 trillion - 53% of budgeted FY25 borrowing. This is sharply lower than last 5-year average of more than 59% in first half of FY and has resulted in lower 15.5% gross supply & ~21% net supply as compared with 1HFY24. Consolidated State budget indicate a higher SDL (State Development Loans) borrowing for FY25 at Rs 11.1 trillion, compared to Rs 10.1 trillion in FY24. Nonetheless, the combined G-Sec and SDL gross supply is still lower in FY25. SDL 1QFY25 borrowing calendar came at Rs 2.54 trillion, as against Rs 2 trillion in 1QFY24. With G-sec calendar more evenly distributed for FY25, even States seem to have attempted to evenly distribute their borrowings across the four quarters.

Global rates remained volatile as the incoming data tested the patience of market in terms of the timing of first-rate cut by FOMC. Indian rates also tracked the global rate movement before rallying towards the end of month triggered by light 1HFY25 G-Sec borrowing calendar. During this month, 10 yr G-Sec oscillated between ~7.02% - 7.10% and closed the month at ~7.06%. Domestic banking liquidity remained in deficit towards the FY end.

Outlook

The global backdrop remains evolving on rate cut cycle. Even as many key Central Banks have recently reiterated the high likelihood of rate cuts beginning over next few months, incoming data on jobs market & economy in US points toward a delayed rate cut cycle, making the rate market volatile. Along with that, recent surge in crude prices, due to escalation in geo-political risks pose risk to the global inflation trajectory.

Domestic fundamentals are much better placed. Core inflation has eased to a multi - year low of 3.4% in February’2024 and recent cuts by Government on LPG, diesel & petrol price is expected to provide further relief. As food inflation remains elevated, RBI has recently maintained the FY25 inflation at 4.5% even as it lowered the projection for 3 out of 4 quarters with 2QFY25 expected to see inflation dropping below 4%, almost after 5 years. India’s external sector indicators have remained resilient; current account deficit for FY24 is expected well below 1%, surplus Balance of Payment and Foreign Exchange (Fx) reserves have strengthened to more than USD 645 bn (as on March 29, 2024).

While the timing of domestic rate cut cycle will depend on US rate cut cycle, domestic fiscal demand – supply is looking favorable with lesser G-Sec supply in FY25 on the back of fiscal consolidation and particularly in 1HFY25 with light G-Sec borrowing calendar. Demand is expected to remain robust from investors like banks, insurance companies, EPFO(Employees' Provident Fund Organisation), NPS(National Pension System) etc. and even FPIs(Foreign Portfolio Investment) as G-sec gets included in global debt indices.


Overall, risk-reward remains favorable at current juncture with benign fundamental & elevated yields across the yield curve. Permitting risk appetite, it is a prudent time to go long on duration with increased allocation toward funds like Gilt fund, Medium Duration Fund, Corporate Bond Fund, Banking & PSU Funds etc on the back of favorable fiscal-demand supply dynamics. Next few months could see bouts of volatility as market struggles to see the first rate cut in US, any uptick in domestic yields on global spillovers should be taken as an opportunity to add further duration. CY2024 will eventually see the rate cut cycle beginning and markets will react much in advance to the expected policy stance change followed by rate cuts thereby upfronting the returns through spread compression over 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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