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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.

July 2022

Macro Economic Review
 
 

Global inflation continued to surge to multi decade highs. Domestic CPI inflation eased marginally to 7.01% YoY in June 2022 from 7.04% YoY in May 2022 on the back of lower-than-expected prints for food and beverages (led by vegetables and oils/fats) – (up 7.6% YoY in June vs 7.8% YoY in May) and the miscellaneous group (up 6.3% YoY in June vs 6.8% YoY in May). The cut in excise duty on petrol and diesel also helped the decline in the transport and communication sub-index of CPI. While the share of items in the CPI basket that witnessed a sequential increase in prices eased marginally to 79% in June from 80-83% in April-May, it still remained above the average levels seen during the pre-pandemic period. Core inflation for June 2022 came at 6.2% YoY vs 6.4% in the previous month.

Manufacturing Purchasing Managers' Index (PMI) jumped to 56.4 in July 2022, after declining to 53.9 in June 2022. This is the highest reading of the PMI in the last eight months. It is also the 13th consecutive month when the manufacturing activity has shown an expansion. The growth was spread well across sectors, with investments goods doing particularly well. On the other hand, Services PMI declined to 55.5 in July 2022 from 59.2 in June 2022, although continued to remain inhealthy expansion. New business inflows increased at the slowest pace in the last four months due to competitive pressures, unfavourable weather and price pressures. Input price pressures abated slightly, and the employment sub-component rose marginally.

The index of eight core industries rose by 12.7% YoY in June 2022, lower than the 19.3% growth registered in the preceding month. Seven of the eight core industries reported a rise in production, while one reported a fall. Cumulative output of eight core industries during April-June 2022 rose by 13.7% YoY, as compared to a 26% growth recorded during the same period a year ago.

The merchandise trade deficit widened to a record high of USD 31bn in July 2022 vs a deficit of USD 25.6 bn in June 2022, driven by relatively weaker exports and continued robust imports. Export growth fell by 0.8% YoY and saw a decrease of 12.2% MoM. Deceleration in exports was led by cotton (-28.7%), petroleum products (-7.1%), gems and jewellery (-5.2%), engineering goods (-2.5%), drugs and pharmaceuticals (-1.4%). Import growth remained strong at 43.6% YoY in July with crude oil imports growing by 70% YoY and non-oil non-gold imports up 45% YoY. During Apr-Jul 2022, exports increased by 19.3% YoY to USD 156.4bn. During Apr-Jul 2022, imports have seen an increase of 48.1% YoY to USD 256.4bn. FX reserves as at the end of July 2022 saw a sharp monthly decline of USD 22 bn to end at approximately USD 571 bn.

Central Government's gross fiscal deficit touched 21.2% of its annual budget during the first quarter of FY23 (18.2% in previous year). For Q1 FY23, government expenditure increased by 15.4 % YoY whereas Government’s receipts increased 9% YoY.

GST collections were higher by 3% MoM at INR 1.49 trillion and e-way bills higher by 1.2% MoM. Bank credit growth for July 2022 continued to be strong at around 12.6% YoY vs 13.2% YoY in June 2022.

Overall domestic demand and activity levels remain robust. Input price pressures whilst being high have softened a little. Global commodity prices softened in July and may help to lower inflation pressures. 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

 

  

Globally economics continue to influence investor behaviour across markets and the battle to tame inflation dominates the agenda for most authorities and central bankers. Post the most recent 75bps rate hike in the US and the subsequent moderation of 10-yr yields based on lead indicators of inflation and growth, global markets staged a smart recovery buoyed by the expectation that the current rate hike cycle in global markets may conclude earlier than anticipated.

Notwithstanding the above, we reckon the current rate of inflation in India is only marginally higher than its 20-year average and hence should have lesser impact on the consumer behaviour than in developed countries where inflation is running much higher than their respective 20-year averages. Also from India’s 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 can 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 zone 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 growth/inflation dynamic drives hope of faster return to neutrality. 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 well 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 before turning incrementally constructive. Meanwhile, banks, industrials, parts of consumption remain our 'go to' sectors for additional allocation.

The undergoing quarterly result season for 1QFY23 is witnessing healthy top line growth but margins have been under pressure as the steep commodity price escalation remains to be passed on to the customers. As a result, we have seen marginal downgrades to FY23 earnings estimates and some to FY24 estimates. While this trend may still take a couple of quarters to run out, we believe that India’s overall profit pool has reasonable resilience to the current inflation shock and should not result in material earnings downgrades hereon. Market valuations are now at or marginally above 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 remaining 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 inflation continued to surge to multi decade highs forcing many Central banks to aggressively tighten the monetary policies even at a risk of recessionary fears in few major economies. While the labor market in US remains tight, recent moderation in oil & commodity prices expected to provide some relief on inflationary pressures. With the market now factoring in lesser intensity of US future rate hikes, interest rates across major global economies rallied sharply by 40-50 bps during July.

Domestic interest rates also remained volatile with a downward bias though to a lesser extent of 10 – 25 bps across the curve. Yield curve flattened further marginally with 3 to 5 year segment outperforming the other segments in yield movement.

Domestic CPI inflation eased marginally to 7.01% YoY in June 2022 from 7.04% YoY in May 2022 on the back of lower-than-expected prints for food & beverages & cut in excise duty on petrol & diesel. While the recent correction in global commodities & expected normal monsoon provides relief, RBI has continued to maintain FY23 inflation projection at 6.70% highlighting broad-based pressures, elevated core prices & global uncertainty on imported inflation.

FPI’s turned marginal buyers for the first month in 2022 in equity segment (~INR 67 bn) even as debt segment continued to see outflows (~INR 22 bn). INR depreciated sharply and crossed 80 against USD during the month even as RBI intervened actively to smoothen the impact. FX reserves as at the end of July 2022 saw a sharp monthly decline of USD 22 bn to end at approximately USD 571 bn.

RBI further hiked the policy repo rate by 50 bps in August in continuation to its focused shift from growth supporting policy to an inflation controlling one. Elevated inflation trajectory which continues to remain above RBI's medium targets and aggressive tightening by major central banks prompted the MPC to raise policy interest rates towards the higher end of market expectations.

Outlook

MPC has clearly articulated its concern on inflation, which is reflected in retention of inflation forecasts for FY23. We believe supply side disruptions, geopolitical tensions, commodity prices & improving domestic demand conditions pose risks to inflation outlook, while the growth seems to be fairly supported by domestic factors. Anchoring inflation trajectory remains a key priority for MPC and given the current inflation trajectory, we expect MPC to continue with front-loaded rate hikes. Additionally, with the narrative in August MPC on external global factors, we now expect a policy repo rate to reach ~6% by Dec 2022 / Feb 2023, faster than our earlier expectations of April 2023. Further rate hikes, if any will depend upon the expected inflation trajectory in FY24 which is still evolving & dependent upon geo-political uncertainty.

Besides the inflationary pressures, another key monitorable to keep a watch on is the Balance of Payment situation, which can also influence RBI’s decision for pre-emptive rate hikes. Aggressive rate hike in US has triggered a significant USD strength against many currencies including INR even as RBI has actively intervened to smoothen the volatility.

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.

Against the backdrop of many such uncertainties, we prefer using the conventional wisdom to contain interest rate risk with a moderate overall duration of debt investment portfolio. Yield curve has already flattened sharply since March 2022 with 1-2 yr segment hardening by ~140 bps while the 5 yr+ segment has hardened by much lesser 50 – 60 bps. A much flatter yield curve gives an opportunity to investors to cut down on duration risk and continue to maintain high accrual. The 2 to 4 year segment of the yield remains well placed from carry perspective for medium to long investors, as it has already priced in more aggressive rate hikes and also lesser 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 il-liquidity premium to increase sharply over a period 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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