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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.

June 2021

Macro Economic Review
 
 

The lockdowns of April and May gave way to steady re-opening of activities across states in the month of June, as Covid-19 cases continued to drop across the country. Economic activity levels started to pick up as mobility increased. The vaccination rate also improved as production and availability of vaccines increased.

A key development in June was the announcement made by the Finance Minister, which extends an economic support package targeted at the sectors worst hit by the second pandemic wave. Among the schemes announced, some were new initiatives (such as credit guarantee for microfinance institutions, 0.5mn free tourist visas, health-care scheme focusing on pediatric care), but many were an extension to previously announced schemes (such as the Emergency Credit Line Guarantee Scheme (ECLGS), Atmanirbhar Bharat Rozgar Yojana for job creation, and free food distribution). Relief measures to the tune of INR 6.29 lakh crs were announced, including direct fiscal cost to the government as well as additional contingent liabilities in the form of credit guarantees. Of the approximately 2.7% of GDP fiscal package, roughly 0.6% will be the cash outgo for the current fiscal year. The total quantum of credit guarantees is INR 2.67 lakh crs, which includes the enhancement to the Emergency Credit Line Guarantee Scheme (ECGLS) by INR 1.5 lakh crs, the health sector (INR 50,000 crs), microfinance institutions (INR 7,500 crs), and other sectors (INR 60,000 crs). Whilst the headline announcement is positive, it mainly addresses the supply side and not much on the demand side.

Headline CPI for May 2021 came in at 6.3%, against the forecast of 5.3% and much higher than the April 2021 number of 4.29%. The number is well above the consensus market expectations of 5.3%. The CPI this month saw broad-based increase across food and non-food items. Food inflation was elevated due to higher oils & fats inflation (30%), high inflation in eggs, meat & fish, pulses and fruits. The food inflation is much more broad-based than earlier in the year when food inflation was high mainly caused by higher vegetable prices and a couple of other items. The continued trend could push food inflation higher in the coming months. Transport and communication inflation also came in at a high of 12.5%. This includes petrol and diesel used for private and public vehicles’ consumption. Given the rise in petrol and diesel prices in June as well, the prices are expected to moderate a bit in coming months due to favorable base effects as an additional duty was imposed in June of the previous year. The fuel and light inflation came in at a high of 11.58%. Core inflation also came in high at 6.6%. Most of the segments of core inflation except housing and education came in at 6% or higher range. Inflation in the health segment was at a high of 8%.

The services PMI (Purchasing Managers’ Index) remained in the contraction zone of 41.2 versus previous month of 46.1, led by a sharp contraction in new orders for a second month in a row. The manufacturing PMI as well contracted to 48.2 from 50.8 in the previous month. Both their performance is far better than the sharp crash seen during the first wave in 2020, but a key area to keep a watch this time around is building input cost pressures for both sectors.

The Eight core sector performance should be read against the favourable base effect from the previous year. The May core sector output rose by 16.8% against a contraction of 21.4% previous year. However, on a month-on-month basis, there has been a decline of 3.7%, which reflects the impact of the second wave of the Covid-19 and the associated lockdowns. Month-on-month improvement has been registered in case of fertilizers, natural gas and coal production. The monthly index for May’21 is still 6.1% lower than the pre-pandemic index of February’20. Infrastructure related sub-sectors like cement and electricity production saw the sharpest contraction (18% and 11% below pre-pandemic levels, respectively). However, commodity-intensive steel production came in 4% higher than Feb’20 levels.

The June trade deficit widened to USD 9.4bn from the lows of USD 6.3bn last month, largely due to import normalisation. That said, the trade deficit remains much lower than the USD 13.7bn deficit clocked in the six months before the second wave. Understandably, the oil import bill ballooned as crude prices touched USD 73 per barrel. Core imports (non-oil, non-gold), too rose. The latter crossed the USD 30bn mark for the first time since Aug 2018. Gold imports, on the other hand, remained rather low at under USD 1bn (vs an average of USD 5.3bn in the past six months before the second wave). Export earnings remained strong on the back of buoyant global demand, led by engineering goods and chemicals. Foreign Exchange reserves ended June 2021 at USD 604 bn – up USD 11 bn for the month.

E-way bills which are a good early indicator of activity levels saw a rebound from 4 crores in May 2021 to 4.7 crores in June 2021. However, it remains substantially lower than the high of 7 crores recorded in March 2021.

Overall financing conditions continue to remain benign compared with last year. Domestic demand and activity levels which softened across sectors in April and May have started to improve in June. Service’s sector, which has experienced a sharper slow-down as a result of lockdowns, continues to remain subdued. The manufacturing sector is better positioned given the improving global growth outlook and resilient domestic demand. The government’s fiscal incentives and RBI’s monetary measures will ensure that any slow-down in growth doesn’t become self-fulfilling. Liquidity conditions remain benign and with strong foreign exchange reserves, any global spill-over risks can be better managed. The pace and scale of Covid-19 vaccination continue to improve and remain an important driver of growth for rest of FY22.

  
Equity Market

 

  

The BSE-30 Index and Nifty-50 Index gained 1% in the month of June while CNX Mid-cap and CNX Small-cap indices gained 4.6% and 5.0% respectively. Markets were buoyed by a steady decline in Covid cases, pick up in vaccination drive, ease of lockdown like restrictions. However, rising inflation and the Delta plus variant of the novel coronavirus weighed on investor sentiment. On the global front the US Federal Reserve kept interest rates unchanged, but signalled that they expect two increases by the end of 2023. On the domestic side, during the quarter, the MPC (Monetary Policy Committee) kept repo rate unchanged at 4% and continued with its accommodative stance. The government announced relief measures to support the economy including Rs. 1.1 tn worth of loan guarantee scheme for Covid affected sectors and increased the outlay for the ECLGS scheme to Rs. 4.5 tn (from Rs. 3 tn). In terms of flows, both FIIs (Foreign Institutional Investors) and DIIs (Domestic Institutional Investors) were net buyers during the month with FIIs buying US$ 2.4 bn of Indian equities (which included some large secondary deals) while DIIs also brought US$ 0.9 bn in the month of June. In sectoral trends, IT was the clear winner followed by FMCG, Realty, Pharma while Banking and Energy sector were the laggards.

Based on the result season gone by, Corporate India appears to have displayed remarkable strength in FY21, with the Nifty ending the year with a healthy (15%) earnings growth, which was unthinkable a year back. The second Covid wave in Apr-May’21 has dampened sentiments and impacted economic activity. Since restrictions this time around were localized and less stringent v/s the lockdown in CY20, one expects the impact in 1QFY22 to be contained. But unlike last year, the impact of the second wave has been more pronounced in the rural and interiors of India, which can potentially delay consumption-led recovery. As highlighted in the past, the pace of vaccinations will likely be key to containing the economic damage, if any arising out of a probable third wave. Daily vaccine doses administered in India have now risen to an average of 7-8m v/s 3.5-4m in the prior month. This has helped the market to largely look through the second Covid wave, helped further by strong liquidity and robust participation from non-institutional investors. We reckon strong earnings contribution from commodity cyclicals and global businesses like pharma and technology may well compensate for shortfall in earnings caused by the second wave on domestic economic activity. BFSI and commodities are expected to drive bulk of FY22E earnings.

In the US, the decline in market-driven inflation expectations in recent weeks, as with the job data, has reduced the near-term pressure on the Fed, which is why the most newsworthy development of the June FOMC (Federal Open Market Committee) meeting was that the Fed “dot plot” forecast now incorporates 50bps of tightening in 2023 v/s 2024 earlier. This in our view, will likely provide the necessary backstop to a build-up of any fresh runaway inflation expectations. Nonetheless, our fund house view remains that inflation is primarily a manifestation of money supply and the strong broad money growth will lead to harder inflation down the road. In that context, hereon the Fed’s direction on the velocity of monetary easing will perhaps be more pertinent to global market risks than interest rates. Alongside, we also remain cognizant of the medium-term impact of the second wave on the India economy, a possible 3rd wave, rising commodity prices especially oil and stiffer entry valuations in general. The progress of the monsoon will also likely determine the course of rural and consumption demand for 2021-22. As per IMD, the rainfall for June was 10% above estimate but the rainfall pattern is uneven with several North India and North East states receiving poor rainfall. The IMD believes, July should the biggest month for rainfall and some deficits may be bridged. Some of these risks could have the potential to slow market returns in the near-term. Valuations, while tolerable at an aggregate level, are getting frothy in certain parts of the broader market. The IPO market has turned vibrant over the past 6-9 months, which is bringing in a plethora of new-generation businesses as investment opportunities. However, valuations in many of these, are fairly demanding.

Keeping all the above in view, we think risk-reward in the markets are evenly balanced at this stage. We retain our belief that the Indian economy should witness a recovery in 2021, albeit of a slightly lower intensity than before the onset of the second wave but accelerate thereafter. Based on current assessment, globally oriented businesses, cyclicals and industrials, healthcare and technology will likely dominate most part of 2021 even as consumer sentiment gradually repairs itself from the impact of the second wave during this period. We remain with our tactical preference for cyclicals such as financials, industrials, commodities etc. in the near-term. We also like Technology for its earnings resilience but have more recently opted to moderate our O/W of the past 6-9 months on valuations. India, however, 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. Our chosen path to portfolio construction is a balanced approach regards 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.

 

 
 
Fixed Income Market
 
 

The Covid-19 cases witnessed a drop across the country permitting partial easing of state lockdowns & steady re-opening of the activities across states from the mid of June. The vaccination rate also improved as production and availability of vaccines increased. Economic activity levels started to pick-up once again as mobility increased.

However, due to the strict lockdowns which impacted the demand, India Manufacturing PMI fell to 48.1 in June 2021 from 50.8 a month earlier, first contraction in the manufacturing sector since July last year. The services PMI remained in contraction zone of 41.2 versus previous month of 46.1, led by a sharp contraction in new orders for a second month in a row. The May core sector output rose by 16.8% as against a contraction of 21.4% in the previous year, largely on the back of favorable base effect as previous year had strict national level lockdown. On a month on month basis, there has been a decline of 3.7%, which reflects the impact of the second wave of the Covid-19 and the associated lockdowns.

The headline CPI for May 2021 surprised sharply on the upside and printed at 6.3%, against the market consensus of 5.4% and much higher than the April 2021 number of 4.29%. This month was actually the peak of lockdowns due to second wave and CPI saw rise in food, fuel and core inflation across the board. Food inflation was elevated due to higher oils & fats inflation, high inflation in eggs, meat & fish, pulses and fruits. Continuous rise in petrol & diesel prices have imparted greater inflationary pressure with transport & communication and fuel & light coming in at 12.5% and 11.6% respectively. Core inflation also remained elevated at 6.6%.

The June trade deficit widened to USD 9.4bn from the lows of USD 6.3bn last month, largely due to import normalization. June Imports increased by 9.6% month-on-month due to easing of state-wide restrictions, while the June exports rose by a marginal 0.6% month-on-month. Domestic demand lags behind global activity levels with non-oil import growth much lower than non-oil exports, for now. With the normalization in activity levels, FY22 is again expected to slip in to trade deficit after recording a trade surplus in the previous year.

The foreign exchange reserves continue to surge and has reached a record high of USD 608 bn on the back of robust FPIs inflow in equity market and provides comfort on external stability.

Systemic Liquidity continued to remain in surplus at an average of ~Rs. 4.8 trn in June 2021, almost similar as in the previous month at ~Rs. 4.6 trn. Systemic liquidity is expected to increase in July as government spend increases.

Fiscal deficit in 2MFY22 stood at INR 1.2 trn (~8.2% of FY2022BE) much lower than the average of ~ INR 3.9 trn during the same period over past 3 years, on the back of healthy tax revenues & RBI’s dividend transfer.

Rates continued with a downward bias for initial few days in June till the inflation negative surprise, and hardened thereafter for rest of the month. Most impacted segment was 2024, 2025 & 2026 segment, which hardened by 10 - 20 bps on month-on-month basis, reversing some of the rally in the previous month. The short end remained almost flat during the month supported by the surplus liquidity, while the long 10 yr G-Sec hardened by a marginal 3 bps to close at 6.04%. RBI's G-Sec Acquisition Program (G-SAP) 1.0 supported the long end. Corporate bonds and G-Sec performed in line with each other.

Outlook

The Covid-19 2nd wave has tapered, but the count of fresh cases still continue to remain elevated. Along with the fears of subsequent waves & threat of new variants, growth uncertainty will remain high unless a large part of the population is vaccinated.

On inflation front, last CPI print has surprised negatively both in terms of the quantum of increase and also with its wide-spread nature, as the elevated global commodity prices along with the domestic supply - side disruptions due to the state lockdowns imparted the price pressure. While the inflation is expected to moderate over next few months with favorable base effect and restoration of supply side, average inflation for FY22 is still expected to overshoot the RBI’s current projection of ~5.1%.

Amidst the continuing growth uncertainty, we believe RBI will continue to give prime importance to the economic growth recovery & financial stability as of now and maintain the similar approach of lose monetary policy through accommodative policy stance as well as benign systemic liquidity through the most of CY2021. While the inflation needs to be monitored closely, RBI may take comfort as long as the inflation remains within the inflation targeting framework of 2% to 6% and is not led by the demand driven factors. Additionally, RBI’s readiness to act swiftly further through various tools, reassurance of surplus systemic liquidity and G-SAP 2.0 will help in addressing market concerns & ensure the orderly evolution of the yield curve.

We feel that 1-5 years segment of the yield curve continues to provide attractive opportunity from risk-reward perspective and should be a part of core fixed income allocation depending on the investment horizon. Current yields at longer-end provides the benefit of high accrual, given the steepness of yield curve and some allocation at the longer end finds merit on the back of conviction that RBI will continue to support through G-SAP and Open Market Purchase Operations.

Any broad-based recovery in credit environment is still sometime away and we believe one has to be very careful & selective in going down the credit curve.

 

 
 
 
 

 

 




 

 

 
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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