Insights

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.
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 2019

Macro Economic Review
 
 

October ‘19 saw strong return in Equity indices and positive finish for bonds. Nifty increased by 3.5% for the month on back of upbeat Q2 corporate earnings whereas 10 year government bond yields declined by 9 bps for the month on the back of surplus liquidity in the system. INR appreciated 0.4% vs USD. FPI flows saw $2,064 mn inflows into equities and $581 mn inflows in Debt.

The two inflation rates Wholesale Price Index (WPI) and Consumer Price Index (CPI) have been witnessing diverging trends since April ‘19 with the WPI steadily declining and CPI inching upwards (in 4 out of the last 5 months). The wholesale price inflation moderated to 0.3% in September ‘19 (slowest pace of growth since March 16), dragged down by subdued inflation in fuel and power group along with contraction in the prices of manufactured goods.

At the same time, retail inflation rose to a 14-month high of 4% (at the MPC’s threshold level), driven by an increase in the prices of food products.

Industrial output (as measured by Index of Industrial Production) contracted by 1.1% in Aug ’19, which was a reversal from the positive growth rate of the previous month (4.3%). The lackluster growth in industrial output was mainly on account of the contraction in manufacturing and electricity segment. In addition, contraction in the production of capital goods (indicative of weak investment climate), infrastructure goods and consumer durables (i.e. reflective of subdued demand conditions) further weighed on industrial production. In September ‘19, the core sector (as per Bloomberg Index : INFRIDXY index) contracted sharply by 5.2% (the lowest since the index was constituted) vis-à-vis the 0.1% growth in the previous month. Barring fertilizers, all the other seven sectors registered negative growth with production of coal having declined by 21% (highest contraction among the sectors).

Services PMI (Purchasing Manager’s Index) for September ‘19 declined to a 19-month low of 48.7 owing to weak demand, competitive pressures and challenging market conditions. The manufacturing PMI declined to a 2-year low of 50.6 from 51.4 in August ‘19. It was the slowest pace of growth in production and new factory orders in the last 2 years along with moderation in sales, which weighed on manufacturing activity during the month.

GST collections have been lower than INR 1 lakh crore target in 3 out of the last 6 months. In the month of August, the GST collections were 4.5% higher yoy but 4% lower month on month. The government’s financial position for the first half of fiscal 2020 shows that 92.6% of the budgeted fiscal deficit has been used which was 2.7% lower than the comparable target of year ago. Revenue collections at 41.6% of the budgeted target have been only 1.5% higher than the comparable target a year ago. Tax collections have been lower so far this fiscal (36.8% of the budgeted target vis-à-vis 39.4% in the comparable period a year ago). The expenditure towards subsidies is lower during H1FY20 (1% lower than the comparable period a year ago) on account of lower food subsidy.

Exports as well as imports declined in September’19. Exports growth contracted by 6.3% yoy vs 6% in the previous month. Exports were impacted mainly by global economic slowdown and trade tensions. Imports contracted by 13.8% yoy to a 3 year low, reflective of subdued demand conditions in the economy. The trade deficit narrowed in September to a 6 month low of $10.7 bn ($13.4 bn in Aug ‘19). For the first quarter of this fiscal year, the current account deficit at (US$ 14.3 billion) narrowed to 2% of GDP as against 2.3% of GDP in the corresponding period in the previous year. This was mainly on account of increased remittances, higher services receipts and lower crude oil prices. Foreign exchange reserves increased 2% from $434 bn in September to $441 bn in October.

Liquidity conditions within the banking system continued to remain surplus on back of government spending, FX inflows and benign leakage from currency in circulation. Average liquidity in system for month of October was approximately INR 185,000 crores.

On the global front, growth slow-down continues across Europe, Japan and China with manufacturing PMI numbers continuing to slip into contractionary territory. Even US manufacturing figures fell into contractionary territory forcing Federal Reserve to cut rates by another 25 bps in October bringing 2019 rate cuts in US to 75 bps. Brexit has got delayed to January 2020 after extension given by EU, helping the overall risk-on sentiment for October.

Overall October ’19 macro data on domestic as well as global front continued to show slow-down across manufacturing and services. In face of benign inflation globally, Central Banks have continued to ease policy rates. As the impact of lower rates continues to diminish, talks of fiscal stimulus continues to gather momentum globally.

Equity Market

  

Despite a weak start, Sensex gained 3.8% in October ’19 month post a 25 bps repo rate cut by RBI followed by another small fiscal stimulus through DA (Dearness Allowance) hike of 5% for government employees/pensioners. On the political front, the BJP emerged as the single largest party in both Maharashtra and Haryana in the recently concluded state elections. On the global front, China claimed that part of the trade deal with the US was completed triggering renewed optimism over the trade wars resolution whereas, the UK and the EU struck a long-awaited Brexit deal, but the UK House of Commons rejected PM Johnson’s deal and chose to go for Christmas general elections. The US Federal Reserve cut interest rate by 25 bps but signalled its rate-cut cycle might be at a pause. In terms of India’s domestic economic activity indicators, barring consumer credit growth and electricity consumption, most other indicators like auto sales (wholesale), consumer durable production continues to remain weak. Auto sales data for October ‘19 does, however, suggest some pick up in retail sales during the festive season, especially for passenger cars. Auto, Oil & Gas, Healthcare were the top performing sectors, whilst Infotech and Cap-goods were relatively weak (Source : Bloomberg). In terms of flows, FPIs invested US$1.8 bn and DIIs bought US$656mn worth of equities. Capital market saw muted activity.

In the ongoing result season for 2QFY2020, the Nifty and the broader universe components appear to have met expectations on revenue and operating earnings but surprised on PAT owing to the revision in tax expenses post the corporate tax cuts. In terms of PBT, Automobiles and Healthcare have exceeded, while Cement and Capital Goods have lagged behind expectations. Not all corporates are shifting to the new tax regime due to considerations around MAT credit and other exemptions. Notably, the trend in earnings revision seems more balanced thus far, which was skewed significantly in favor of downgrades in the past quarters. This can be attributed to the revised lower tax assumptions. Commentary from Management of respective sectors is incrementally positive for Automobiles and Corporate Banks, while it is stable for FMCG. Commentary remains cautious for IT (especially on margins) and capex-oriented companies.

At a global level, the US Fed twin policy of rate hikes and balance sheet tightening of 2018 appears to have reversed course even as global money supply (M1) trends are bottoming out. With most central banks around the world in easing mode and US-China trade talks once again assuming the right direction, conditions for improved global economic activity and price inflation are developing. This should in turn augur well for risk assets such as equity.

Locally, current growth trends in India are still running below potential, but medium-term; our positive outlook on the economy is premised on improving macro factors - controlled inflation, stable commodity prices/currency and continuing moderation of interest rates. Measures such as corporate tax cut, good monsoons and accelerating rural spends – interestingly disbursements under the PM Kisan Yojna scheme, a rural income support program, more than doubled in just the month of Oct to Rs400 bn v/s the Apr-Sep 2019 period – should aid India’s growth recovery. Improvement in global conditions should likely benefit India through stabilisation of exports, rising WPI and improving liquidity. It is imperative, that RBI maintains and builds upon its monetary aggression.

From a portfolio management standpoint, we restrict ourselves to a bottom-up approach to stock selection and portfolio construction until stronger evidence of more broad-based growth emerges. Given the extent of the slowdown across various sectors of the domestic economy, we would also like to keep our outlook on business growth recovery muted for the next couple of quarters even though the recent tax cut should aid overall earnings growth this fiscal. We prefer to evaluate investment propositions based on flat to weak growth assumptions for the ensuing future and resultant price to intrinsic value equation. We continue to be wary of balance-sheet related risks to businesses.

 

 
Fixed Income Market
 
 

The bond yields have largely stayed unchanged over last month despite the last repo rate reduction of 25bps in early Oct’19. (With this last 25bps cut the cumulative repo rate reduction from Feb’19 is 135bps). The fears of fiscal slippage in this FY have kept the bond yields elevated. The sharp reduction in the corporate income tax rates, sub-par collections in the GST each month; the drop in the headline growth rates and the media coverage of the distress in several manufacturing sector has kept the yields unchanged in the last few months.

While the monetary policy stance has been maintained at accommodative, and the minutes of the monetary policy suggest that the repo rates may be lowered further, given the growth slowdown has failed to enthuse the bond investors. Although in the borrowing calendar, government has stuck to the original fiscal target, the market is finding it challenging to come to terms of the governments’ intent. Although government has multiple avenues to bridge the gap, the market feels the government may access the bond market for additional borrowings if the need arises.

Last month the headline CPI has moved up from 3.21% to 3.99%, mostly due to the rise in the food prices attributed to the unseasonal rains. RBI opines that the upward price pressure from food will be offset by the downward movement in oil prices.

The Q1FY20 real GDP growth was at 5% and hence recently RBI reduced the full year growth estimates to 6.1% from 6.9%.

With the recent reduction in the repo rate, the spread between the 10 year benchmark and the repo rate is 150bps whilst the long period average is under 80bps, also supported by:

• Benign inflation environment. The drop-in core inflation data to closer to 4% is being reasoned out as the drop in demand, which is now visible across several sectors.
• Softening international oil prices as growth slows in several other economies.
• Improved sentiment amongst foreign investors leading to positive foreign inflows into debt.
• The drop in global yields, particularly in US and Europe improves the relative attractiveness of the EM bonds.
• Possible inclusion of Indian bonds in international bond indices (presented by Bloomberg in Sept’19 in NY in the presence of PM Modi).

The weakening inflation pressures globally have increased reasons to believe successive rounds of rate reductions and QE across the globe. The Fed’s mid cycle cumulative rate 75bps rate reduction and the rally in bonds in Europe, which is pushing the yields to historic low levels seem to be pricing in some probability of recessionary conditions around the globe. This rally in bonds is expected to have a spill over positive effect on Indian bonds in time. Additionally, the Indian policy makers also seem to be front loading the easy monetary policy action to support a revival.

Based on RBI’s suasion we observe few banks have started to link their lending rates to an external benchmark which RBI feels will work towards transmission of rates into the borrowers. So far, the transmission of lower rates into the system has been lacking.

The refinancing of debt in the financial services sector and risk aversion is also keeping the investors away from most of the lower tier credits.

So far, the transmission of lower rates has been restricted to only few select top tier credits in an environment of risk aversion. The eventual drop in interest rates should help in balancing the overall leverage across sectors over a period of time and ideally may help in attracting equity capital as earnings from savings and debt investments move lower. However, it remains to be seen whether this theoretical cycle follows through in India in this environment.

Outlook
We reason that the slowing domestic growth is a function of both slowing global growth and slowing domestic consumption. The average headline CPI (presently at 3.99%) for FY20 is expected to be comfortably well within 4% due to benign oil prices, drop in core inflation and soft food prices (although there is some rise in vegetable prices in the recent period). The drop in core inflation in India to ~ 4% levels in the recent months after staying at over 5.5% for the last few years highlights the slowing domestic consumption.

Thus with slowing growth and high real interest rates, RBI is likely to continue the rate reduction and attempt to push lower rates into the economy. However, drop in repo rate do not always guarantee lower borrowing cost, and hence we feel RBI may maintain sufficient surplus liquidity so as to help lower the deposit rates of the banks and enabling them to price their loans cheaper.

In this environment, we urge investors to start selecting funds in alignment with their investment horizon and longer depending on their individual risk appetite. Some additional fund duration over one’s investment horizon should work favorably, as the risk return matrix is tilted towards lower rates. We expect the actions of RBI to create additional demand for gilts and bonds in this environment.

Any upward revision in borrowing calendar of Government for FY20 may pose a risk to this view. However, it may get neutralized through creation of higher demand for gilts and bonds by infusing liquidity into the system by RBI, OMO, long-term repo and/or from higher demand for Indian bonds from foreign investors amidst low rates globally and the recent transfer of higher reserves from RBI to government.

 

 

 




 

 

 
DISCLAIMER: These views have been expressed by the fund managers of Invesco Asset Management (India) Private Limited. All opinions included in this article constitute the authors’ views as of this date and are subject to change without notice. The stocks referred in the above content, if any, are for the purpose of explaining the concepts and should not be construed as recommendations from Invesco Asset Management (India) Private Ltd. (Invesco Asset Management (India) / Invesco Mutual Fund). The Fund may or may not have any present or future positions in these stocks. The commentary is for information purposes only and not an offer to sell or a solicitation to buy units of Schemes of IMF. All figures, charts/graphs, estimates and data included in this article are as of this date and are subject to change without notice. The data used in this material is obtained by Invesco Asset Management (India) from the sources which it considers reliable. Neither Invesco Asset Management (India) nor any person connected with it accepts any liability arising from the use of this information or in respect of anything done in reliance of the contents of this information. While utmost care has been exercised while preparing this content, Invesco Asset Management (India) does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. This information alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. The recipient of this material should exercise due caution and/or seek independent professional advice before making any investment decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
  • Fund Manager Meet

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Read

    27th June, 2014

  • Webcast

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Play

    27th June, 2014

  • Conference Call

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Read

    27th June, 2014

  • Fund Manager Meet

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Register

    27th June, 2014

    4.30 pm – 6.30 pm
  • Webcast

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Register

    27th June, 2014

    4.30 pm – 6.30 pm
  • Conference Call

    Nitish Sikand, Fund Manager

    Topic: Debt Market Outlook

    Join us for an interactive session where we will provide you an update on the current debt markets and positioning strategy of select fixed income funds.

    Register

    27th June, 2014

    4.30 pm – 6.30 pm
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.
Request for Literature
We will send the Literature requested by you by post. Please provide the following details to process your request:
Subscribe with Us
I will like to subscribe for . Here are my details:
Thank You
Thank you for providing your details. Your request will be processed in the next 2-3 working days.
X
Quick Email
Send Document(s) As:
Links
Attachment
Enter ARN Code :
(e.g. ARN-000000-0)
Thank You
Thank You for submitting your details.\nOur representative will get in touch with you shortly.
Email sent successfully
The fund has been added in the watchlist.