Invesco Mutual Fund

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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.

April 2021

Macro Economic Review
 
 

Improving growth and activity levels started to moderate in April given the sharp increase in Covid-19 cases due to Wave 2 in India. Whilst the vaccination drive continues to have good momentum, Covid-19 cases have shown a broad-based increase throughout the country forcing localized lock-downs. The initial impact looks like a slow-down in activity levels as opposed to complete seizure, which happened in 2020 given the national level lock-downs in 2020.

The Index of Industrial Production (IIP) contracted by -3.9% in February 2021, a six month low. IIP had showed growth in December 2020 only to continue on a downward trajectory for the last two months. The fall in growth is due to contraction in the mining & manufacturing segment and a decline in the output of both capital goods as well as consumer non-durables. On the other hand, the output of eight core sectors in March 2021 rebounded sharply by 6.8% vs a fall of -3.6% in the previous month.

Manufacturing PMI continued to expand for the eighth consecutive month with a print of 55.5 in March 2021. It has, however, decelerated from the high of 57.7 witnessed couple of months earlier. This may be pointing to the impact of increasing Covid-19 cases and associated lock-downs. Services PMI continued to rise and reached 54.6. However, this will also likely show deceleration given recent lock-downs.

Retail as well as wholesale inflation continued to pick-up, indicative of a rebound in activity levels and pricing pressures. Retail inflation rose to 5.5% vs 5.03% in the previous month. The uptick in inflation was driven by food (up 5.25%YoY) and fuel prices (up 4.5% YoY). Within food prices, vegetables prices and cereal prices are showing softening trend vs previous year. However, pulses, meat and proteins and oil / fat’s prices continue to show strong increases YoY and MoM. Core inflation has continued to tick up and was up 13 bps MoM to 5.72% on back of higher transportation costs. Wholesale inflation rose sharply to 7.4% vs 4.2% in February driven by price rises in the manufacturing segment. Strong increase in commodity prices seems to be feeding through in end prices of manufactured goods.

The governments' fiscal position has continued to improve in recent months with higher levels of economic activity translating into higher revenue. GST collections for April came at INR 1.41 lakh crores, a new record and up 14.6% from previous month. Fiscal deficit during April-February 2021 was at INR 14 lakh crores, 36% higher YoY and stood at 76% of the revised estimates for FY21. Revenue receipts of the government stood at INR 13.7 lakh crores, close to the same level as last year. Revenue and capital expenditures have grown significantly by 11% and 33% YoY respectively.

Trade deficit has started to widen highlighting improving activity levels. March 2021 trade deficit came in at USD 13.9 bn, up 6.9% from previous month. Exports showed a sharp jump of 60.3% YoY whereas Imports increased by 53.7% YoY. While prima facie, the increase in imports and exports looks sharp, it is a combination of two factors – low base and abnormal growth in a handful of items. In March 2021, total imports surged to $48.4bn from $31.5bn in March 2020. Out of this ~$17bn increase, gold imports alone accounted for $8.3bn. Exports grew 58% y/y to $34bn in March 2021 from $21.5bn in March 2020. Out of this $12.5bn increase, engineering exports alone contributed ~$3.9bn. Faster-than-expected global recovery has partly helped to boost India’s engineering exports, specifically steel / metals related. Foreign Exchange Reserves at the end of April were $ 584 bn, up marginally vs the previous month.

Whilst financing conditions have remained benign compared with last year, domestic demand and activity levels have started to soften across many sectors. Service’s sector may suffer sharper slow-down given lock-downs. Manufacturing sector seems to be slightly better positioned given good order books and improving global growth outlook. RBI has announced certain liquidity and forbearance measures across retail, SME and MSME sectors, which will help to soften the pain for financial institutions. Overall, whilst the lock-downs will slow-down the growth rate, the country looks better positioned to weather the impact compared to last year given various policy measures put in place last year and continuation of those. Liquidity conditions remain benign and with strong foreign exchange reserves, any spill-over risks can be better managed. Key going forward will be pace and scale of Covid-19 cases vs vaccination.

  
Equity Market

 

  

Sensex (-1.5%) and Nifty (-0.4%) underperformed the global markets during April as a surge in daily Covid-19 cases in India to 400k+ (~4x peak of 1st wave) led to renewed restrictions across the country. Shortage of medical supplies, imposition of strict lockdowns in some states, sharp loss of momentum in some of the lead indicators dented investor sentiments. Mobility indicators, E-way bills (trucking activity), power demand showed slowdown, while rail freight and GST collections showed healthy trends. Positive news on vaccine front (Sputnik EUA, allowing fast-track approvals for other vaccines, next phase for 18+ from May) provided some relief to the markets. Preliminary 4Q earnings came largely in-line (IT, Financials) and better than expectations (Materials, Staples) which helped support sentiment. In terms of flows, DIIs (Domestic Institutional Investors) almost entirely absorbed the selling from FIIs (Financial Institutional Investors) to the tune of ~$1.5bn, as Domestic Mutual Funds witnessed inflows in March after several months of redemptions. On the sectoral trends, Metals outperformed as regional prices remained strong while Pharma too did well due to reasonable valuations and defensive appeal. Realty, Capital Goods, FMCG and Auto underperformed. Mid cap and small caps outperformed the large cap indices.

The second wave of the pandemic in India continues to be intense. However, looking at (1) stable daily confirmed Covid-19 cases in Maharashtra, the state where the second wave began (2) declining daily confirmed cases in the worst-affected districts of Maharashtra and (3) rising recovered cases in several states over the past few days provide respite. The market has largely ignored the short-term negatives of the pandemic but may want to look deeper into the longer-term implications of and lessons from the pandemic. A well-administered roll-out of the vaccination program over the next 9-12 months will be crucial in holding up market sentiments. Overall growth assumptions on the economy and earnings for FY22 will likely be tested based on the intensity and breadth of the state-level lockdowns but may be well compensated by strong earnings contribution from commodity cyclicals and few global businesses like pharma and technology.

In the recent pronouncements, the RBI continues to follow on its commitment to maintain easy financial conditions until the economic situation stabilises. The Reserve Bank of India (RBI) announced a slew of measures for small businesses and household borrowers, comprising loan restructuring and extensions of moratoriums under the existing schemes. The major announcements included a) credit support to the healthcare sector to address the challenges arising from the ongoing Covid-19 wave, b) extension of loan restructuring till Sep’2021 for retail and MSME borrowers with loans up to Rs. 250mn, and c) enhanced access to funds for small finance banks (SFBs) with SLTRO (special long-term repo operations) of Rs. 100bn at repo rate. RBI also announced its second purchase of government securities of Rs. 350bn under the G-sec Acquisition Program (G-SAP) on May 20, 2021.

The outlook for developed economies, particularly the US is buoyed by 1) the fast pace of vaccinations, 2) USD 1.9tn Fiscal Stimulus, 3) strong household savings and 4) planned infrastructure push. While the latter has a medium-term impact, the former two can result in growth surprising on the upside in the near term. Moreover, the Chinese economy too seems to be on a very stable wicket. The strength of the two largest global economic engines will likely support overall growth for emerging market economies like India as well. As the effect of the huge monetary stimulus eventually shows up in the form of inflation, the tolerance of the US Fed and its reaction to the same will likely be key monitorable for global equity markets in 2021.

Aggregated for the above, we continue to stay with the 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 accordingly configure our portfolios to tactically reflect preference for cyclicals such as financials, industrials, commodities etc in the near-term. Our medium to long term stance is to stay the middle path in portfolio construction with regards to 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
 
 

After remaining under control for long, Covid-19 2nd wave has hit us hard forcing many states to impose partial to full lockdowns and thereby moderating the economical growth activity in April, which otherwise was steadily gaining traction. As the vaccination drive continues to gather pace, the initial impact looks like a slow-down in activity levels as opposed to complete seizure, which happened last year during national level lock-downs.

March GST collections, collected in April, were at an all-time high supported by economic recovery, improved compliance and also as the FY end phenomena. GST collection was at Rs.1,414 bn for March (14% mom) compared to Rs.1,239 bn in February and registered a 7th consecutive month of more than Rs. 1 trn collection. The increase was despite the resurgence in Covid infection rate, but the sustainability of the trend remains doubtful amidst the re-introduction of localized restrictions.

Retail as well as wholesale inflation continued to pick-up, indicative of a rebound in activity levels and pricing pressures. Retail inflation rose to 5.5% vs 5.03% in the previous month largely driven by food (up 5.25%YoY) and fuel prices (up 4.5% YoY). Core inflation (ex-food / fuel) has continued to tick up and printed around 5.72% on back of higher transportation costs. Wholesale inflation rose sharply to 7.4% vs 4.2% in February driven by price rises in the manufacturing segment. Sharp rise in commodity prices seems to be feeding through in end prices of manufactured goods.

Trade deficit has started to widen highlighting improving activity levels. March 2021 trade deficit came in at USD 13.9 bn, up 6.9% from previous month. Exports showed a sharp jump of 60.3% YoY whereas Imports increased by 53.7% YoY. However, FY21 is expected to close with a Current Account Surplus largely on account of Covid-19 led disruption. Foreign Exchange Reserves remained strong at $ 584 bn as end of April, marginally up than previous month.

In April, the average systemic liquidity was ~Rs. 5.47 lakh crore, higher than the previous-month average of ~Rs. 5.19 lakh crore.

RBI in its April MPC (Monetary Policy Committee) policy maintained status-quo on policy rates and continued with accommodative stance as long as necessary, to sustain growth on a durable basis while ensuring that inflation remains within the target going forward. RBI recently announced various measures amidst 2nd wave of Covid-19, largely targeted towards health sector and MFIs / SMEs / MSMEs and also announced the 2nd tranche of G-SAP (G-Sec Acquisition Programme) 1.0 of Rs. 35,000 cr.

Rates largely maintained a softening bias especially in 2nd half of the month supported by dovish MPC policy and also as the market concerns on RBI’s unwinding of policy measures got pushed back amidst Covid-19 led disruption. During the month, 2 to 5 yr G-Sec rallied by 20 – 40 bps while the 10 yr G-Sec benchmark cooled off by ~13 bps to close @ 6.03%. G-Sec outperformed the corporate bonds during the month.

Outlook

Covid-19 situation has worsened significantly, which can delay & also impose the downside risk to nascent economic growth recovery. Amidst the growth disruption, RBI is expected to continue with the similar approach of lose monetary policy through accommodative policy stance as well as benign systemic liquidity as adopted last year to mitigate the impact of Covid-19 on economy. We expect RBI to give prime importance to the economic growth recovery & financial stability as of now, while ensuring that inflation remains within the inflation targeting framework, going forward. RBI’s recent measures on Covid-19 2nd wave & readiness to act swiftly further through various tools, reassurance of surplus systemic liquidity and G-Sec Acquisition Programme points in the same direction.

On inflation front, MPC estimates inflation to remain above 5% for most of FY22, with risks balanced on either side. Inflationary risks can emanate from supply side disruption & rise in global commodity prices that could pose risks to policy stance. We believe, RBI is cognizant of the risk factors on inflation and will embark upon a gradual exit from loose monetary policy depending upon the sustainability of the growth recovery.

Overall, with the recent rapid resurgence of Covid-19 cases, earlier fears of pre-mature withdrawal of RBI’s supportive measures either through upward rate revision or liquidity management have more likely been pushed back to the end of CY21 / FY22 and will more depend on the fast evolving situation. RBI’s continued accommodative policy & liquidity stance, coupled with the G-SAP 1.0 programme is expected to reduce the volatility across the curve and ensure the orderly evolution of the yield curve by addressing the market concerns.

The policy stance to maintain ample liquidity is positive for short end of the yield curve, while the long end also gets supported by the active yield management by RBI through the G-SAP 1.0. We feel that 1-4 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. 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 manage the yield curve.

Credit Environment had been gradually improving over last few months as the economy restored back to normal. However, Covid-19 2nd wave is expected to delay the recovery with some of the sectors like services, hospitality, retail, transportation etc. getting severely impacted by state lockdowns. Absence of RBI’s moratorium facility like last time is also expected to put pressure on debt servicing capabilities of weaker credits. We believe dispersion between high quality & low quality credits will widen again and 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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