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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.
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.

September 2020

Macro Economic Review
 
 

Economic recovery continued to gather pace as post lock-down easing measures along with easier financing conditions continue to bear fruit. Industrial output, measured by Index of Industrial Production (IIP), depicted sequential improvement with less negative growth in July 2020 at -10.4% vs -15.8% in June 2020. Two sectors witnessed positive growth in July i.e. pharma and tobacco. Consumer durables and capital goods, however, continue to witness contraction, reflecting prolonged weakness in consumption and investment demand.

Eight core sector output contracted in August 2020 by -8.5%, marginally higher than -8% in July 2020 and -0.2% in August 2019. The deterioration can be ascribed to localized lockdowns announced in some states, which weighed on output partially. Despite de-growth, sectors like natural gas and steel have seen an improvement from the previous month.

September 2020 Manufacturing Purchasing Managers Index (PMI) rose to 56.8, higher than 52 in August 2020 suggesting that the manufacturing sector has gathered pace. This is the highest PMI reading since January 2012. Improved demand ahead of festive season increased the new orders and production. It was also supported by renewed expansions in export sales and inventory re-stocking as well as an improvement in business confidence.

Services PMI rose to 41.8 from 34.2 in the previous month. This was the highest reading since March 2020. Slowdown in new orders reduced as demand improves. Input costs and output charges both rose.

Retail inflation remained steady at 6.7% in August 2020, unchanged from the previous month. For eleventh successive month, it has remained above RBI’s 4% inflation target. Elevated inflation in the food components and the miscellaneous segment continues to keep retail inflation high. Core inflation for August rose to 22-months high of 5.8%.

Wholesale inflation, whilst rose to 5-months high, remains low at an overall level of 0.2%. Manufacturing inflation increased to 1.3% indicative of improved pricing power. Uptick in certain primary articles (potato and non-food) also led to partial increase in WPI inflation in August 2020.

GST collections amounted to INR 86,449 crore in August 2020, 1% lower than collections in July 2020 and 12% lower yoy. Although the cross - border movements improved, staggered lockdowns imposed by certain states to curb unrelenting increase in coronavirus infection cases weighed on collections during the month. During April – August 2020, total GST collection amounted to INR 3.59 lakh crore, 30% lower yoy.

The fiscal deficit stood at INR 8.7 lakh crore, which is 109% of the budgeted fiscal estimate during April – August 2020. Revenue receipts have declined by nearly 39% and are only 18% of the budget estimate. Expenditure at 89% of the budget has registered a 7% growth yoy.

August 2020, exports and imports both contracted for 6th consecutive month. The gap between export and import growth narrowed with further decline in exports and partial improvement in imports. India’s merchandise trade deficit widened to US$6.8bn in August from US$4.8bn in July 2020. Exports growth contracted primarily led by contraction in exports of petroleum products, gems & jewellery, ready-made textiles and electronic goods, reflective of weak demand conditions overseas and supply disruptions. Imports, on the other hand, witnessed partial improvement owing to the improvement in gold shipments ahead of festive season. Foreign exchange reserves increased to historic high of $545 bn.

With lending conditions better and government fiscal spending percolating into the economy, activity levels have started to improve across various sectors. Monsoon season so far has been close to expectations and has aided rural economic growth where demand continues to be solid. Whilst the upcoming festive season may provide an uptick in consumption demand, investments continue to be tepid and is unlikely to see a noteworthy improvement during the course of the year. Government spending has supported the non-urban economy and is expected to remain strong.

  
Equity Market

 

  

The BSE-30 and Nifty-50 indices fell 1.5% and 1.2% in September in local currency terms. After rallying steadily during the initial part of the month, the market fell sharply in the 3rd week of September due to some global risk aversion heading into the US elections and second wave risks. Later, expectations of a stimulus package from the government and firm global cues helped Indian markets recover from the sell-off. SEBI’s new circular for multi-cap schemes led to some short-lived optimism for small/mid-caps as clarification issued later gave options to merge / convert / switch with other schemes and possibly avoid switching weight to small/mid-caps.

The growth rate of Covid virus spread in India moderated over September, daily new case additions also appear to be moderating but more importantly recovery/fatality rates continue to steadily improve. After some moderation seen in August, sequential improvement in some of the high frequency indicators was healthy in September, with GST collections, power demand, E-Way bills (trucking activity), Rail freight volumes, auto sales volumes all improving at a healthy rate. Monsoon season ended with 9% above normal rain, and area under sowing higher by 5%YoY. On the government policy front, Rajya Sabha (Upper House) passed two farm bills aimed at liberating the farmers from the control of middle men and to improve farm incomes. Lok Sabha (Lower House) passed three labor bills that allowed businesses flexibility in hiring, retrenchment, making industrial strikes difficult besides facilitating ease of doing business and expanding the social security net. In flow trends, FIIs turned net sellers of ~$0.8bn after 4 consecutive months of inflows while DIIs were marginal net buyers. Within sectoral indices, Infotech, Healthcare, Consumer Durables, Auto outperformed, whereas Bankex, Oil & Gas, Metals and Realty sectors underperformed the BSE Sensex.

Near term, global and local markets are likely to revolve around news flow relating to the US Presidential elections and its outcome besides the corporate result season that kicks off in the first week of October. Investors will scour for trends in consumer confidence specifically compared to the lockdown quarter, stability of asset quality in banks and NBFCs and earnings delivery from sectors such as technology and healthcare. Without visible and concrete evidence of earnings improvement hereon, valuations can likely impede market strength hereon. Global and domestic monetary policy remains a key risk in our view and inflation readings of the recent past, though mainly led by supply-side dynamics, can confound policymakers. However, with Govt’s borrowing calendar for 2HFY21 largely unchanged v/s earlier and RBI’s continued dovish messaging, we expect interest rates to remain benign for the foreseeable future.

As a fund house, our portfolio positioning while balanced at one level, does tilt towards an eventual cyclical recovery. Important sections of the market such as financials and parts of consumer discretionary still lag the broader market but some degree of risk aversion in the short run can favour defensives such as technology, pharma and telecom. Earnings-based valuation parameters would stay volatile for a while and can likely throw up incorrect conclusions. Today, investment decisions that discount near term earnings profile but are justifiable based on long-term intrinsic or franchise value of enterprises attract our attention. We continue to adopt the middle path in portfolio construction with regard to sector exposure, market cap bias and balance between growth and value.

 

 
 
Fixed Income Market
 
 

Indian economy has started to limp back to some early stage of ‘normalcy’ ever since the central government has decided to open up the economy in a phased manner.

Although the economy has been opened, the 1st quarter GDP contracted by 23.9% YoY and the Index for Industrial Production (IIP) for July also contracted by 10.4%. The Wholesale Price Index (WPI) remained a low 0.16% after being in negative for several months, and the Consumer Price Index (CPI) remained high while it softened marginally to 6.69% from 6.93%. High CPI inflation along with growth contraction has been perplexing for the policy makers. Additionally, the retirement of the Monetary Policy Committee (MPC) members has also possibly broken the continuity of the monetary policy regime.

The closure of the loan moratorium period in Aug’20 has resulted in credit negative news going up in the system. The one-time restructuring opportunity for the banks without the need to classify a restructured loan as NPA may be availed by the banks and borrowers alike during this period of credit distress. The distress in the credit market remains high. Although the status of asset quality remains under wraps, we expect the real NPA levels within the banking system to move into double digits and approx. closer to 15%.

The delayed and broken transmission of the repo rate reductions has also arguably raised questions on the reasonings of the efficacy of repo rate reductions.

Going ahead, we do feel that there is a fair chance for the inflation to soften if the supply bottlenecks are addressed by the government. Despite a pause in Aug policy, RBI Governor’s decision to stem out the negative movement in bond prices by announcing OMOs (as operation twist) and softening the interest rate volatility concerns of the banks by increasing the Held-To-Maturity (HTM) category has been welcomed by the market. However, the drop in bond yields has been short-lived since the tax revenue of the government has remained benign. However, its expected the bond yields may start to move south in case the tax collections pick up over the months due to opening up of the economy and the governments' steadfastness to hold on to the original borrowing calendar.

Outlook

• We expect growth to remain soft to contracting, and inflation to eventually slow down over the next few months. RBI forecasts a contraction of GDP in FY21.
• For economic recovery the private sector investments and overall consumption needs to recover. Both fiscal and monetary stimulus works as an enabler for pick up in consumption.
• The challenges of the banks (led by rise in NPA, drop in capital adequacy) is the headwind for credit growth.
• Expect rate reductions to restart along with liquidity infusion from RBI. We would expect OMO and Long Term Repo Operation (LTRO) to continue over the months.
• Yields to remain benign and the steepness of the yield curve to reduce as and when increased OMOs are announced by RBI.

Recommendation

• Recommend investors to remain invested.
• Investors are also urged to invest in high credit quality funds only thereby remain insulated from the stress in the credit environment.
• Investors ideally should also get invested into debt funds before the foreign inflows re-start.

 

 
 
 
 

 

 




 

 

 
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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