The last 6 months have been unprecedent in terms of both, the Covid-19 pandemic’s impact on economic indicators (growth and inflation) and the policy response from the Govt. and institutions that matter to address this mayhem. As a result, while some statistical data point to recovery, a good number of datasets also highlight the decimation from trend growth and the hard work needed to just get back to pre-Covid levels. Housing and auto sales, industrial activity has signalled optimism in some economies while employment growth, services activity, consumer confidence continues to be languishing. Uncertainty prevails as it is not clear what has found support in the massive stimulus programs and what is normal demand. Consequently, past trends and historical relationships may not hold the same weight and newer data could throw more light on the path ahead. Though 2020 Global GDP growth is still estimated to be deeply negative it has seen an upward revision from the abysmal lows of April-June. The inconstant nature of the health crisis remains a risk alongside wild cards like the US election outcome, Brexit discussions, geo-political realignments and China led disruptions on military, trade or cybersecurity front.
MANY PIECES OF THE ECONOMIC PUZZLE NEED TO FIT TOGETHER
The last 6 months have been unprecedent in terms of both, the Covid-19 pandemic’s impact on economic indicators (growth and inflation) and the policy response from the Govt. and institutions that matter to address this mayhem. As a result, while some statistical data point to recovery, a good number of datasets also highlight the decimation from trend growth and the hard work needed to just get back to pre-Covid levels. Housing and auto sales, industrial activity has signalled optimism in some economies while employment growth, services activity, consumer confidence continues to be languishing. Uncertainty prevails as it is not clear what has found support in the massive stimulus programs and what is normal demand. Consequently, past trends and historical relationships may not hold the same weight and newer data could throw more light on the path ahead. Though 2020 Global GDP growth is still estimated to be deeply negative it has seen an upward revision from the abysmal lows of April-June. The inconstant nature of the health crisis remains a risk alongside wild cards like the US election outcome, Brexit discussions, geo-political realignments and China led disruptions on military, trade or cybersecurity front.
Focus shifts back to the Phase 3 results in several high-profile vaccine trials which are scheduled for release by early
Source: Barclays Bio-tech Equity Research
GLOBAL EQUITIES: RESURGENCE OF FORGOTTEN RISK
All that goes up must come down too unless it is in a zero-gravity or irrational environment. Investors were taken for a ride, the roller-coaster type, when they least expected as Nasdaq corrected 12% within 21 days from its record high made on 03-Sep. Global equity participants were jolted from their deep slumber as risk which was pushed to the back benches by central bankers unending liquidity came to the forefront. This just highlights the importance of rational behaviour at all times and especially in such herding times. The stratospheric high valuations failed to lend any comfort as risk-on sentiments switched off leaving the investors in darkness. Data analysis of the S&P 500 and Dollar index performance heading into the US elections shows it can act as an indicator of election outcome, but we would rather let investors focus on the proven fundamentals of prudent asset allocation, quality and valuations.
2020 YoY Global GDP growth estimates have seen upward revisions as some macro datasets show better than expected improvement
Source: Deutsche Bank, Fitch Ratings, OECD, S&P Global Ratings
Developed economies seem to be better placed to recover from the pandemic inflicted pain relative to emerging markets. Given the high valuations and elections uncertainty in US, it is preferred to be tactically overweight on Europe vs US. Global allocation not only helps in equity & currency diversification, but reduces portfolio volatility and ensures exposure to innovative and ‘New World’ opportunities in Tech, Health, AI/ML, Gaming, Commerce & Communications.
GLOBAL FIXED INCOME: POLICY SUPPORT LIMITATIONS; PREFER IG
Even as the US Fed has asked for more fiscal stimulus to tame the pandemic, the Democrats and Republicans are yet to make up their mind. We believe whatever that final number be (within a range of $1.5-3tn), it would only drive up sentiments but not real growth. Because what really matters for growth is the monetary velocity and not the central bank balance sheet size or inflation or policy rates. In 2000, the US Fed crossed the point where lowering interest rates did not stimulate economic activity. Instead the rising debt burden detracted from it as revenues went towards debt service rather than productive investments. Safe haven sovereigns were in demand this month as risk-off sentiments ruled investors’ minds. We continue to prefer IG relative to HY bonds given elevated bankruptcy filings and default risks, uncertainty around fiscal & monetary policy effectiveness and economic growth trajectory.
Post 2000, US Fed’s lowering of interest rates did not stimulate the economic activity as seen in Real GDP growth
Source: Bloomberg
GLOBAL COMMODITIES: RETAIN OVERWEIGHT STANCE ON GOLD
Industrial commodities and Oil came under pressure in Sep as they lost some demand recovery price gains witnessed last month. But it was not the same with Agri Commodities like Corn and Soyabean which were up 7-8% in Sep. This is indicative of elevated food price inflation which in turn could actually benefit Gold for its inflation hedging characteristics. Gold saw some profit booking also as dollar index made some gains from the bottoms. Given massive money supply, negative yielding debt and volatility risks, we retain OW stance on Gold.
Gold supply has inched up slowly, not keeping up with demand
Source: World Gold Council
INDIA MACRO: ART DEPLOYMENT OF POLITICAL CAPIAL
The Govt. seized the opportunity in clearing landmark reforms during the Monsoon session despite strong opposition from other political parties. The 3 Agri reforms – curtailing monopoly of APMCs, eliminating stock limits on traders for several commodities and permitting contract farming – are politically bold, promising and comprehensive. The Parliament also approved 3 labour codes on Industrial Relations, Social Security and Occupational Safety, which along with the Wage Code (Aug-19), subsume 29 previous central labour laws. Simply put, these laws not only make hiring & firing easier for employers and restrict strikes & curtail powers of trade unions, but also extend social security benefits beyond permanent workers. The other politically tough reform is that of electricity distribution where some baby steps for privatisation have been taken. Talks of a second dose of fiscal stimulus continue to do the rounds but one could still argue it is delayed. Nonetheless, better late than never.
1QFY21
GDP de-growth of -24% has led to further downgrades of FY21 GDP growth
estimates from multiple agencies
Source: S&P, ICRA, CRISIL, NCAER, Goldman Sachs, Moody’s, Fitch Ratings
Post 1QFY21 shocker, the FY21 GDP growth estimates have been revised downwards to double-digit YoY decline by a swathe of agencies. But 8-year high Manufacturing PMI at 56.8, buoyant auto wholesales, improving power and fuel demand, GST and toll collections point to steady recovery from the lows. Centre wants the States to move forward towards normalised economic activity with SOPs in place and localized lockdowns to address any resurging virus risks. Key support has come in from low oil prices, good monsoons and foreign capital flows during these challenging times. Upcoming festival season consumption demand must be closely watched.
GST collections for Sep’20 came in 3.9% YoY higher at INR 95,480cr, the highest in the last six months
Source: GOI
INDIA EQUITIES: INVESTORS MOVE FROM SECONDARY TO PRIMARY MARKET
This month was all about IPOs and all that comes with it – oversubscription and listing gain records were made as investors scrambled to get a hand on the hottest new offer in town. It is pertinent to note that not all primary offers (OFS, fresh issue) are worth subscribing to and gains (if not booked on listing) could turn into losses as reality (quarterly results) catches up or sentiments turn weaker. The FIIs turned net sellers – a full reversal from the record Aug inflows – along with MFs. The good part is the number of MF folios is still trending higher and SIP book is still pulling in a billion dollars every month. Index level valuations are still frothy despite minor correction but the index is composed of many constituents. Disciplined approach calls for building long-term focused equity portfolios with companies which are market leaders, enjoy strong moats, have superior management quality and are available at fair valuations.
Even as Retail participation moved higher delivery volumes dropped over last 7 months – indicative of speculative behaviour
Source: Bloomberg, ACE Equity
Future EPS growth appear favourable for Large caps but momentum indicators are suggesting better breadth and volumes for Mid-caps. SEBI’s rebalancing of multi-cap funds has helped revive sentiment in smaller companies. As valuations are expensive for both, we are turning Neutral between Large and Mid-caps. Sequentially, third month drop in non-institutional volumes coinciding with subdued institutional flows makes further upside dependent on upcoming earning releases and management guidance. Recent drop in put option premiums to less than ~1% of Nifty 50 Index gives an opportunity to insure investment portfolios given the event packed months ahead.
INDIA FIXED INCOME: RANGEBOUND FOR NOW; OW CORPS/SHORT-TERM
The Central Govt. has stuck to its 2HFY21 borrowings of INR 4.34 lakh crores (for a total of INR 12 lakh crores for FY21) even as fiscal deficit has reached 109% of the BE as of Aug end. We believe there are upside risks to these numbers as Govt. comprehends impact of shortfall on the receipts side from lost tax revenues and delayed divestments of Air India, LIC and BPCL. The State Govts. have also guided to borrow INR 2 lakh crores in Oct-Dec quarter with the number expected to rise as they now have to forego GST compensation cess due to ‘Act of God’. Cutting expenditures would help in reigning in the ballooning fiscal deficit but at the cost of reviving growth as private capex is also absent. RBIs now postponed MPC meeting holds key to future yield movements. Given elevated Aug inflation at 6.9%, it most likely would be a wait and watch policy this time around as well. Unless the new MPC appointees think otherwise.
Central Govt. borrowing to remain high at INR 12 lakh cr for FY21; Consolidated FY21 fiscal deficit now expected at 12-13% of GDP
Source: Bloomberg, DBIE, Mar21E is Estimate
It will be a tug-of-war between RBI and investors as the former tries to keep Govt. borrowing costs lower and latter try to yield the most to offset the rising supply. Though credit downgrades seem to be bottoming out as economy reopens impact of one-time restructuring must be seen. Top quality corporate issuances / funds and short duration investments are preferred in debt portfolios.
CURRENCY: TURN NEUTRAL ON USD-INR
The dollar index reversed from the lows as risk-off returned and propped up USD against other major currencies like EUR/GBP/CHF/CAD. It shows why USD still rules at the top of the safe-haven list of currencies. Relatively INR held on pretty stable as signs of economic recovery and RIL’s FDI inflows helped in offsetting the FII equity outflows. Current account surplus came in at a record-high 3.9% of GDP for 1QFY21 led by contraction in trade deficit. Export growth for Sep turned positive after 6 months. FX reserves continue to provide a robust import cover. EMBI spreads and VIX trends would be key to attract FII flows to EMs including India. We turn Neutral on USD-INR as risk-reward seems balanced.
India’s exports rose for the first time in 7-months by 5.3% in Sep-20 compared with a 12.7% decline in Aug
TACTICAL ASSET ALLOCATION (TAA) VIEWS & PERFORMANCE
Source: Bloomberg. Assuming a 6% annualized yield for cash.
GLOBAL ASSET PERFORMANCE SNAPSHOT
Source: Bloomberg Equity/Fixed Income Returns/Yields in local currencies. Commodities in USD. Numbers for Fixed Income are Yields as of 30th September 2020.
ROUTES TO MARKETS: MODEL ALLOCATIONS
Glossary: COVID: COVID: Corona Virus Disease; U.S.: United States; EM: Emerging Markets; DM: Developed Markets; PMI: Purchasing Manager’s Index; AI: Artificial Intelligence; ML: Machine Learning; O(U)W: Over (Under) Weight;; HY: High Yield; IG: Investment Grade; GDP: Gross Domestic Product; GST: Goods and Service Tax; RBI: Reserve Bank of India; MPC: Monetary Policy Committee; FII Foreign Institutional Investment; YoY: Year on Year; MoM: Month on Month; SOP: Standard Operating Procedure; SIP: Systematic Investment Plan; MPC: Monetary Policy Committee; Capex: Capital Expenditure; BE: Budgetary Estimates; OFS: Offer for Sale; SEBI: Securities and Exchange Board of India; MF: Mutual Fund; EPS: Earnings per Share; IPO: Initial Public Offering; BE: Budget Estimates; APMC: Agricultural produce market committee; USD: United States Dollar; INR: Indian Rupee; EUR: Euro; GBP: Great Britain Pound; CHF: Swiss Franc; CAD: Canadian Dollar; FDI: Foreign Direct Investment; RIL: Reliance Industries Ltd; FX: Foreign Exchange; EMBI: Emerging Markets Bond Index; VIX: Volatility Index