Quarterly Investment Policy Committee (IPC) Oct-20 :
The great expectations rally!
Oct 20, 2020 Dipankar MitraSomnath MukherjeeResearch, ASKWA
Quarterly Investment Policy Committee (IPC) – Neutral Equity;
Overweight Fixed Income; Underweight Alternatives
A. Economy: Recovery apace but medium term weakness1. ACAI shows pace of recovery quickened in Sep-202. Govt. and corporate on weaker footing3. Chinks in the growth story4. Back to basics growth strategy: Reform scorecard5. Current pursuit: Building a globally competitive
manufacturing sector6. Geopolitical imperative of China import
substitutionB. Neutral on equity
1. Equity market has recovered but the pace of recovery slowed
2. Sector performance has diverged further3. Volatility is staying high4. Valuations are at all time peak5. Earnings recovery on high hopes6. Flows have been fluctuating and don’t show any
spike7. US election – what is there for us8. The risk of second wave before vaccine availability
C. Overweight on Fixed Income1. Yield curve brought
down to Jul-20 levels2. RBI takes care of
remaining concerns of bond market
E. Underweight Alternatives1. The relationship of gold
with other financial variables weakened somewhat
2. INR may not propel similar type of toppings on Dollar return
Summary & conclusion: Stay Neutral on Equities; Overweight on Fixed Income; Underweight Alternatives
1. The pace of recovery has quickened in Sep-20. But the medium term growth prospecthas weakened on account of falling saving and investment and weak financial positionof the Government and the corporates constraining their ability to act as growth drivers.
2. Meanwhile the momentum of recovery in the equity market has slowed down andthere has been some sector rotation. Volatility and valuations remain high whileearnings expectations hasn’t materialized for long. Flows remain volatile and much lessthan expected. Meanwhile Covid-19 cases have surged again in Europe/US and havecrossed 7.5m in India. We stay neutral on equity but have turned overweight onfinancials due to higher margin of safety.
3. On the fixed income side Government borrowing stay within limits anticipated earlier. Aslew of measures by RBI has eased the benchmark rates and kept various spreadsrangebound. As the inflation and liquidity pressures ease in the second half, we expectpressure to ease further. Hence we stay overweight on fixed income with a bias forduration play at the mid segment in Gsec and AAA space.
4. In the alternative space, the relationship of gold with usual financial variables haveweakened somewhat. Due to India’s current strategy for import substitution and capitalflow prospect, INR outlook has changed and unlikely to provide similar topping on dollarreturns. We have turned underweight on gold. We stay underweight on absolute returnstrategies and neutral on REIT.
ACAI shows pace of recovery quickened in Sep-20
Sources – CMIE, RBI, Govt, Bloomberg, ASKWA Research.
Many a indicators have started turning up ASK Composite Activity Index (ACAI) recovery gathering pace
Note: The ASK Composite Activity Indicator (ACAI) is a comprehensive tracker of the economy with a data dashboard of 36 key indicators of the economycovering nearly all aspects of the non-agricultural economy including energy, manufacturing, investments, real estate, infrastructure, foreign trade &investments, transports, financial services, and measures of corporate and government financial health and household well being. The number of variablesthat are at (yellow), above (green) or below (red) their historical average for the period, provides a good guide to the state of the economy. The aggregate ofthe 36 indicators into a single index - ACAI incorporates the extent of variation in the variables apart from their direction of change. ACAI is meant to serveas a more recent (nowcasted) and alternative measure of economic activities to be available before the GDP data is released for the quarter
• ACAI shows indication of economy bottoming out in Apr-2020 and after relatively sharp recovery in May-20 and Jun-20.While it slowed down somewhat during Jul-20 and Aug-20, early indication point to recovery gaining pace in Sep-20.
• Electricity demand showed YoY growth. Rail freight grew sharply. Import of telecom instruments too revived. On thefinancial sector, double digit deposits growth was preserved while first year premium of life insurance companies spiked.Exports, trade balance and foreign investment flows too were buoyant.
• However, residential real estate, bank credit growth, corporate ratings, central government tax and expenditures wereareas yet to show any traction at present.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-
18Fe
b-1
8M
ar-1
8A
pr-1
8M
ay-1
8Ju
n-18
Jul-
18A
ug-1
8Se
p-1
8O
ct-1
8N
ov-1
8D
ec-1
8Ja
n-19
Feb
-19
Mar
-19
Apr
-19
May
-19
Jun-
19Ju
l-19
Aug
-19
Sep
-19
Oct
-19
Nov
-19
Dec
-19
Jan-
20Fe
b-2
0M
ar-2
0A
pr-2
0M
ay-2
0Ju
n-20
Jul-
20A
ug-2
0Se
p-2
0
Red (Below Avg) Yellow (Around Avg) Green (Above Avg)
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
Mar
-16
Jun
-16
Sep
-16
Dec
-16
Mar
-17
Jun
-17
Sep
-17
Dec
-17
Mar
-18
Jun-
18
Sep
-18
Dec
-18
Mar
-19
Jun-
19
Sep
-19
Dec
-19
Mar
-20
Jun
-20
Sep
-20
ASK Composite Activity Index (ACAI) ACAI - Trend
Demonitisation
GSTIL & FS
Covid-19
Perod of high real interest rate
However, Govt. and corporate on weaker footing
Sources – CMIE, IMF, ASKWA Research
One of the weakest fiscal effort Despite manageable debt level
Corporate sector focused on deleveraging Amidst rising NPAs
7 75 6
12 11
64
1110 11
9 11 10 18
6 8 911 11
12 12 12 1314 15 15 15 16
24
-5
0
5
10
15
20
25
30
Increase in 2020 Fiscal Deficit General Govt. deficit (2020)
5
11 12 11 12 17 18 1219 16 13 21 21
33
30
19
56 57 63 6477 80 84
102 102 102 105 111
141
268
0
50
100
150
200
250
300
Increase in 2020 Public Debt Public Debt (2020)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
D/E Interest coverage (RHS)
12.7
2.3
12.5
0
2
4
6
8
10
12
14
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
E
NP
As
as
% o
f to
tal a
dva
nce
s
Gross NPAs
Chinks in the growth story
Sources – CMIE, WTO, ASKWA Research
Real sector growth stagnated at 5% Slow structural transformation
The phenomenon of Jobless growth Global trade prospects weak
1.9
1.7
1.4
-0.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1980s 1990s 2000s 2010s
Emp growth (CAGR)
Back to basics growth strategy: Reform scorecard – Pt 1
Sources Media, CMIE, Bloomberg, ASKWA Research
Reform Assessment Score
1. Indirect tax : GST Largely accomplished but needs fine tuning and adherence to rule
based approach
5
2. Direct tax : DTC Direct Tax Code effectively implemented for the corporate sector,
tax rate lowered
5
3. Doing Business Progress in certain aspect marred by its lack in other areas, crucially
dependent on States
3
4. FDI Largely liberalised for most sectors with some strategic limits 5
5. Subsidies Petroleum subsidy nearly eliminated; now taxed heavily 5
6. Bankruptcy law IBC/NCLT is the most successful way of handling corporate stress.
Capacity needs to be enhanced.
5
7. Bankruptcy for financial
firm
Law passed, implementation awaited 3
8. NPA resolution NPAs have remained high amidst high real interest and slowing
economy
1
9. Privatisation While better than previous attempts, the disinvestment proceeds
fallen short of target. Overdependence on share sale in lots than
privatisation.
3
10. RERA Helped the real estate sector transformation to an organised one 5
Performance
Continued on next slide
Reform Assessment Score
1. Indirect tax : GST Largely accomplished but needs fine tuning and adherence to rule
based approach
5
2. Direct tax : DTC Direct Tax Code effectively implemented for the corporate sector,
tax rate lowered
5
3. Doing Business Progress in certain aspect marred by its lack in other areas, crucially
dependent on States
3
4. FDI Largely liberalised for most sectors with some strategic limits 5
5. Subsidies Petroleum subsidy nearly eliminated; now taxed heavily 5
6. Bankruptcy law IBC/NCLT is the most successful way of handling corporate stress.
Capacity needs to be enhanced.
5
7. Bankruptcy for financial
firm
Law passed, implementation awaited 3
8. NPA resolution NPAs have remained high amidst high real interest and slowing
economy
1
9. Privatisation While better than previous attempts, the disinvestment proceeds
fallen short of target. Overdependence on share sale in lots than
privatisation.
3
10. RERA Helped the real estate sector transformation to an organised one 5
Performance
Back to basics growth strategy: Reform scorecard – Pt 2
Sources Media, CMIE, Bloomberg, ASKWA Research
Reform Assessment Score
11. Land availability Significant progress in digitising record, creation of land bank
despite challenges from State governments
5
12. Labour reform Code simplified, laws enacted despite significant challenges 5
13. Agricultural reform Laws to liberalise agricultural market enacted despite significant
challenges; food inflation lowered substantially
5
14. Mining No major success post the initial auctions, Private sector mining
permitted
1
15. Priority sector lending Norms relaxed 3
16. Power sector reform UDAY scheme met with some initial success but some fundamental
issue of Discom viability have stayed.
3
17. NBFCs and Cooperative
banks
Weaknesses persist while financial market stability has been
ensured
1
18. Filling up Judicial
vacancies
Tardy progress 1
19. Digitising judiciary Tardy progress 1
20. Transfer pricing Work in progress 1
Total 26
Performance
Current pursuit: Building a globally competitive manufacturing sector
Sources Media, Exim Bank, ASKWA Research
Enablers Correcting inverted duty structure
Public procurment (20-30% of GDP), move to EU norm of "price quality ratio), Favour MSME
Efficient customs and procedures
Reliable standards and certification
Doing business, enforcement of contract, judicial process, state reforms
Competitiveness R&D and skill development (TAFP and TADP programmes), M&A to promote tech acquisition
Industrial cluster development
WTO compliant incentives (capital, R&D subsidy) vs. sector specific e.g., EHTP, EOU, SEZ, EPCG
Improve global mfg competitiveness rank to 5th from 11th on 2016
Graduation/sunset clause and trigger mechanism to FTAs
Then Now
Very restrictive FDI regime Soliciting FDI with near full liberalisation
Inward looking – producing mainly for domestic market Producing for domestic market and crucially exports
Global trade regime was very restrictive, and countries could follow their own policy
WTO regime places restriction to the extent to which countries can follow trade-restrictive policies
Reliance on State monopolies to deliver on crucial sectors Far higher reliance on private sector to deliver
Had choice to be more open Trade-war limited possibilities of export-led growth
Markets worked under a lot of restrictions. Factor market largely unlocked with latest series of changes.
Geopolitical imperative of China import substitution
Sources Media,, ASKWA Research Note: Word cloud map from news headlines from Google search on “India China” extracted on October 2, 2020
Equity market has recovered but the pace of recovery slowed
Sources: CMIE, Bloomberg, ASKWA Research
6563 63 63 63 63 65 63 63 64
6265
91
85 85 85 85 86 87 86 86 86 8790
97 98 98 98 98 99 99 99 99 100 101
109
60
85
110
31
st D
ec 2
01
9 =
10
0 (
Ind
exed
)
23-Mar 30-Jun 10-Oct
Sector performance has diverged further
Sources: CMIE, Bloomberg, ASKWA Research
5953
5955
52
59 6167
7671
57
72
82
7066
69 71 6976
8682
99
81 83
96
121
66
74 7578 79 81 83
8597
98 100
142
151
50
75
100
125
150
PSU
Ban
kex
Rea
lty
Fin
ance
Met
als
Cap
Go
od
s
Oil
& G
as
Po
wer
FMC
G
Co
ns
Du
rab
les
Au
to IT
Hea
lth
care
31
st D
ec 2
01
9 =
10
0 (
Ind
exed
)
23-Mar 30-Jun 10-Oct
Volatility is staying high
Sources Bloomberg, ASKWA Research
0
10
20
30
40
50
60
70
80
Jul-
10O
ct-1
0Ja
n-11
Apr
-11
Jul-
11O
ct-1
1Ja
n-12
Apr
-12
Jul-
12O
ct-1
2Ja
n-13
Apr
-13
Jul-
13O
ct-1
3Ja
n-14
Apr
-14
Jul-
14O
ct-1
4Ja
n-15
Apr
-15
Jul-
15O
ct-1
5Ja
n-16
Apr
-16
Jul-
16O
ct-1
6Ja
n-17
Apr
-17
Jul-
17O
ct-1
7Ja
n-18
Apr
-18
Jul-
18O
ct-1
8Ja
n-19
Apr
-19
Jul-
19O
ct-1
9Ja
n-20
Apr
-20
Jul-
20O
ct-2
0
VIX Index
Valuations are at all time peak
Sources – CMIE, Bloomberg, ASKWA Research
Nifty at all time high even on forward P/E Midcaps have run up once again
Nifty is in second quartile of valuation band now Midcaps too closer to historical high
19.8
8.8
18.1
11.9
19.2
13.2
21.1
20.8
15.3
17.5
13.2
8
10
12
14
16
18
20
22
Apr
-06
Sep
-06
Feb
-07
Jul-
07D
ec-0
7M
ay-0
8O
ct-0
8M
ar-0
9A
ug-0
9Ja
n-10
Jun-
10N
ov-1
0A
pr-1
1Se
p-1
1Fe
b-1
2Ju
l-12
Dec
-12
May
-13
Oct
-13
Mar
-14
Aug
-14
Jan-
15Ju
n-15
Nov
-15
Apr
-16
Sep
-16
Feb
-17
Jul-
17D
ec-1
7M
ay-1
8O
ct-1
8M
ar-1
9A
ug-1
9Ja
n-20
Jun-
20
Nifty Avg +1 SD -1 SD
18.3
17.0
20.8
24.5
17.3
13.0
23.8
12
14
16
18
20
22
24
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
Jan
-18
Ap
r-1
8
Jul-
18
Oct
-18
Jan
-19
Ap
r-1
9
Jul-
19
Oct
-19
Jan
-20
Ap
r-2
0
Jul-
20
1yr
Fo
rwa
rd P
E
Nifty BSE Mid Cap
0
5000
10000
15000
20000
25000
Sep
-10
Mar
-11
Sep
-11
Mar
-12
Sep
-12
Mar
-13
Sep
-13
Mar
-14
Sep
-14
Mar
-15
Sep
-15
Mar
-16
Sep
-16
Mar
-17
Sep
-17
Mar
-18
Sep
-18
Mar
-19
Sep
-19
Mar
-20
Sep
-20
Px = 11914.2 (Actual) @ P/CF of 24.4x Px = 19009.04 @ P/CF of 39x
Px = 14861.55 @ P/CF of 30.5x Px = 10714.07 @ P/CF of 22x
Px = 6566.58 @ P/CF of 13.5x Px = 2419.1 @ P/CF of 5x
0
10000
20000
30000
40000
Sep
-10
Mar
-11
Sep
-11
Mar
-12
Sep
-12
Mar
-13
Sep
-13
Mar
-14
Sep
-14
Mar
-15
Sep
-15
Mar
-16
Sep
-16
Mar
-17
Sep
-17
Mar
-18
Sep
-18
Mar
-19
Sep
-19
Mar
-20
Sep
-20
Px = 14765.55 (Actual) @ P/E of 331.8x Px = 3466.4 @ P/E of 77.9x
Px = 2367.38 @ P/E of 53.2x Px = 1268.35 @ P/E of 28.5x
Px = 169.33 @ P/E of 3.8x
Earnings recovery on high hopes
Sources – Bloomberg, ASKWA Research
Earnings degrowing since Dec-18 quarter
Pinning hopes on sharp earnings recovery in FY22
0
8 9
3
8
46
15 1416
10
-7 -8 -9 -10
-1
3
-1
4
12
6
1416
14 12
11
-2-5
0
-4
5
-4
-19 -18
-25
-20
-15
-10
-5
0
5
10
15
20
Jun
-12
Sep
-12
De
c-12
Ma
r-13
Jun
-13
Sep
-13
De
c-13
Ma
r-14
Jun
-14
Sep
-14
De
c-14
Ma
r-15
Jun
-15
Sep
-15
De
c-15
Ma
r-16
Jun
-16
Sep
-16
De
c-16
Ma
r-17
Jun
-17
Sep
-17
De
c-17
Ma
r-18
Jun
-18
Sep
-18
De
c-18
Ma
r-19
Jun
-19
Sep
-19
De
c-19
Ma
r-20
Jun
-20
Sep
-20
EPS growth (YoY%)
LPA: 12%
-5
3134
31
12
2622
-13
8
26
73
15
-5-1
11 12
-4-4
4
43
-15
-5
5
15
25
35
45
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 E FY22 E
Nifty Earnings
Long period avg: 11%
Last 6yr avg: 1.7%
Flows have been fluctuating and don’t show any spike
Sources – CMIE, Bloomberg, ASKWA Research
FIIs flows have been volatile with debt sell off Even FIIs equity flows are not outsized by historical standards
MFs have been selling in equities Flows by other institutions are also not high
-600
-400
-200
0
200
400
600
800
Dec
-05
Jun-
06D
ec-0
6Ju
n-07
Dec
-07
Jun-
08D
ec-0
8Ju
n-09
Dec
-09
Jun-
10D
ec-1
0Ju
n-11
Dec
-11
Jun-
12D
ec-1
2Ju
n-13
Dec
-13
Jun-
14D
ec-1
4Ju
n-15
Dec
-15
Jun-
16D
ec-1
6Ju
n-17
Dec
-17
Jun-
18D
ec-1
8Ju
n-19
Dec
-19
Jun-
20
FIIs equity (INR bn)
-1400
-1200
-1000
-800
-600
-400
-200
0
200
400
600
Jan-
18Fe
b-1
8M
ar-1
8A
pr-1
8M
ay-1
8Ju
n-18
Jul-
18A
ug-1
8Se
p-1
8O
ct-1
8N
ov-1
8D
ec-1
8Ja
n-19
Feb
-19
Mar
-19
Apr
-19
May
-19
Jun-
19Ju
l-19
Aug
-19
Sep
-19
Oct
-19
Nov
-19
Dec
-19
Jan-
20Fe
b-2
0M
ar-2
0A
pr-2
0M
ay-2
0Ju
n-20
Jul-
20A
ug-2
0Se
p-2
0
FIIs
flo
ws
(IN
R b
n)
Debt Equity Total
-400
-200
0
200
400
600
800
Jan-
18Fe
b-1
8M
ar-1
8A
pr-1
8M
ay-1
8Ju
n-18
Jul-
18A
ug-1
8Se
p-1
8O
ct-1
8N
ov-1
8D
ec-1
8Ja
n-19
Feb
-19
Mar
-19
Apr
-19
May
-19
Jun-
19Ju
l-19
Aug
-19
Sep
-19
Oct
-19
Nov
-19
Dec
-19
Jan-
20Fe
b-2
0M
ar-2
0A
pr-2
0M
ay-2
0Ju
n-20
Jul-
20A
ug-2
0Se
p-2
0
MFs
flow
s (I
NR
bn)
Debt Equity Total
-200
-100
0
100
200
300
400
500
600
Jan-
18
Mar
-18
May
-18
Jul-
18
Sep
-18
Nov
-18
Jan
-19
Mar
-19
May
-19
Jul-
19
Sep
-19
No
v-1
9
Jan-
20
Mar
-20
May
-20
Jul-
20
Sep
-20
DII
s a
nd
oth
er f
low
s
DII(BSE+NSE+MCX-SX) BSE (Clients+NRI+Proprietary)
US election – what is there for us
Sources Macrotrends, Bloomberg, ASKWA Research
Appointment President Party
Sensex S&P 500 Sensex S&P 500
20-Jan-81 Ronald Reagan Republican 147 132 19.9 10.2
20-Jan-89 George H. W. Bush Republican 632 287 41.5 10.9
20-Jan-93 Bill Clinton Democratic 2532 433 6.5 15.2
20-Jan-01 George W. Bush Republican 4194 1343 10.2 -6.2
20-Jan-09 Barack Obama Democratic 9101 805 14.6 13.8
20-Jan-17 Donald Trump Republican 27035 2271 10.6 11.2
10-Oct-20 40509 3477
Index level CAGR
Democrats’ have fared better for the market but there could be more factors at play
Evidence is mixed for Indian markets highlighting dominance of other factors
The risk of second wave before the vaccine availability
Sources – Worldometer, ASKWA Research
UK US
India Russia
Fixed Income: Yield curve brought down to Jul-20 levels
Sources – CMIE, Bloomberg, Media, ASKWA Research
Yield curve softened between Apr-20 to Jul-20 Current yield curve brought down to that level again
No surprise on the borrowing programme Scope of drop in yield in mid-maturity
4.7
9.6
4.9
8.0
9.6
17.5
13.4
21.4
0
5
10
15
20
25
FY20 FY21 E
Amou
nt o
f bor
row
ing
(IN
R tn
)
Centre States Total net borrowing Total gross borrowing
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 14Y 15Y 20Y 30Y 40Y
30-Apr-20 31-May-20 30-Jun-20 31-Jul-20
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 14Y 15Y 20Y 30Y 40Y
31-Jul-20 31-Aug-20 30-Sep-20 10-Oct-20
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
2yr 5yr 10yr 14yr 30yr 40yr FRB
H1 FY21 H2 FY21
Fixed Income: RBI takes care of remaining concernsof bond market
Sources RBI, Media, CMIE, ASKWA Research
1. Assurance of accommodative stance for extended period2. Explicitly mentioning that the inflation hump would be looked through3. On Tap TLTRO of INR 1tn to be reviewed later4. OMOs in SDLs5. Strong moral suasion6. Increased limit of HTM in SLR7. Increased size of OMO auctions8. Conduct of OMOs to stabilize yield than to infuse further liquidity9. Secondary market sizable OMO operations10. Bias to mid-duration for auctions bringing yields down in that segment11. Signaling through auction devolvement12. Tightening transmission to ensure that rate cuts are fully reflected across
market segments over a period of time
Gold: The relationship of gold with other financial variables weakened somewhat
Sources – Bloomberg, CMIE, ASKWA Research
Gold cycles are long and contains a bet on INR Gold go up when US 10-yr yield is low
Significant negative correlation with USD too Gold and S&P altered relation
0
1
2
3
4
5
6
7
200
400
600
800
1000
1200
1400
1600
1800
2000
Jul-
99
Jul-
00
Jul-
01
Jul-
02
Jul-
03
Jul-
04
Jul-
05
Jul-
06
Jul-
07
Jul-
08
Jul-
09
Jul-
10
Jul-
11
Jul-
12
Jul-
13
Jul-
14
Jul-
15
Jul-
16
Jul-
17
Jul-
18
Jul-
19
Jul-
20
Gold US 10yr
Correl: (-) 89%
70
75
80
85
90
95
100
105
110
115
120
200
400
600
800
1000
1200
1400
1600
1800
2000
Jul-
99
Jul-
00
Jul-
01
Jul-
02
Jul-
03
Jul-
04
Jul-
05
Jul-
06
Jul-
07
Jul-
08
Jul-
09
Jul-
10
Jul-
11
Jul-
12
Jul-
13
Jul-
14
Jul-
15
Jul-
16
Jul-
17
Jul-
18
Jul-
19
Jul-
20
Gold USD
Correl: (-) 46%
500
1000
1500
2000
2500
3000
3500
4000
200
400
600
800
1000
1200
1400
1600
1800
2000
Jul-
99
Jul-
00
Jul-
01
Jul-
02
Jul-
03
Jul-
04
Jul-
05
Jul-
06
Jul-
07
Jul-
08
Jul-
09
Jul-
10
Jul-
11
Jul-
12
Jul-
13
Jul-
14
Jul-
15
Jul-
16
Jul-
17
Jul-
18
Jul-
19
Jul-
20
Gold SPX Index
Correl: (+) 59%
Correl: (+) 3% : Since 2012
135
222
183
50
70
90
110
130
150
170
190
210
230
250
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
Dec
-15
Jun-
16
Dec
-16
Jun-
17
Dec
-17
Jun-
18
Dec
-18
Jun-
19
Dec
-19
Jun-
20
Gold (USD) Gold (INR) Nifty
INR may not propel similar type of toppings on Dollar return
Sources – Bloomberg, CMIE, ASKWA Research
Large Rupee depreciation happened during CAD drop Targeted reduction in trade deficit
Sharp increase in forex indicates comfort on external front No need to depreciate the currency with current REER/NEER
-6.8
-2.9
40
45
50
55
60
65
70
75
80
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
Jun
-11
Dec
-11
Jun
-12
Dec
-12
Jun
-13
Dec
-13
Jun
-14
Dec
-14
Jun
-15
Dec
-15
Jun
-16
Dec
-16
Jun
-17
Dec
-17
Jun
-18
Dec
-18
Jun
-19
Dec
-19
Jun-
20
CAD/GDP INR/USD
312
276
424
393
542
100
150
200
250
300
350
400
450
500
550
600
Dec
-05
Aug
-06
Apr
-07
Dec
-07
Aug
-08
Apr
-09
Dec
-09
Aug
-10
Apr
-11
Dec
-11
Aug
-12
Apr
-13
Dec
-13
Aug
-14
Apr
-15
Dec
-15
Aug
-16
Apr
-17
Dec
-17
Aug
-18
Apr
-19
Dec
-19
Aug
-20
Forex reserves (USD bn)
71
117
100
105
110
115
120
125
64
66
68
70
72
74
76
78
80
Oct
-15
Dec
-15
Feb
-16
Apr
-16
Jun-
16A
ug-1
6O
ct-1
6D
ec-1
6Fe
b-1
7A
pr-1
7Ju
n-17
Aug
-17
Oct
-17
Dec
-17
Feb
-18
Apr
-18
Jun-
18A
ug-1
8O
ct-1
8D
ec-1
8Fe
b-1
9A
pr-1
9Ju
n-19
Aug
-19
Oct
-19
Dec
-19
Feb
-20
Apr
-20
Jun-
20A
ug-2
0
NEER (36-currency trade-weighted) REER (36-currency trade-weighted) (RHS)
-43
-77
-98
-89
-23
-7-12
-8 -8 -5-5 -6-9 -10
-1
-120
-100
-80
-60
-40
-20
0
YTD FY17 YTD FY18 YTD FY19 YTD FY20 YTD FY21
Tra
de
def
icit
(USD
bn
)
World China USA
Strategy: Neutral Equity; Overweight Financials
Sources – ASKWA Research.
Equity:1) There has been some weakening of the medium term drivers of growth in India including
a drop in saving and investment ratios and stagnation of the real sector. Fiscal constraint has led to one of the restrained Covid-19 response from the government while private sector is yet to emerge from its cycle of deleveraging.
2) The policy to revive manufacturing through a combination of Make in India initiative along with import substitution attempts to add new levers to growth. A slew of reforms undertaken provides the backdrop. The geopolitical tension with China makes such a growth strategy an imperative while in the near term it is a risk to the equity market.
3) Equity market recovery momentum has weakened somewhat and there has been some trend change in sectoral performance in the last quarter.
4) Both volatility and valuation has remained high in equity market in the post recovery phase. Earnings growth has been at low single digit for last six years although expectation for a sharp recovery stays afloat. Flows too has been volatility without clear upsurge.
5) US elections is likely to create some near term volatility in the market. A surge in Covid-19 cases abroad is another source of uncertainty for the equity market.
In view of the accumulated risks in the market we would stay neutral on the market. However, in view of the higher margin of safety in the financial sector amidst recent corrections and signs of recovery, we are overweight on the space.
Sources – ASKWA Research.
Fixed Income market:1) The revised FY21 borrowing by Centre and the States now stands at near INR 22 tn vs.
11.5 tn of FY20. However, there hasn’t been hike since the previous estimates and includes increased borrowing by the Centre for GST compensation.
2) Higher capital flows coupled with continued OMOs from RBI have ensured high deposits growth for the banks unmatched by credit growth which remains muted. This would keep SLR demand high from banks.
3) RBI has undertaken a slew of measures to stabilize the yields effectively making sure that the benchmarket 10yr yield moves below the upper band of 6%.
4) RBI has also conducted the borrowing programme across maturity basket in such a way that it does not generate any undue stress at any particular market segment. The OMO in SDL is another measure to have a salutary impact on the yield spreads.
Given the strong bias of RBI to see rates lower and inflation risks eventually tapering off, we stay with our 10yr benchmark Gsec forward guidance at 5.00% to 6.50% and maintain our overweight stance on fixed income. As before, the strategy should be geared towards high quality Gsec and AAA in the 3-5 year maturity bucket, and locking in yields across highest rated instruments at the short end of the curve. We stay underweight on credit given the impact of crisis on credit environment.Cash:We stay underweight on cash to accommodate for stance for other asset classes.
Strategy: Overweight Fixed Income underweight Cash
Strategy: Alternative - Underweight Gold & Absolute Return; Neutral REIT
Sources – ASKWA Research.
Gold:1) Gold is typically negatively correlated with other financial assets viz., including USD, S&P
and bond yield. The equity market has recovered the lost ground to new heights and the peak of volatility is also behind us.
2) Thus in recent times there has been some weakening of these relationships.3) As the lower bound on US interest rate has neared and US equities have run up too the
relative attractiveness of gold has dimmed. USD has weakened and the prospect of US economy and market do not point to secular downtrend of USD.
4) INR outlook too is altered now as there has been concerted attempt to reduce trade gap through import substitution strategy and overall trade also slowed down resulting in current account surplus for two consecutive quarters. Besides there is no urgency now to follow a depreciation policy with REER/NEER valuation been rangebound.In view of weakening of the relationship between gold and other financial variables and relative higher valuation we have turned underweight on gold.
Absolute return: With the period of extreme volatility ahead us and increased tax incidence, we remain underweight on Absolute returns strategies.REIT:With the overhang of issues due to Covid-19 uncertainties we stay neutral on REIT.
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(ASKWA) /sender for the success of any investment product / ideas discussed herein or assures, guarantees any minimum returns and/or preservation of
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