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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