the alpha investor - finpeg.com · 2020. 3. 4. · the alpha investor issue #4, feb 2020 as markets...

The Alpha Investor Issue #4, Feb 2020

As markets catch Corona cold, it’s time to get greedy!

Dear Investor, February was the kind of month that you witness very rarely as an investor. S&P 500 witnessed its fastest 10% correction. Indian markets were not immune as well (pun unintended).

It’s times like these that reinforce our belief in a rule-based data driven investing methodology rather than succumbing to our emotions of greed and fear.

The key theme of this issue is our own performance and how we have protected your portfolio so far. We also cover how we are gearing your portfolio to take advantage of what’s likely to come next.

Happy reading!

Shubham Satyarth

Co-founder, Finpeg

INSIDE THIS ISSUE 1. Cover Story

2. Indian Markets

3. Indian Macro

4. Global Markets

5. Global Macro

6. Performance Data

Smart solutions for smart money

The Alpha Investor | Issue# 4

The Alpha Investor, Feb 2020 | Issue #4| Finpeg

THE ALPHA INVESTOR, FEB 2020 | ISSUE #4 |

What’s Inside? AS MARKETS CATCH COVID COLD, IT’S TIME TO GET GREEDY ........................................................................ 3

HOW HAS FINPEG’S ASSET ALLOCATION EVOLVED? ....................................................................................................... 3 IT’S TIME TO GET A BIT GREEDY .................................................................................................................................. 4 MARKETS LIKELY TO REMAIN VOLATILE IN THE NEAR TERM…. .......................................................................................... 6 AND FINPEG INVESTORS HAVE THAT PLAN ................................................................................................................... 7 FINALLY, HOW IS FINPEG STRATEGY PERFORMING TODAY? .............................................................................................. 7

INDIAN MARKETS – MARKETS MARCH ON DESPITE HEADWINDS .................................................................. 8 1. EQUITY MARKET WRAP FOR THE MONTH ................................................................................................................. 8 2. EQUITY MARKET VALUATIONS .............................................................................................................................. 4 3. DEBT MARKET WRAP FOR THE MONTH ................................................................................................................... 5 4. WHAT IS THE “SMART” MONEY DOING? .................................................................................................................. 6

INDIAN ECONOMY – RECOVERY TO BE SLOW AND BUMPY ............................................................................ 7 1. SUMMARY AND OUTLOOK .................................................................................................................................... 7 2. GDP AND THE ECONOMY – RECOVERY DELAYED? ...................................................................................................... 8 3. INFLATION AND MONETARY POLICY ........................................................................................................................ 9 4. EXCHANGE RATE – INR FALLS AS INVESTORS RUSH TOWARDS SAFE HAVEN ................................................................... 10

GLOBAL MARKETS – IT WAS ALL ABOUT THE LAST WEEK OF FEB ................................................................. 11 1. GLOBAL EQUITY MARKETS ................................................................................................................................. 11 2. GLOBAL DEBT MARKETS .................................................................................................................................... 12 3. DOLLAR AND GOLD ........................................................................................................................................... 13

GLOBAL MACRO .......................................................................................................................................... 14 1. GLOBAL MACRO SNAPSHOT ............................................................................................................................... 14 2. CORONA VIRUS OUTBREAK – AN UPDATE ............................................................................................................... 16

PERFORMANCE DATA .................................................................................................................................. 18 1. BEST PERFORMING EQUITY MUTUAL FUNDS IN FEBRUARY 2020 ............................................................................... 18 2. BEST AND WORST PERFORMING NIFTY STOCKS IN FEBRUARY 2020 ........................................................................... 19



As markets catch COVID cold, it’s time to get greedy What a way to end February! It’s was literally a free fall for the global stock markets. Benchmark US equity index (S&P 500) corrected 13% in just 7 trading sessions (their fastest decline since financial crisis of 2008)! Back home, NIFTY 50 corrected 9.4% from its peak of 12,362 (14th Jan closing). And what caused this mayhem? It’s the Virus! In our previous issue of The Alpha Investor, we had discussed Corona Virus and its impact on global economy and equity markets. Specifically, we had noted that we were puzzled by the fact that markets were not pricing in the economic risk. We had mentioned that the risk was (and still is) real and significant. As it turns out, markets have finally woken up to that reality. But this correction has given us a solid window of opportunity to start buying equities now. And I will soon discuss the reasons behind our aggressive equity stance. But before that, let’s see how our asset allocation has moved since Jan 2018. How has Finpeg’s asset allocation evolved? We pick Jan 2018 for a specific reason - it was in Jan 2018 that our algorithm started indicating an all-cash portfolio. If you have been investing with us since 2018, you would know that for a better part of 20 months, we kept your money in arbitrage and/or liquid funds. That’s the story till September 2019. And our all-cash call worked out beautifully! If you would have invested Rs 1 lac in NIFTY 50 index on 1st Jan 2018, it would have grown to Rs 1,05,375 by 16th September 2019 (the day we started moving back into equities). That is an annualized return of just 3.2%. In contrast, if you would have invested Rs 1 lac in NIFTY 50 index on 1st Jan, 2018 through Finpeg’s strategy, it would have grown to Rs 1,12,767 at an annualized return of 7.4%. The difference in performance becomes more striking if you consider the mid cap index. The same Rs 1 lac in NIFTY Midcap 100 would have shrunk to Rs 76,000 by 16th September 2019 in a normal buy-and-hold strategy. That’s a negative annualized return of 15%. In contrast, with Finpeg, the money in same NIFTY Midcap 100 would have grown to Rs 1,12,134 at an annualized return of 7%. The charts below tell the picture:

Exhibit 1: Finpeg strategy outperformed a regular buy and hold strategy from Jan 2018 till Sep 2019

Source: Finpeg, NSE

₹1,05,375

₹1,12,767

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Finpeg Strategy vs Normal Buy and Hold (NIFTY 50)

Normal Buy and Hold Finpeg

Exhibit 2: A regular strategy lost money in mid-caps from Jan 2018 till Sep 2019

Source: Finpeg, NSE

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Finpeg Strategy vs Normal Buy and Hold (NIFTY Midcap 100)




That’s the story till September 2019. That’s when our algorithm started signaling a gradual move into equity funds. And this was driven by number of factors:

1. A surge in global liquidity as Central Banks started pumping money (covered in detail here), 2. Earnings kicker due to sharp cut in corporate tax rates (hence a downward adjustment in PE

ratio) 3. Nascent signs of economic recovery both in India and the rest of the world 4. Uptick in 10Y bond yields after bottoming in September leading to steepening of the yield

curve (discussed in detail here) And the markets did run up quite a bit. So much so that, pretty soon, we had to pause deployment into equities. And today as we face a global virus panic where everyone is fearful, it’s time to get greedy! It’s time to get a bit greedy If you are investing with us, you would have noticed that we have again started moving money into equity mutual funds and increasing the overall share of equity in your portfolio. Well, our algorithm derives its signal from a number of parameters. Let’s discuss some of the important ones: 1. Global liquidity and monetary policy easing We have been highlighting this factor as the major driver of equity markets across the globe. In case you missed it, you can read our detailed analysis here – Fed is the only real game in town The fact is that major central banks (Federal Reserve Bank of US, European Central Bank and Bank of Japan) have been supplying the markets with liquidity. And markets love liquidity. Below is the chart of NIFTY index compared with Fed’s Balance Sheet (a proxy for liquidity): Will this liquidity injection continue? With Corona Virus scare, chances are, that not only will this continue, it could actually increase in quantum. The current Fed dispensation doesn’t like big corrections in equity markets and will likely do everything in their power to keep the markets buoyant. Plus, we have now seen the PBoC (Peoples Bank of China) also joining the party. On top of

Exhibit 3: Performance of NIFTY w.r.t to Federal Reserve Balance Sheet since Jan 2018

Source: FRED, NSE

Exhibit 4: Performance of NIFTY index during times of Fed QE (liquidity injection)

Source: Finpeg, NSE

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that, we could see major fiscal stimulus to counter the demand shock generated by Corona Virus. We are already seeing one in China. While that’s about liquidity, the other big factor is that the Federal Reserve Bank could lower its policy rates going into the year. As the yield curve has inverted (yet again) and the stock markets have corrected sharply, the probability of a rate cut has spiked up. When we started writing this report (on Monday 2nd March), there were rumors about Fed doing an emergency rate cut. By the time you will be reading this, Fed has already done an emergency 50 bps rate cut. 2. The virus spread will stabilize and eventually stop While the economic impact of the entire outbreak could be large and significant, the outbreak itself should come under control sooner rather than later. And equity markets are forward looking. The first signs of any abatement in the spread of the virus will likely be the bottom of this current correction. Number of incremental cases have already started to drop in China and as we enter summer months, the spread of virus will also decline significantly. There are obvious tail risks to this thesis. (1) The virus spreads into Eurozone and North America and (2) The economic impact is so severe that we could see the global economy slide into a recession. Even if these tail risks materialize and the correction does go deeper, we have enough ammunition to buy equities. 3. Broader markets are now reasonably valued The recent correction has meant that the broader markets are now fairly valued. While the benchmark NIFTY 50 index is still overvalued (trading at 1 SD above its historical average PE on a TTM basis), the broader market is now fairly reasonably valued. Even in NIFTY 50, the valuation has been driven up by the top 10-15 stocks. If we consider the PE ratio (TTM) of NIFTY 50 equal-weighted index, it is now trading very close to its historical average. And mid and small caps also look fairly reasonably valued:

Exhibit 5: While NIFTY 50 still looks overvalued (despite 10% drop), the broader market is now increasingly looking fairly valued

Source: BSE and NSE

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NIFTY 50 NIFTY 50 (Equal Weight) NIFTY Mid Cap 150



4. A structural bottoming out of the Indian Economy As we had discussed in our piece Indian Economy – Recovery in sight but bumps ahead, we believe that Indian economy is likely bottoming out and we should see a structural recovery. Both manufacturing and services PMI hit their 7-year high in the month of January 2020. While the road to recovery will definitely be slower than anticipated earlier, it will still be a recover as we head towards the second half of 2020. Markets likely to remain volatile in the near term…. Right now, there is genuine fear in the market. Stock markets hate uncertainty. And right now, all we have is complete uncertainty of how the entire virus episode will play out. How many people will eventually get infected and what will be the economic cost of this. We would like to present one simple anecdotal evidence of the level of fear in the markets right now. The date is 2nd March 2020 (Monday). Markets around the globe opened in green (as was expected after previous week’s bloodbath). Indian markets are also up – at one point of time, it was at an intraday high of 1.94%. That was at 2:05 PM. At roughly the same time, Press Information Bureau of India (PIB) came out with a release confirming 2 new cases of virus in Delhi and Telangana. And the markets tanked. To an extent that it was down 1.5% within one hour and finally closing 0.6% down. Exhibit 6 below tracks the intraday movement NIFTY on 2nd March 2020. As can be seen from Exhibit 7 above, the CNN Fear and Greed Index has now plunged into extreme fear territory. Therefore, in the near term, brace yourself for some sharp movements in the markets as the news keeps pouring in. Emergence of new cases (especially in US) will likely trigger a sharp correction across the globe. At the same time, any news of monetary or fiscal stimulus could lead to sharp rebounds. During times like these, it is important for investors to not succumb to their own fear and greed and stick to a plan!

Exhibit 6: NIFTY swinging between extremes on 2nd March 2020

Source: Google

Exhibit 7: CNN Fear and Grid Index has plunged to levels of extreme fear

Source: CNN

2:05 PM



And Finpeg investors have that plan At Finpeg, we have made sure that you ride out these volatile times and also end up taking advantage of that. As you would have already seen, we have used this correction to build up our overall equity allocation. Going forward we will continue to do what we do best – continue to monitor data, keep feeding them into our algorithm and act according to the signal. If the markets correct further or remain sideways, you could see us continue to increase the overall equity allocation. We will be honest. We don’t know the bottom. Nobody does. That’s almost impossible to predict. The correction could go on for a while or markets could remain range bound till more clarity emerges on the entire virus situation. Or, we could see a sharp rebound in March. But the good thing from your perspective is that your portfolio has more than enough cash left to make full use of this correction, if it were to go any deeper. And once the dust settles on this virus issue, we expect a strong rally in India equity markets in the medium term. And we are making sure that your portfolio is geared to benefit from that. Finally, how is Finpeg strategy performing today? It would be unfair to end without showing you the strategy performance till date (as of markets closing on 28th February 2020). Rs 1 lac invested in NIFTY 50 through a conventional buy-and-hold strategy would have grown to Rs 1,07,274 at an annualized return of 3.31%. On the other hand, Rs 1 lac invested in NIFTY 50 through Finpeg’s strategy would have grown to Rs 1,12,814 at an annualized return of 5.74%. Similarly, Rs 1 lac invested in NIFTY Midcap 100 through a conventional buy-and-hold strategy would have shrunk to Rs 80,089 at an annualized return of negative 9.77%. On the other hand, Rs 1 lac invested in NIFTY 50 through Finpeg’s strategy would have grown to Rs 1,13,897 at an annualized return of 6.21%. And these are actual numbers based on the exact dates we moved from liquid/arbitrage funds to equity funds.

Exhibit 8: Finpeg strategy has outperformed a regular buy and hold strategy

Source: Finpeg, NSE

₹1,05,375₹1,07,274

₹1,12,767

₹1,12,814

₹90,000

₹95,000

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Finpeg Strategy vs Normal Buy and Hold (NIFTY 50)


Exhibit 9: A much stronger outperformance if we compare against the mid cap index

Source: Finpeg, NSE

₹76,067 ₹80,089

₹1,12,134 ₹1,13,897

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Finpeg Strategy vs Normal Buy and Hold (NIFTY Midcap 100)




Indian Markets – Markets march on despite headwinds 1. Equity Market wrap for the month Table 1: Index Returns as of Feb 29th, 2020

1 Month 3 Months 6 Months 1 Year Year to date

NIFTY -6.36% -7.03% 1.62% 3.79% -8.05%

NIFTY Mid Cap -6.80% -1.85% 7.25% 0.39% -1.85%

BSE Small Cap -6.54% 1.49% 9.37% 0.14% 0.07%

NIFTY Auto -14.62% -13.84% -1.50% -17.37% -15.91%

NIFTY Bank -5.47% -8.55% 6.27% 8.80% -9.21%

NIFTY FMCG -4.76% -5.11% 0.18% 0.16% -3.06%

NIFTY IT -5.77% 2.43% -4.98% -3.30% -3.24%

NIFTY Pharma -6.90% -6.79% -6.14% -14.72% -5.84%

Small and mid-caps are now outperforming large caps As can be seen from Exhibit 10 and 11 below, mid and small caps are now clearly outperforming the NIFTY 50 index. While mid and small cap indices are up 7.25% and 9.37% in the last 6 months, NIFTY 50 index is up just 1.62%. Even year-to-date when NIFTY is negative 8%, mid cap is down only 1.85% and small cap is actually up marginally (0.07%)

The picture of contrasting performance becomes clearer if we look at Exhibit 12 and 13 below. Exhibit 13 charts the performance of NIFTY vs mid and small cap indices with common base of 1000 since Jan 2018 till Sep 19th, 2019. As can be seen, NIFTY outperformed by a margin (the blue line). On the other hand, in Exhibit 13, we have shifted the common base to September 19th, 2019 and tracked the performance till date. As can be seen, the blue line is well below mid and small cap lines.

Exhibit 10: February was a bad month with all indices declining 6% - 7%

Source: BSE and NSE

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Exhibit 11: Small and mid-caps are now clearly outperforming the large cap NIFTY index

Source: NSE

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BSE Small Cap Nifty Midcap 100 NIFTY 50



But the current correction has spared no one (as expected). NIFTY’s advance to decline ratio for the last week of February was 3:47 implying only 3 stocks went up. Even year-to-date, only 8 stocks in NIFTY have yielded positive returns. The recent correction has also meant that NIFTY is now well below its 50 and 200 day moving average (DMA).

Exhibit 12: Index performance with common base since Jan 2018 till Sep 2019

Source: BSE and NSE

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NIFTY NIFTY Mid Cap 100 BSE Small Cap

Exhibit 13: Index performance with common base since Sep 2019 till Feb 2020

Source: BSE and NSE

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Relative Index Performance with commoan base since Sep 2019

NIFTY NIFTY Mid Cap 100 BSE Small Cap

Exhibit 16: NIFTY 50 vs percentage of stocks above their 200 day moving average

Source: NSE

Exhibit 17: NIFTY 50 vs percentage of stocks above their 50 day moving average

Source: NSE

Exhibit 14: Only 8 stocks in NIFTY has yielded positive returns YTD

Source: NSE

Exhibit 15: NIFTY now well below its 50 and 200 day moving average (DMA)

Source: NSE



2. Equity Market Valuations Despite the recent 9.4% correction, NIFTY (on a trailing PE basis) continues to trade 1 standard deviations above its historical average (Exhibit 18). While this has come down significantly (last month it was 2 SD above average), NIFTY is still expensive. However, it should be noted that valuations have been driven up primarily by top 10-15 stocks in the NIFTY. If we look at the PE ratio of NIFTY 50 Equal Weight Index (where all 50 stocks have same weight unlike NIFTY 50 which is weighted by market capitalization), we find that valuations are close to historical average. Similarly, valuations for both small and mid-caps are now close to their respective historical averages. This suggest that barring some froth in the top 10-15 stocks, the broader market is now fairly valued. Given this scenario (along with reasons mentioned above for our aggressive equity stance), we believe that the best way to play this out will be through multi cap funds. In a scenario where large caps are richly valued and there are global headwinds, we feel multi cap strategies are our best bet.

Exhibit 18: NIFTY is trading 1 SD above its historical average

Source: NSE

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Exhibit 19: NIFTY Equal Weight Index is now closer to its historical PE average

Source: NSE

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Exhibit 20: Mid Cap valuations have come off significantly and appears reasonable now

Source: NSE

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Exhibit 21: Small Cap valuations have come off significantly and is in the attractive zone

Source: BSE

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2.00

2.20

2.40

2.60

2.80

3.00

Apr-1

5

Jun-

15

Aug-

15

Oct-1

5

Dec-

15

Feb-

16

Apr-1

6

Jun-

16

Aug-

16

Oct-1

6

Dec-

16

Feb-

17

Apr-1

7

Jun-

17

Aug-

17

Oct-1

7

Dec-

17

Feb-

18

Apr-1

8

Jun-

18

Aug-

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Oct-1

8

Dec-

18

Feb-

19

Apr-1

9

Jun-

19

Aug-

19

Oct-1

9

Dec-

19

Feb-

20

BSE Small Cap PB

Average 1 SD 2 SD PB



3. Debt Market wrap for the month 10-year GSEC yields fell by 17bps in the month of February as investors switched their asset allocation from equities to safer government securities due to COVID outbreak scare. This was in line with global bond yields that also collapsed during the month making it a strong month for bonds. Continuously falling rates over the last 1 year (122 bps) has meant that bonds have outperformed equities by a margin on a 1-year and YTD basis (refer Table 2) While the headline inflation for the month of January was high at 7.59%, the expectation of a likely cooling off in inflation weighed in on the yields. This coupled with collapse in oil prices further helped ease inflation expectations. We believe that inflation trajectory going forward could be on a downward trajectory as energy prices cool off. However, a supply chain disruption due to the virus outbreak could have some inflationary impact. It remains to be seen if RBI continues to hold on to rates or lowers it in its next policy meet to be held in April 2020. Table 2: Returns of Gilt and Medium to Long duration Funds

Scheme Name 1M 3M 6M

YTD

1Y

IDFC Bond Fund 0.81% 1.75% 4.17% 1.65% 10.05%

ICICI Prudential Bond Fund 1.68% 2.38% 5.12% 1.91% 12.66%

HSBC Debt Fund 1.97% 2.19% 3.22% 2.38% 11.89%

IDFC G Sec Fund 2.76% 3.72% 5.07% 3.02% 17.00%

DSP Govt Sec Fund 2.83% 3.35% 5.06% 3.19% 15.62%

Nippon India Gilt Securities Fund 2.59% 3.20% 4.41% 2.79% 15.27%

The spread between yields of AAA rated bonds and GSEC remains high for longer maturities (see Exhibit 24) making AAA rated accrual strategy attractive. This also highlights the overall risk aversion in the market towards corporate credit.

Exhibit 22: 10-year GSEC yields fell in the month of Feb by 17bps

Source: Bloomberg

2.00

4.00

6.00

8.00

10.00

12.00

03/99

12/99

09/00

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06/19

03/20

Indian GSEC yields

GSEC10Y GSEC3M

Exhibit 23: Spread between AAA and GSECs remains high

Source: Bloomberg



4. What is the “smart” money doing? After being a net buyer of Rs 1 lac cr in 2019 and Rs 12,123 cr in January of 2020, FIIs buying into equities slowed down in the month of February. While still net buyers, the pace slowed down considerably as FIIs pulled money out during the last week of Feb. On the debt market segment, FIIs turned net buyers after for the first time since October 2019. FIIs bought Rs 2,097 cr in February 2020. Interestingly, DII (Mutual Funds) were also net buyers in the equity markets in the month of February. DIIs bought Rs 3,051 cr (net) in February. As the markets were falling in the last week of February, DII actually turned net buyers during that week (saving markets from further collapse).

Exhibit 24: Monthly FII/FPI inflows in Equity markets

Source: NSDL

-₹30,000

-₹20,000

-₹10,000

₹0

₹10,000

₹20,000

₹30,000

Feb-

10Au

g-10

Feb-

11Au

g-11

Feb-

12Au

g-12

Feb-

13Au

g-13

Feb-

14Au

g-14

Feb-

15Au

g-15

Feb-

16Au

g-16

Feb-

17Au

g-17

Feb-

18Au

g-18

Feb-

19Au

g-19

Feb-

20Monthly FII/FPI Inflows (Equity)

Average FII Equity

Exhibit 25: Calendar year FII inflows in Equity and Debt markets

Source: NSDL

-0.03

1.281.13

0.97

0.18 0.210.51

-0.33

1.01

₹0.140.42 0.35

-0.51

1.59

0.46

-0.44

1.49

-0.48

0.26

-₹0.10-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Yearly FII/FPI Inflows (lac cr)

Equity Debt

Exhibit 26: Monthly Domestic Institutional Investors (MF) inflows in Equity markets

Source: Moneycontrol

-₹15,000

-₹10,000

-₹5,000

₹0

₹5,000

₹10,000

₹15,000

₹20,000

₹25,000

₹30,000

Feb-

14

Jun-

14

Oct-1

4

Feb-

15

Jun-

15

Oct-1

5

Feb-

16

Jun-

16

Oct-1

6

Feb-

17

Jun-

17

Oct-1

7

Feb-

18

Jun-

18

Oct-1

8

Feb-

19

Jun-

19

Oct-1

9

Feb-

20

Monthly DII Inflows (Equity)

Average DII Equity

Exhibit 27: Calendar year DII inflows in Equity and Debt markets

Source: Moneycontrol

0.240.71 0.48

1.17 1.130.49

-0.06

6.23

4.47

3.333.90

3.25

5.26

0.53

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2014 2015 2016 2017 2018 2019 2020

Yealy DII inflows (lac cr)

Equity Debt



Indian Economy – Recovery to be slow and bumpy 1. Summary and Outlook Indian economy grew by 4.7% in the third quarter of this financial year (Sep-Dec 2019). While this appears to be a recovery in growth over previously reported 4.5% in 2QFY19, it should be noted that 2QFY19 number itself was revised to 5.1%. Even Q1 number was revised upwards to 5.6%. However, if leading indicators are anything to go by, we believe that the GDP growth for Q3 will also be revised upwards and we could have seen a potential recovery in the third quarter itself. However, the secular recovery is likely to be delayed as we could see negative fallout from COVID outbreak impacting Indian growth in the first half of 2020. This was evident in the PMI numbers published for the month of February. After hitting it’s 8 year high of 55.3 in January, Manufacturing PMI inched downwards to 54.7 in February. Thus, what looked like a secular uptick could very well be halted due to disruptions caused by the virus outbreak. We note that the disruption could be even larger if the virus were to spread in India. We had cautioned our readers about this in our previous issue as well:

“However, just as we were entering a possible phase of recovery, corona virus outbreak (discussed in detail here) threatens to spoil the party. This outbreak is likely to have a major impact on global supply chain, global trade and hence the global economy for at least the first half of 2020. There is no way that India will not be impacted by this disruption in the world trade.”

Retail inflation (as measured by CPI) has been steadily creeping up. The headline retail inflation for the month of January was 7.59%, well above RBI’s range of 2% - 6%. However, with crude prices correcting sharply (due to virus outbreak) and food inflation also showing signs of cooling off, we expect retail inflation to moderate by February 2020. We do however note that acceleration in core inflation (ex food and energy) from 3.5% to 4.2% is a worrying sign. Given these opposing forces, it will be interesting to see how inflation moves in the months of February and March (in our view, likely to ease) which would also decide if RBI’s course of action on interest rate. We note that RBI may be guided by more than inflation in its policy meet in April. As global Central Banks get ready to lower rates aggressively to counter outbreak-induced slowdown, RBI will have to join the bandwagon to adopt similar measures in India. We should also keep an eye on how Rupee moves with respect to the US Dollar. A sharp break out in dollar and significant rupee weakness could lead to muted returns in Indian equities. So far, since the start of this correction, INR has depreciated by 1.7% against the US dollar. Significant INR weakness is not good for equity returns (at least in the near term) as FIIs tends to move out of the markets if outlook on INR is weak.



2. GDP and the economy – recovery delayed? Indian economy grew by 4.7% in the third quarter of this financial year (Sep-Dec 2019). While this appears to be a recovery in growth over previously reported 4.5% in 2QFY19, it should be noted that 2QFY19 numbers itself were revised to 5.1%. Even Q1 numbers were revised upwards to 5.6%. However, if leading indicators are anything to go by, we believe that the GDP growth for Q3 will also be revised upwards and we could have seen a potential recovery in the third quarter itself. However, the secular recovery is likely to be delayed as we could see negative fallout from COVID outbreak impacting Indian growth in the first half of 2020. This was evident in the PMI numbers published for the month of February. After hitting it’s 8 year high of 55.3 in January, Manufacturing PMI inched downwards to 54.7 in February (Exhibit 29). Thus, what looked like a secular uptick could very well be halted due to disruptions caused by the virus outbreak. We note that the disruption could be even larger if an outbreak were to happen in India. While it’s a recovery likely delayed, but there is a high probability of a cyclical recovery as we head into the second half of this year. A continued spread of the virus (especially in India) remains the biggest risk to our estimates.

Exhibit 28: Real GDP growth has been on a downward trajectory

Source:MOSPI

0

2

4

6

8

10

12

14

02/1

998

01/1

999

12/1

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05/2

017

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018

03/2

019

Quarterly GDP Growth

Average Real GDP Growth

Exhibit 29: PMI fell during the month of February as compared to January

Source:Investing.com

54.7

55.5

46

48

50

52

54

56

58

60

Apr-1

2Ju

n-12

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12Oc

t-12

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9Ju

n-19

Aug-

19Oc

t-19

Dec-

19Fe

b-20

Markit Manufacturing & Services Purchasing Managers Index

Manufacturing PMI Services PMI

Exhibit 30: December IIP fell after moving into positive zone in November

Source:MOSPI

-10

-5

0

5

10

15

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25

07/2

006

02/2

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10/2

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IIP Growth Monthly

Average IIP Growth

Exhibit 31: YoY change in IIP growth turned negative in December

Source:MOSPI

-30.00

-25.00-20.00

-15.00-10.00

-5.000.00

5.0010.00

15.0020.00

25.00

08/2007

03/2008

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05/2009

12/2009

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02/2011

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04/2012

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06/2013

01/2014

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03/2015

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05/2016

12/2016

07/2017

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09/2018

04/2019

11/2019

YoY change in IIP growth



3. Inflation and monetary policy Retail inflation (as measured by CPI) has been increasing steadily and has now crept up to 7.59% in January 2019. The inflation accelerated for the 6th straight month to the highest since May of 2014. WPI inflation recorded its highest number in 8 months at 3.1% Retail inflation was primarily driven by rising food and energy prices. Food inflation was 14.1%. While overall inflation appears to be accelerating, food inflation appears to be abating. Food price inflation for January 2020 stood at 13.63%, coming down from high of 14.19% in December 2019. It should be noted that core inflation (ex Food and energy) accelerated from 3.5% to 4.2% in January. We should note that this is the second consecutive month where the retail inflation is above RBI’s comfort range of 2% - 6%. Plus, an acceleration of core inflation does not augur well for overall trajectory in the coming months. At the same time, food inflation is slowing down and oil prices are collapsing (due to the virus outbreak). THis should provide an easing effect on the inflation in coming months. Given these opposing forces, it will be interesting to see how inflation moves in the month of February and March which would also decide if RBI will adopt a more accommodative stance in its policy meet in April.

Exhibit 32: WPI inflation was at an 8-month high in the month of January

Source: CEIC, Finpeg Research

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

01/2

007

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018

07/2

018

01/2

019

07/2

019

01/2

020

Indian Inflation Rate

CPI Change (YoY) WPI Change (YoY)

Exhibit 33: YoY change in inflation rate still climbing

Source: CEIC, Finpeg Research

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

12/2

006

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018

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018

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019

YoY change in inflation rate

CPI Change (YoY) YoY change in Inflation Rate

Exhibit 34: Crude continues to slide as demand plummets

Source: MacroTrends, Finpeg Research

0

20

40

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WTI Crude (USD/barrel)

Exhibit 35: RBI keeps repo rate unchanged at 5.15% in its December policy meet

Source: Reserve Bank of India

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Jan-

06Se

p-06

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20

RBI Repo Rate

Repo Rate Average



4. Exchange Rate – INR falls as investors rush towards safe haven INR depreciated by 1.2% in the month of February as investors rushed towards dollar (considered as a safe haven). Bulk of INR weakness was visible in the last week of February when global markets went into a turmoil. On a YTD basis, INR is down 1.4% against the dollar. Table 3: INR against major currencies (% change, positive number is depreciation)

Currency 1 Month 1 Year

Euro (EUR) 1.48 -1.26

Canadian Dollar (CAD) 0.09 1.32

Australian Dollar (AUD) -1.21 -5.37

British Pound (GBP) 0.48 -0.47

Singapore Dollar (SGP) -0.91 -0.83

Japanese Yen (JPY) 0.61 3.70

Indonesian Rupiah (IDR) -1.92 2.00

Korean Won (KOW) -0.83 -4.92

Thai Baht (THB) -0.69 2.48

Hong Kong Dollar (HKD) 1.29 2.78

Chinese Yuan (CNY) 0.74 -2.29

Brazilian Real (BRL) -4.43 -14.00 Source: Economic Times

Exhibit 36: Rupee weakened by 1.2% against the USD in February


-20-15-10-5051015202530

0

1020

3040

5060

70

80

02/9

902

/00

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/14

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/16

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/18

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/20

USD INR

USD/INR USD INR (YoY)

Exhibit 37: Rupee has been fairly stable in 2019 as well as Jan 2020


-13.00

-8.00

-3.00

2.00

7.00

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2000

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2019

Annual USD INR (yoy,%)

INR Depreciation Average Annual Depreciation



Global Markets – It was all about the last week of Feb 1. Global Equity Markets February (the last week) was a record of sorts for the global markets. Benchmark US equity index (S&P 500) corrected 13% in just 7 trading sessions (its fastest decline since financial crisis of 2008)! As you can see in the table below, every major stock index across the world went into correction territory as concerns virus outbreak outside China started to grip the markets. It is surprising to note that everything seemed good till the first 20 days of February. And after that, all hell broke loose. As news about rapidly rising cases of infection in South Korea and Italy started to come in, markets went into a free fall. Italy, really was the turning point as it stoked fears of spread in entire Euro zone and a shutdown. And on 27th February, a number of new cases emerged in USA leading to S&P falling 4.5% in a single day. German index (DAX) was the worst hit falling 14% since peaking in mid-February. Chinese stock markets were actually up 5% in February. This was primarily because the Chinese markets had already taken a major beating in January ahead of the world markets.

Table 4: Performance of major indices across the world

Indices 1M 3M 6M 12M YTD

S&P 500 -10.03% -5.95% 0.95% 5.37% -9.32%

Nasdaq -7.87% -1.13% 7.59% 12.80% -5.77%

Russel 2000 -10.42% -9.11% -1.23% -7.12% -11.42%

FTSE -10.86% -10.43% -9.63% -7.40% -13.46%

DAX -9.63% -10.17% -0.53% 2.49% -11.17%

Stoxx 600 -10.04% -7.80% -1.32% 0.38% -10.50%

Nikkei 225 -9.43% -9.23% 2.54% -2.13% -10.63%

Shanghai Composite 4.87% 0.16% -1.50% -2.08% -6.64%

Hang Seng -1.21% -2.84% 1.96% -9.31% -8.46%

NIFTY -6.36% -7.03% 1.62% 3.79% -8.05%

Source: Bloomberg, Finpeg Research



2. Global Debt Markets February was a great month for bonds across the world. As the threat of virus outbreak gripped the equity markets, investors rushed into safer haven assets aka government securities. 10-year yield in US collapsed by 35 bps in February with most of it coming in the last few days of the month as we saw a frantic sell off in the equity markets. At the time of writing this report, Fed has already delivered an emergency 50 bps rate cut which ended up pushing US 10-year treasury below 1% for the first time in history. Collapse in yields has been primarily driven by investor fleeing to safer assets. It is also interesting to note that with this collapse, the 10Y-3M yield curve is now back to being inverted after steepening in September last year. We did a detailed analysis on yield curve and its importance here - Yield curve inversion: What is it and why should you care? If we compare the 10-year bond yield with earnings yield of S&P 500, we get the relative attractiveness of bonds w.r.t stocks. As can be seen in Exhibit 40, difference between earnings yield and bond yield remains well above historical average thus implying that stocks remain attractive relative to bonds. This has only gone up in the month of February as stocks tanked while bonds rallied. Another interesting indictor we track is the spread of corporate bonds over US treasury. As you can see, the risk-off event has resulted in a sharp spike in the spread, especially in the high-yielding category. It’s still nowhere close to highs achieved during the peak of 2008 GFC, but its inching up.

Exhibit 38: US 10-year yields collapsed by 35 bps in February

Source: Bloomberg

-0.50

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US 10Y and 3M GSEC yields

US10Y US3M

Exhibit 39: German 10Y GSEC now deep into negative territory

Source: Bloomberg

-2

-1

0

1

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3

4

5

6

Jan-99

Dec-99

Nov-0

0Oc

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1Oc

t-12

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8Mar-19

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10Y GSEC yields

Germany Japan

Exhibit 40: S&P earnings yield remains attractive w.r.t 10-year bond yield

Source: Dr. Robert Shiller, Bloomberg

-5

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Difference between Earnings yield of S&P and 10-year GSEC

Average EY - DY

Exhibit 41: Corporate Bond Spread in US over 10Y Treasury

Source: FRED

19.88

5.06

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Corporate Bond Option-Adjusted Spreads

BBB AAA High Yield



3. Dollar and Gold US Dollar behavior was slightly surprising during this entire mayhem. USD index (DXY) peaked with S&P 500 on 20th February at 99.86 and then started a sharp decline to close the month at 97.36, a 2.5% drop. This is puzzling because in times of extreme panic, USD and US Treasury securities are the first to go up as they are considered to be the ultimate safe haven. Gold was flat during the month but not without its share of volatility Gold prices were extremely volatile during the month. The prices peaked at USD 1682.35/oz on 24th February (up 5.8% from the start of the month) only to correct sharply to close the month at USD 1585.87/oz (down 5.7% from peak). The sharp correction in gold corresponded with the sharp correction we witnessed in the equity markets. This initially surprised a lot of investors, as gold is considered to be a safe haven, and was expected to go up as equity markets corrected sharply. However, it should be noted that the reaction of gold was not unprecedented. As equity markets tanked and investors faced margin calls, they had to sell off gold to cover those margins. A similar thing happened during the crash of 2008.

Exhibit 42: Dollar surprisingly weakened when the entire mayhem was being played out

Source: FRED, Bloomberg

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Exhibit 43: Dollar index was up 1% in the month of February

Source: Bloomberg

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Exhibit 44: Gold has finally woken up from its long winter slumber

Source: Goldprice.org

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Exhibit 45: Gold and S&P corrected together at the start of GFC

Source: Goldprice.org, Bloomberg

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Gold vs S&P during GFC 2008-09

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The Gold Winter



Global Macro 1. Global Macro Snapshot Table 5: Overview of major and emerging economies

US Germany Japan UK Euro GDP (yoy, 4QCY19) 2.30% 0.40% -0.40% 1.10% 0.90% Inflation (yoy, Jan 2020) 2.50% 1.73% 0.70% 1.80% 1.40% 10Y Gsec (latest) 1.15% -0.62% -0.10% 0.55% 0.14% Central Bank Rates (latest) 1.75% 0.00% -0.10% 0.43% 0.00%

China Indonesia Brazil

GDP (yoy, 4CY19) 6.00% 4.97% 1.20% Inflation (yoy, Jan 2020) 5.40% 2.98% 4.19% 10Y Gsec (latest) 2.83% 6.96% 6.57% Central Bank Rates (latest) 4.05% 4.75% 4.25%

Corona virus impact – Chinese economic activity crashes and the world is likely to follow In our last issue, we had argued that the impact of the virus outbreak will be real and significant. And we had also noted that the leading indicators for the month of February will give a decent idea of the likely impact. Well, if Chinese PMI numbers are anything to go by, we are in for a bad time as the virus spreads to other parts of the world. While Exhibit 47-49 show Manufacturing PMI for US, Eurozone and China respectively, the real story lies in Exhibit 49. Chinese manufacturing PMI plunged to 40.3, the lowest level ever achieved. As we had noted in our previous issue, Chinese activity had come to a grinding halt and this was to be expected. But more than the actual numbers, this serves as a blue print of what could likely happen to the rest of the world if the virus spreads internationally (which is already happening). No wonder then that the markets are spooked.

Exhibit 46: Global slows in Euro zone and Japan as US holds firm in 4QCY20

Source: TradingEconomics

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Exhibit 47: US manufacturing PMI dipped in February on account of second order impact

Source: Investing.com

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PMI uptick in Eurozone does not reflect the virus impact fully. The outbreak in Italy only started in late February and has since then spread in other European countries. We provide an update on the corona virus situation in our next section. Inflation to inch downwards from February In our last issue, we had noted that inflation was likely to peak in January and we continue to believe that to be the case. Inflation across globe nudged upwards in January (Exhibit 50). As oil prices have collapsed and an overall demand shock generated in the economy, we believe that we would see strong disinflationary pressure play out in the near term. Benign inflation will help Central Banks to lower rates aggressively to combat the disruption caused by the virus outbreak. We had covered this in detail in our cover theme.

Exhibit 49: And absolute plunge in Chinese manufacturing PMI in February


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China Manufacturing PMI China PMI (yoy change)

Exhibit 51: Central Banks in US and China cutting rates as growth slows down

Source: Bloomberg

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Exhibit 48: Eurozone PMI bottomed in Dec 2019 and picked up in Jan and Feb 2019


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Exhibit 50: A secular global uptick in inflation around the world


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2. Corona virus outbreak – an update In our previous issue, we had covered the impact of the virus in detail. We had specifically mentioned the following points:

1. China is a much bigger player in the global Economy compared to SARS outbreak in 2003. And the world is much more interconnected than what it was in 2003.

2. The spread in China itself was sufficient to cause a big disruption in global economy. 3. Equity markets were definitely not pricing in the impact. 4. Potential risk of international spread of the virus.

We seem to have been vindicated on all our points. Markets did eventually start pricing in the impact and the virus has now spread beyond China. And is spreading at an alarming rate. The worst impacted countries (beyond China) are South Korea, Italy and Iran. And new cases are being detected in almost every country on a daily basis. As of writing this report, total number of cases stood at 91,342 and total number of deaths stood at 3,120 (Exhibit 52).

While the daily growth of total cases in China has stabilized, it is increasing at an alarming rate in other parts of the world. What’s more interesting is Exhibit 53 which shows the growth in number of cases outside China. Refer Exhibit 53 and 54 below. It’s not a pretty picture. It suggests that the virus is now a truly global phenomena and it will be very difficult to contain. The cases are growing at an exponential rate and likely to do so in the near future.

Exhibit 52: Number of new cases in China has stabilized but has picked up alarmingly in other parts of the world

Source: Worlometer.com



Few important things that we need to consider and watch out for:

1. Placing travel restrictions is very difficult for other countries unlike China. This makes containment even more difficult.

2. As more countries start testing actively in the coming weeks, expect an even sharper rise in number of cases.

3. Watch out for spread of virus in US and Euro zone area. This will potentially have the biggest impact on the markets.

4. An outbreak in India, apart from the obvious direct impact on our lives, will be very bad for our own equity markets.

Exhibit 53: Number of new cases in other parts of the world is now increasing at an alarming rate

Source: Worlometer

Exhibit 54: Global spread of Corona virus dashboard

Source: Johns Hopkins CSSE



Performance Data 1. Best performing Equity Mutual Funds in February 2020

Best Large Cap Funds Feb-2020 YTD 1Y Axis Bluechip Fund -1.7% -1.1% 18.3% JM Large Cap Fund -2.2% -2.8% 2.7% Canara Rob Bluechip Equity Fund -2.6% -1.5% 15.9%

Best Multi Cap Funds Feb-2020 YTD 1Y Canara Rob Equity Diver Fund -1.7% 0.6% 13.3% Axis Multicap Fund -1.7% -1.1% 17.3% DSP Equity Fund -1.8% 1.4% 21.0%

Best Mid Cap Funds Feb-2020 YTD 1Y Invesco India Midcap Fund -1.1% 4.5% 14.5% DHFL Pramerica Midcap Opp Fund -1.4% 7.1% 14.3% Axis Midcap Fund -1.8% 2.6% 16.8%

Best Small Cap Funds Feb-2020 YTD 1Y Axis Small Cap Fund -1.7% 6.8% 30.6% Sundaram Small Cap Fund -3.0% 4.3% 4.8% DSP Small Cap Fund -3.4% 3.1% 10.0%

Best Large & Mid Cap Fund Feb-2020 YTD 1Y Canara Rob Emerging Equities Fund -1.8% 2.4% 12.8% LIC MF Large & Midcap Fund -2.9% -0.7% 16.1% BOI AXA Large & Mid Cap Equity Fund -3.2% -0.7% 13.8%

Best Focused Fund Feb-2020 YTD 1Y Principal Focused Multicap Fund -1.7% -0.7% 14.9% IIFL Focused Equity Fund -1.8% 0.5% 27.7% SBI Focused Equity Fund -1.9% 0.7% 19.9%

Best ELSS Fund Feb-2020 YTD 1Y BOI AXA Tax Advantage Fund 0.1% 2.1% 15.2% Kotak Tax Saver Scheme -0.8% 2.8% 22.4% Motilal Oswal Long Term Equity Fund -1.8% -0.1% 12.6%



2. Best and worst performing NIFTY stocks in February 2020

Top-10 NIFTY stocks Feb-2020 YTD 1Y Hindustan Unilever Ltd. 6.91% 12.30% 25.37% Titan Company Ltd. 5.62% 8.64% 22.83% Bharti Airtel Ltd. 5.45% 15.49% 70.16% Nestle India Ltd. 2.73% 6.77% 50.97% Bajaj Finance Ltd. 2.29% 5.54% 67.84% Asian Paints Ltd. 0.13% 0.26% 29.13% UPL Ltd. -1.30% -11.65% -40.25% Power Grid Corporation of India Ltd. -2.86% -7.16% -0.93% Tata Consultancy Services Ltd. -3.80% -7.73% 0.24% HDFC Bank Ltd. -3.97% -7.90% 15.30%

Bottom-10 NIFTY stocks Feb-2020 YTD 1Y Tata Motors Ltd. -26.98% -30.09% -28.48% Mahindra & Mahindra Ltd. -19.41% -14.82% -29.65% Eicher Motors Ltd. -18.17% -24.79% -16.77% Hero MotoCorp Ltd. -17.99% -15.65% -23.32% Hindalco Industries Ltd. -17.67% -27.25% -20.52% Vedanta Ltd. -17.33% -26.26% -34.28% ITC Ltd. -15.99% -17.03% -28.99% Oil & Natural Gas Corporation Ltd. -15.60% -27.85% -38.33% Sun Pharmaceutical Industries Ltd. -14.14% -14.14% -16.64% Bharti Infratel Ltd. -13.63% -15.72% -26.87%



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the alpha investor - finpeg.com · 2020. 3. 4. · the alpha investor issue #4, feb 2020 as markets...

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