Monthly Commentary October 2019

Market Performance

Growth

  • RBI in its Monetary policy cut Repo rate by 25 bps to 5.15%. RBI continues to maintain “Accommodative” stance. GDP growth forecast trimmed sharply to 6.1% from 6.9% in FY-20.
  • Services PMI signalling contraction. Core sector growth also contracted for the month of September declining by -5.2% Vs -0.5% in August. Aug-19 IIP Contracted by 1.1%. The cumulative industrial growth over the Apr-Aug-19 at 2.4%. 15 out of the 23 industry groups in the manufacturing sector showed a decline in output.
  • The cumulative monsoon ended at 10% above the LPA, the highest since 1994.
  • India has jumped 14 places to the 63rd position in the World Bank’s ‘ease of doing business’ rank.

Trade Position

  • Merchandise Trade Exports fell by 6.57%; Imports fell 13.85%; Trade deficit registered 7 months low of US$10.86bn.
  • CAD at 2.0% of GDP; FPI recorded net inflow of US$4.8bn as against an outflow of US$8.1bn in Q1FY-19. An accretion of US$14.0bn to the Forex reserves.

Inflation

  • CPI increased marginally to 3.99% in September from 3.21% in August, CPI is at 14-month high. WPI eased to 0.33%, its lowest in more than 3 years led by lower inflation in fuel and manufactured goods.

Global

  • At its October meeting, the FOMC of the US Fed cut the target rate to 1.75%.
  • Global Manufacturing PMI remained stagnant; New orders fall as international trade volumes weaken; Business optimism remains low.
  • WTO downgraded its global trade growth forecasts to 1.2% in 2019, down from an April forecast of 2.6%; 2.7% growth for 2020 is predicted on a return to more normal trade relations.
  • IMF downgraded global growth to 3%, its slowest pace since the global financial crisis. The uptick in global growth for 2020 is driven by emerging market and developing economies that are projected to experience a growth rebound to 4.6%.
  • China quarterly economic growth sinks to 26-year low.
  • ECB kept refinancing rate at its record low of 0% and the deposit rate at -0.50%; it maintained status quo on all fronts.

Equity Outlook

  • Expectation of a relief in personal income tax and DDT, progress on privatisation of PSU companies and better-than-expected earnings from frontline companies kept the momentum upbeat. RBI trimming growth forecast and lower growth projections from various institutions dampened the sentiments.
  • We think it is a good time to increase some Risk in portfolio as most of the bad news is already in price.
  • We continue to maintain our stance of having large cap (According SEBI classification Focused and Multicap schemes having large cap bias) schemes over Midcap and small cap schemes as anchor of the portfolio. We had recommended reducing Mid & Small Cap exposure last year. Investors should reallocate to this segment as Mid and Small cap segment have corrected meaningfully and on Valuations they are now at a discount to Large caps.

Debt Outlook

  • 10-year Benchmark 7.26% GOI 2029 rallied 6 bps to close at 6.64% in the month of September. With Government keeping its borrowing plan for the second half of the fiscal year in line with the annual budget estimate and announcement of new 10 year benchmark paper infused fresh demand for spread papers Adding to the momentum, rate cut hopes in the upcoming monetary policy further supported the bond yields.
  • With liquidity in large surplus mode shorter end of the curve looks attractive.
  • For a 3-year investor, we recommend allocation in 1-5-year average maturity segment with high credit quality portfolios mainly focused on accrual. The high-quality PSU and corporate bond spread over G-Sec is attractive.