Monthly Commentary September 2019

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Growth

  • The Finance Minister, SLASHED corporate tax rate by 10% –effective tax rate currently stands at 25.17%, inclusive of surcharge and cess. 15% tax rate for new manufacturing companies.
  • Manufacturing PMI slipped to 51.4 in August, it’s lowest mark since May 2018. Services PMI also slowed to 52.4 in August from 53.8 in July.
  • The growth of eight core infrastructure industries slowed down to 2.1% in July 2019 as compared to 7.3% in the same month a year ago.
  • Snapping two-month declining trend, IIP stood at 4.3% in July 2019.
  • Indian automobile industry sales fell for 10th straight month in August.

Fiscal Position

  • Fiscal deficit touched Rs 5.47 lakh crore in the first four months (April-July) of FY20, which is 77.8% of the Budget Estimate.
  • The government’s total direct tax collection was only 4.7% more so far in FY20 as against a steep 17.5% higher tax collection budgeted for the full year.. August GST collection stood at Rs. 98, 202 Crs.

Inflation

  • CPI increased marginally to 3.21% in August from 3.15% in July, WPI remained unchanged at 1.08% in the month of August.

Global

  • MSCI World and MSCI Emerging both indices were up 1.73% and 1.74% respectively.
  • China’s official manufacturing PMI fell to 49.5 in August from 49.7 in July, while non-manufacturing PMI rose to 53.8 in August from 53.7 in July.
  • The PBOC cuts the reserve requirement ratio by 50 bps points for all banks, with an additional 100 bps cut for qualified city commercial banks.
  • ECB slashed the deposit rate by 10 basis points to -0.50%, while it left the main refinancing rate and the marginal lending rate unchanged at 0% and 0.25%, respectively; governing council approves purchases of debt at 20 bn euros a month starting November 1.
  • US Federal Reserve cuts the target interest rate by 25 bps to a range of 1.75-2% but gives mixed signals about its future course of action.
  • OECD says the global economy will see its weakest growth since the 2008-2009 financial crisis this year, slowing from 3.6% last year to 2.9% this year before a predicted 3.0% in 2020.
  • BoE’s Monetary Policy Committee all voted to keep rates on hold at 0.75% and reiterated a warning that leaving the EU without a deal would slow growth and raise prices.

Equity Outlook

  • Weak GDP data weighted on domestic risk sentiments early in the month. However, signs of easing US-China trade tensions, aggressive stimulus from the ECB, and rate cut hopes from RBI boosted sentiments. Strong up-move was triggered by government’s announcement of cut in corporate tax rates. Both Sensex and Nifty, settled at two-month high. Both the indices registered their biggest single day gains in 10 years on 20th September 2019
  • With strong Fiscal support in the form of Corporate Tax rate cut should help revive animal spirits back. But, impact of this on bond yields and translation of tax cut into higher sales and profits needs to be watched. Hence, 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 Market outlook

  • 10-year Benchmark 7.26% GOI 2029 increased 14 bps to close at 6.70% in the month of September. After FMs policy announcements, bond market had a sell off, it was a knee jerk reaction to the implications of revenue loss arising out of tax reductions.  As per initial estimates by the government, the possible revenue loss to the government would be roughly Rs. 1.45 lakh crore per year. Fall in Crude oil prices, fall in US treasury yields restricted rising yields. Bond markets are awaiting for Monetary policy and Second half borrowing calendar.
  • 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.

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