Multitude of geo-political risks came to the forefront in Nov but were thrown out of the window as hopes of a US-China trade talks buoyed sentiment. Not that the talks have concluded, and the deal is done-and-dusted but hopes are enough to fire up the animal spirits. Trump has dilly-dallied like a pendulum swing with his statements throughout Nov. Come 15-Dec and we will finally get to know if Trump becomes Grinch who stole Americans’ Christmas or Santa who pushes the can (aka tariffs on further $160bn of Chinese imports) down the road. But, some of US’s trading partners – Argentina, Brazil, France – did bear the tariff brunt this time around. In the UK, the spotlight has shifted to the upcoming general election on 12-Dec-19. Also, ongoing protests in Hong Kong continue to hinder Asia’s economy and one must be watchful if US support disrupts the ongoing trade negotiations. So, politics is likely to remain front and centre of investors’ minds as the year draws to a close.
TARIFFS OR NO TARIFFS: SO NEAR YET SO FAR
Multitude of geo-political risks came to the forefront in Nov but were thrown out of the window as hopes of a US-China trade talks buoyed sentiment. Not that the talks have concluded, and the deal is done-and-dusted but hopes are enough to fire up the animal spirits. Trump has dilly-dallied like a pendulum swing with his statements throughout Nov. Come 15-Dec and we will finally get to know if Trump becomes Grinch who stole Americans’ Christmas or Santa who pushes the can (aka tariffs on further $160bn of Chinese imports) down the road. But, some of US’s trading partners – Argentina, Brazil, France – did bear the tariff brunt this time around. In the UK, the spotlight has shifted to the upcoming general election on 12-Dec-19. Also, ongoing protests in Hong Kong continue to hinder Asia’s economy and one must be watchful if US support disrupts the ongoing trade negotiations. So, politics is likely to remain front and centre of investors’ minds as the year draws to a close.
GLOBAL EQUITIES: GROWTH OPTIMISM LEADS TO BLUE SKY SCENARIOS
Equities scaled new highs as an outcome of coordinated monetary and fiscal expansionary policies in several geographies. EU went easy on fiscal policy and all main UK political parties are willing to deliver fiscal stimulus as they enter elections. Japan too unveiled $120bn fiscal package to shore up growth. There has been growing clamour in China for state support post monetary easing but existing high debt and increasing defaults has put the Govt. in a quandary. US macro data showed improving signs as 3QCY19 GDP was revised upwards and Nov PMI pointed to a pickup in activity across both manufacturing and services. All major components of Eurozone Mfg. PMI rose MoM and Germany’s 3QCY19 GDP reading at 0.1% helped it avoid a technical recession. China Mfg. PMI also reported highest ever expansion since Dec-16 with both domestic and exports orders sub-index rising.
DMs beat EMs this month, and we continue to be a notch overweight on DMs basis relative valuation attractiveness and higher trailing ROEs. Though macro parameters and corporate earnings consensus outlook have improved for EMs, one-month data is not a trend and we would wait for more clarity.
GLOBAL FIXED INCOME: PAUSE FOR NOW
Nov was a silent period as far as Central Bank actions are concerned as US Fed, ECB and BoJ had held their meetings in Oct. UK’s BoE at its meeting in Nov left policy rates unchanged, though there were 2 dissenters calling for a rate hike. Chinese central bank PBOC cut the medium-term lending facility rate after 4 years along with 1 & 5-year loan prime rate to boost credit growth. ECB welcomed its new president, Christine Lagarde, whose first policy meeting is on 12-Dec-19. With tender shoots of growth reappearing across regions and central banks waiting on the sidelines, global bond yields were higher for the month.
GLOBAL COMMODITIES: OIL VOLATILE, GOLD LOST SOME SHEEN
Crude ended with healthy gains in a volatile month marked by fraying relationship between OPEC & Russia and weekly changes in US oil inventories at key hubs. OPEC+ will meet in Vienna on 5-6-Dec-19 to chalk out plans as to whether to deepen supply cuts now (favoured by Saudi Arabia) or later in April (supported by Russia). Saudi has largely turned a blind eye to cheaters within the OPEC+ alliance, making additional reductions to its own output to offset excesses by the likes of Iraq and Russia. Meanwhile, US became a net exporter of crude & refined products for a full month for first time in 70 years.
With volatility cooling off a bit on trade talks, Gold posted slight correction. Bullish readings and net futures contracts positions have moderated this month (though still high), but we still stay a notch OW on Gold as any concerns around growth will drive investors back to the shiny yellow metal.
INDIA MACRO PAIN: THAT SINKING FEELING
Consensus estimates had aligned lower before Sep quarter GDP print hit the headlines to offset an extremely otherwise shocking reality. Nominal GDP came in at 6.1% for 2QFY20 vs budgeted 11% for FY20 – catching up seems a distant dream now. No doubt manufacturing was the biggest pain point as indicated by 2 consecutive months of negative 8-core industries index growth (pulled down by Coal, Electricity, Cement, Steel primarily) and negative IIP for Sep (Capital Goods being the major drag). Fixed capital formation continued to come off with just 1% YoY growth, despite strength in Central Govt. capex in 2QFY20, indicating a continuing feeble sentiment in private capex space.
The less said the better on tax collections, as both direct and indirect taxes have failed to meet their budgeted growth targets, so far, this fiscal. A combination of these factors is likely to lead to slippage in fiscal deficit upwards of targeted 3.3% for FY20 even if announced disinvestments are completed in the next 4 months. Keeping this in mind, Moody’s changed the stance on India sovereign rating from Stable to Negative. But, a minister in the Govt. hurriedly tweeted that S&P has reaffirmed its rating stance as Stable even before S&P could publish their own report. Over to Fitch now for their comments. Not to forget, S&P’s India subsidiary CRISIL just lowered their FY20 GDP growth forecast to 5% from 6.3% earlier. Silver lining to all this bad news is that Rabi sowing is catching up and reservoir levels are good. To give more hopes – Mfg. & Services Nov PMI have rebounded from their lows.
SC upheld the primacy of secured financial creditors over unsecured financial and operational creditors on distribution of proceeds in the long pending Essar Steel case. This should go a long way in expediting the resolution of stressed assets under the IBC and is a positive for PSU banks. Further, the government also notified rules providing for insolvency proceedings of financial institutions. Govt. made quite some positive moves in Nov - set up INR 250bn AIF for stalled real estate projects, gave 2-year moratorium on spectrum payments for FY21 and FY22 to ease stress for incumbent telecom players and gave in-principal approval for major disinvestments to address fiscal worries. Is this enough or more needs to be done? Well, we will be above the water, only when trust comes back in the financial system.
INDIA EQUITIES: NEUTRAL VS. BONDS, A NOTCH OW ON MID CAPS
2QFY20 earnings season came to an end with 50% companies reporting positive & in line results vs. 51% in 1QFY20. Equity Valuations are sky-high both on trailing and forward basis and positives from corporate tax cuts seems to have been completely priced in though demand/revenue growth concerns remain. Such times call for a balanced asset allocation between Equity and Debt. Earnings downgrades have been higher for Mid-caps though both yielding CAGR of ~26% on a 2-year forward basis. FIIs pumped in huge amounts in Equity (highest since Mar-19, and sold off Debt) but DIIs turned net sellers. Thus, though liquidity flows turned in favour of Large-caps, sustainability must be seen, but relative valuations continue to favour Midcaps over Large-caps.
INDIA FIXED INCOME: CORP. SPREADS ATTRACTIVE; PREFER SHORT
At 5-Dec-19 RBI meeting, MPC unanimously and shockingly left rates unchanged (against consensus market expectations of 25bps cut, though OIS was not showing 25bps) but maintained Accommodative stance. Real GDP growth rate has been further downgraded by a whole 1.1% to 5% for FY20 and inflation expectations have been raised by 1.5% for 2HFY20. MPC has mentioned that there is space for monetary policy action in future but felt it appropriate to pause now given the risks to inflation. RBI wants more clarity on Govt. stance from Union Budget on 1-Feb-20 before taking any steps at their meeting on 6-Feb-20. RBI has expressed confidence that introduction of external benchmarking by banks and surplus system liquidity augurs well for transmission of 135bps repo rate cuts done so far in CY19 to lending rates
Given the widening fiscal deficit concerns, G-Sec supply pressure and wider than average spreads we prefer good-quality Corporate Bonds over G-Secs. Any truce on the trade war and growth positives will benefit short vs long duration, which is our preferred strategy.
CURRENCY: A LOT AT PLAY – OW ON USD
While the USD weakened against other major currencies, EM currencies have been trading with an appreciating bias. While asset flows into the INR has been robust, the RBI has been intervening to provide support to exports. Globally, the OPEC meeting on 5-6-Dec-19 should likely be keenly watched as any alteration in supply would affect Oil prices and in general an Oil spike can hurt the INR. The impact of US backing of Hong Kong protesters on its trade negotiations with China would also have key implications for EM and the USD. Oct-19 exports exhibited mild recovery on YoY basis led by non-oil segment but imports sunk further. Any increase in trade deficit due to mild recovery will put pressure on INR, hence, we remain a notch OW on the USD.
Global policy uncertainty levels moderated as US-China Phase One trade deal talks gathered speed
Source: Bloomberg
Caixin China General Mfg. PMI at 51.8 for Nov reported highest ever expansion since Dec-16; New orders sub-index rising
Source: Bloomberg
Central Banks have started to put a leash around rate cuts
Source: www.cbrates.com
As OPEC cuts its oil supply, US is at record highs – making Oil less sensitive to geo-political risks and disrupting the tight relationship between Oil & Gold
Source: Bloomberg
Q2FY20 GDP growth came in at 6.5Yr low of 4.5% YoY (in-line with est.) pulled down by Industry (0.5% YoY) esp. Mfg. (-1% YoY)
Source: Moneycontrol Research
Personal Consumption (5% YoY) growth recovered from 18Q low (3% YoY in 1Q) but Capital Formation (1% YoY) suffered despite Govt. capex
Source: Bloomberg
DII manager flows turned negative after 6 months of steady buying since Apr-19, must see if weakness persists
Source: Bloomberg
Headline CPI rising sharply driven by food prices, eating into real rates; less room left for further cuts but economists’ expectations were high
Source: Bloomberg
Forex reserves at record high (~$449bn) with import cover highest since Dec-16 now at c.12 months
Source: Bloomberg
TAA VIEWS & PERFORMANCE
Source: Bloomberg. Assuming a 6% annualized yield for cash.
GLOBAL ASSET PERFORMANCE SNAPSHOT
Source: Bloomberg Equity/Fixed Income Returns/Yields in local currencies. Commodities in USD. Numbers for Fixed Income are Yields. As of 30-Nov-19.
ROUTES TO MARKETS: MODEL ALLOCATIONS
