The most anticipated event of 2020 – US elections – had its share of fireworks but passed with less than expected controversies. While the outgoing Trump campaign has filed litigations to contest several state results, given Biden’s margin of victory, these are unlikely to change the Presidential outcome. But US Congress will be divided with the Dems / Reps retaining their current hold on the HOR / Senate (final revelation in Jan-21). For the other most unanticipated event – Covid-19 – Nov-20 has been a turning point as 3 vaccines were announced to be highly effective against the virus (a few more could get on that list soon). With the major hurdles of efficacy and safety adequately addressed, focus now shifts to manufacturing and logistical challenges that lie ahead. While Pfizer and Moderna have stated 90-95% efficacy they require cold storage (-20-70 ºCelsius) and are relatively expensive, whereas, AstraZeneca is less effective (70%) but can be stored at regular fridge temperatures, and comes at a fraction of the price. One thing is for sure – the horizon now looks better.
LONG JOURNEY FROM DESPAIR TO REALISTIC HOPE
The most anticipated event of 2020 – US elections – had its share of fireworks but passed with less than expected controversies. While the outgoing Trump campaign has filed litigations to contest several state results, given Biden’s margin of victory, these are unlikely to change the Presidential outcome. But US Congress will be divided with the Dems / Reps retaining their current hold on the HOR / Senate (final revelation in Jan-21). For the other most unanticipated event – Covid-19 – Nov-20 has been a turning point as 3 vaccines were announced to be highly effective against the virus (a few more could get on that list soon). With the major hurdles of efficacy and safety adequately addressed, focus now shifts to manufacturing and logistical challenges that lie ahead. While Pfizer and Moderna have stated 90-95% efficacy they require cold storage (-20-70 ºCelsius) and are relatively expensive, whereas, AstraZeneca is less effective (70%) but can be stored at regular fridge temperatures, and comes at a fraction of the price. One thing is for sure – the horizon now looks better.
3 billion doses of Covid-19 vaccine could be ready by late 2021
Source: Goldman Sachs, LGT, AZN: AstraZeneca, PFE: Pfizer
GLOBAL EQUITIES: RUSH TO RISK
‘Blue Wave’ or not, the equity markets quickly climbed the huge wall of worry and firmly hooked on to the next best news out there – an antidote to the virus. Rapid vaccine progress added fuel to the post-US election rally, eclipsing worries about ongoing global recession. Equity markets cheered the light at the end of the tunnel, with this year’s biggest losers (Europe, UK, Value) gaining the most in Nov-20. Volatility ebbed as certainty grew. The risk indices receded as sentiments moved into positive zone and led to upward revisions in corporate earnings. That said, investors should not get ahead of themselves and exercise prudence. Valuation signals are flashing red for equities after the recent rally and earnings must provide consistent support. Economic activity, especially in DMs, is expected to recover only gradually due to resurging infections and mobility restrictions. PMIs have already indicated little slowness in pace of expansion. We also need to keep in mind that though vaccine is a definite boost it is not a cure-all for the economic upheaval left behind by the pandemic. More needs to be done to address the unemployment and growth concerns.
Global earnings forecasts – a swift recovery in Europe and Japan
Source: Goldman Sachs, LGT
Global investing has many benefits – diversification, currency exposure, volatility reduction – and adds value to domestic only portfolios. We retain our tactical overweight stance on Europe, while staying invested in US.
GLOBAL FIXED INCOME: PASSING THE BATON; PREFER IG
As days pass by, it becomes clearer that the stimulus baton must pass from the central bankers to the fiscal policymakers before it is too late. Biden’s nomination of ex-Fed Gov. Yellen as US Treasury Secretary is a step in that direction. US Fed left rates unchanged at their last meeting under Trump but discussed on alternative measures to provide accommodation – like enhancing the pace of asset purchases, or continuing the same pace over a longer horizon or shifting to longer maturity purchases. BOE moved ahead and announced a GBP 150bn expansion in its asset purchase facility (GBP 50bn more than expected) and UK Govt. extended the furlough scheme to Mar-21. Even the ECB is likely to focus on a continuation and expansion of the crisis mode measures (TLTRO, PEPP) at least until the end of 2021 at its upcoming meeting. Risk-on mode led to rally in HY bonds in Nov-20 but given that the risks to the growth outlook are “clearly tilted to the downside”, we still prefer IG debt over HY.
Monetary Stimulus at the forefront to fight pandemic crisis
Source: Thomson Reuters
GLOBAL COMMODITIES: SHARP REBOUND; OW GOLD
With successful vaccine trials making headlines, uncertainty around the length of the pandemic is beginning to fade, which in turn is brightening the outlook for risk assets – despite the dark winter ahead. That led to a sharp bounce back in commodity index (+11% MoM) with Oil up 27%!! With investors in buoyant mood, Gold tumbled by 6% even as the dollar index fell sharply by 2.5%. While few risk premiums (volatility, uncertainty) have exited the equation, Gold is still a preferred play on inflation, weaker USD, and easy money supply. Though we reduce our conviction by a notch, we retain our OW stance on Gold.
Volatility moved up sharply in Oct-end to cool off quickly after
Source: Bloomberg
INDIA MACRO: MORE RECOVERY SUPPORT MEASURES, LITTE FISCAL OUTGO
The Govt. continued with its commitment towards making India self-reliant by announcing incremental package of incentives of about INR 2tn under the production linked incentive (PLI) scheme, which will be spread over the next 5-10 years. Of this, details of 3 schemes – large scale electronics manufacturing, bulk drugs and medical devices – with a combined allocation of INR 500bn have already been announced. The PLI scheme at peak production could add ~USD 100bn per annum to GDP and aid job creation besides increasing the share of manufacturing in India’s GDP. A recent study by McKinsey identifies 11 manufacturing value chains that can generate, within the next 7 years, about USD 320bn more in gross value added (GVA) than they do now. Consequently, the PLI scheme merely helps scratch the surface in terms of India’s potential.
A Game Changer: PLI incentive schemes breakup
Source: GoI
Though, 2QFY21 GDP growth at -7.5% YoY pushed India into a technical recession it came in better than expectations. The upside surprise came from industry supported by manufacturing. Agri. also continued with its growth streak at +3.4% YoY. Govt. spending is now clearly a drag as GCE was down 22% YoY, but 7MFY21 fiscal deficit at 120% of BE have not left much wriggle room too.
2QFY21 GDP by expenditure: Pvt. and Govt. consumption down YoY
Source: GoI
INDIA EQUITIES: RUNNING WITH THE BULLS; OW EQUITY / MID CAPS
Consecutive 2 quarters of estimate beats across sectors, positive management commentary and structural reforms announcement led to robust earnings outlook. After a long wait, corporate EPS growth is moving to a higher trajectory. Pandemic has played the role of a catalyst by bringing cost efficiencies and balance sheet discipline across companies. This received further boost from US Democratic President win and vaccine developments leading to record high FII monthly net inflows of INR 620bn. The DIIs, on the other hand, were net sellers to the tune of INR 480bn which was a monthly record as well. It will be interesting to note SIP flows data when it is out. The market breadth improved significantly from 65% to 95% along with delivery volumes for both Large and Mid caps. Retail participation came off slightly as unlocking drove employees back to office. VIX index which had shot up towards Oct-end declined to long-term average levels providing fodder to the risk-on rally.
Significant improvement in market breadth MoM
Source: Bloomberg
Even as absolute (P/E, P/B, Market Cap./GDP) and relative valuations (EY/BY) suggest Equities are expensive vs Bonds, the improved visibility on macro and growth dynamics are aiding positive view on Equities. Liquidity driven by global stimulus measures further complements our revision in stance from Neutral to tactical Overweight on Equity vs Bonds. We retain our OW Mid caps vs Large caps positioning driven by relative valuations & technical momentum indicators.
INDIA FIXED INCOME: GROWTH INFLATION CONUNDRUM; OW CORP / ST
Headline CPI came in at 7.6% YoY vs 7.3% in Sep-20 led by elevated food prices whereas growth recovery improved. While newly constituted MPC is growth-focused and has highlighted out-of-range CPI as transient, rising commodity prices and excess liquidity could play spoilsport, pushing them to hold rates longer than expected. RBI issued a new 10Yr G-Sec which saw the cut-off yield at 5.85% vs 5.77% for earlier 10Yr. Higher yield indicates market worry on growth, inflation, and fiscal deficit dynamics despite RBI’s commitment to keep long-end yields lower through OMO purchases including operation twists. Early availability of vaccines could also push up bond yields as investors shift focus to riskier assets. Even as an IWG’s report has recommended corporate houses entry into banking sector (though experts have opined against it), S&P said that many Indian banks are at risk of becoming ‘fallen angels’ i.e. rating could be revised downward to speculative grade from investment grade.
RBI stepped up OMO activity to tame long-end yields
Source: Bloomberg
The credit upgrades-to-downgrades ratio slightly inched up to 55% from 33% last month but is still away from long-term averages. Long dated G-Sec supply concerns remain. We continue to remain focused on top quality corporate issuances / funds and short duration investments in debt portfolios.
CURRENCY: SAFE HAVEN VS RISK-ON; NEUTRAL ON USD-INR
USD witnessed substantial pressure as investor mood took a U-turn from risk-off to risk-on. Capital moved out of safe-haven assets like Sovereign Debt, Gold into Equity, EM currency and commodities pulling the dollar index down to levels last seen in Apr-18. So, though valuations have become attractive, widening twin deficits (current account + fiscal) would weigh heavy on USD over medium-long term. INR, on the other hand, has benefited massively from FDI+FII flows. Rising US-India inflation differential and trade deficit are concerns offset by record-high FX reserves. We move to Neutral stance on USD vs INR.
Dollar index under pressure as risk sentiments improve
Source: Bloomberg; Rebased to 100 on 01-Jan-20
TACTICAL ASSET ALLOCATION (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 30th November 2020.
ROUTES TO MARKETS: MODEL ALLOCATIONS
Glossary: COVID-19: Corona Virus Disease; U.S.: United States UK: United Kingdom; EM: Emerging Markets; DM: Developed Markets; PMI: Purchasing Manager’s Index; O(U)W: Over (Under) Weight;; HY: High Yield; IG: Investment Grade; GDP: Gross Domestic Product; GST: Goods and Service Tax; RBI: Reserve Bank of India; MPC: Monetary Policy Committee; FII Foreign Institutional Investment; DII: Domestic Institutional Investment; YoY: Year on Year; MoM: Month on Month; USD: United States Dollar; INR: Indian Rupee; FDI: Foreign Direct Investment; FX: Foreign Exchange; VIX: Volatility Index; PLI: Production Linked Incentives; OMO: Open Market Operations; TLTRO: Targeted Long Term Repo Operations; HOR: House of Representatives; Dems: Democrats; Reps: Republicans; BOE: Bank of England; ECB: European Central Bank; PEPP: Pandemic emergency purchase program; GCE: Government Consumption Expenditures; EPS: Earning per Share; CPI: Consumer Price Index; EY: Earnings Yield; BY: Bond Yield; PE: Price-Earnings; PB: Price-Book Value; IWG: Internal Working Group