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The twists and turns in the Brexit tale finally draws us to Boris Johnson stating that the UK must leave on 31-Oct-19 – the fate of (Northern) Ireland is in focus as has been the case over the last couple of years as the backstop agreement of Brexit remains the debate. If the deadline for exit gets pushed back to 31- Jan-20 it’s a sign of “can-kicking”. The Trump impeachment talks are fast gaining momentum as the Democrats build up on Joe Biden’s son’s, Hunter’s, probe by the Ukraine Government. Trump allegedly withheld military aid to Ukraine in exchange for the probe which could hurt the Republicans’ chances in the U.S. elections come 03-Nov-20. No wonder, CDS spikes have been observed in DMs. One could argue for a rosier world without Trump – back to free trade and booming economic welfare.

Monthly Investment Perspectives February 2020

February 2020


The optimism had just come back as US-Iran flare-up turned out to be very brief and US-China Phase 1 trade deal did get signed but a novel Coronavirus (nCoV) had other plans. Detected just at the start of the Chinese Lunar New Year Holidays (one of the largest human migrations), nCoV infected >24k within China (at last count) and spread to over 2 dozen countries in a fortnight. Though nCoV current fatality rate at 2.0% is lower than previous pandemics – SARS 9.6% (2002-03), MERS 34.4% (2012-19) – China’s influence on world economics is far higher now. Given that Chinese economy had started to show signs of stabilization from accommodative monetary and fiscal policy, nCoV will be a near-term drag on growth as people movement stays restricted and factories remain shut. But history suggests such events are transitory with a sharp rebound in GDP and market performance within 2 months of the peak virus news-flow. UK officially divorced EU on 31-Jan but must negotiate a new FTA during 11 months of transition pending which risk of Hard Brexit will persist. Thus, New Year brought to the fore the age-old importance of risk positioning and portfolio diversification in the first month itself.


World stock markets bubbly mood at the end of 2019 was pierced by the volatility of Jan as investors were gripped by fear of unknown unknowns. US continued to outperform with a flat close as other DM/EM equity indices reported losses. US economy remained on a solid footing as Dec GDP came in at a strong 2.1% annualised supported by healthy labour market and robust consumer confidence. Eurozone growth in Dec remained positive but tepid at 0.1% and saw some decline in unemployment. China Dec GDP at 6% was inline but Industrial Production at 6.9% was higher by 1% vs estimates. Economic data releases will be closely monitored for signs of business confidence revival and translating into on-the- ground investments, though a vigorous bounce back in manufacturing activity is not expected given US elections, Brexit transition and China health concerns.

EM valuations are still attractive on Market Cap to GDP basis relative to DMs and earnings growth outlook has also improved post US-China Phase 1 deal. Global fund managers net overweight positions on EMs are also at 8-month high and hence, we remain Overweight on EMs against the Strategic Allocation to EM. Correspondingly DMs underweight to that effect.


As risk sentiments turned sour investors flocked to safe-haven sovereign bonds globally pulling their low yields even lower. Central Banks will stay accommodative through 2020 till fiscal tailwinds do not reverse the economic slowdown or risks to global growth do not fade. US Fed’s decision to keep rates unchanged at January meet came as no surprise given its outlook of a moderate US economic growth. Lagarde’s 2nd meet as ECB chair was also a low-key affair with rates kept on hold and reiteration of her call for more fiscal support from healthier countries in the EU. At BoE, members meeting for the last time under Carney, voted 7-2 to hold rates (2 voted for a cut) waiting for an economic rebound as indicated by business surveys.


Commodity rally which had caught speed in Dec-Jan on positive trade talks was stopped abruptly by nCoV towards Jan end. Any demand slowdown from China has a domino effect as it now plays a big role in global commodity consumption, especially base metals (like iron ore, aluminum, copper, nickel, zinc, crude steel) where its share is greater than or equal to ~50%. Oil too collapsed to 13-month lows as global travel took a hit. Gold rose and shone as it continued its upward march in the uncertain global landscape. We stay Overweight on Gold as a hedge against any such unknown risks.


The eagerly awaited Budget of 2020 pressed on many buttons (which came with a lot of caveats) but fell short of expectations to drive consumption demand and bring the economy back to a high growth path. Investors took it as a non-event and punished markets in-line with global cues which were under pressure from the widening reach of the Coronavirus.

The “simplification” of taxes has clearly been viewed as ironically negative and complicated as the fine print of assessing which deductions/exemptions matter most will weigh on the minds of taxpayers. Budget seemed disconnected from reality just like the equity markets have been in CY19. No measures were announced to revive consumer and business confidence to the extent that the budget speech did not even mention the word “slowdown”. Had some fiscal stimulus package in the form of direct spending been announced, the fiscal multiplier on the economy would have been much more positively pronounced as it would have boosted consumption demand and employment. As anticipated, FY20 fiscal deficit target was revised upwards by 50bps to 3.8% from 3.3% and FY21 now stands at 3.5% (vs. 3% earlier estimate). Heavy reliance has also been placed on disinvestments (added LIC listing, IDBI bank privatization) with the FY21 budgeted amount at more than 3 times the FY20 revised estimate of INR 65,000 crores.

Some macro indicators showed optimism though we believe it is too early to turn bullish – IIP/8-core industries index series turned positive after 3/4 months of being in negative along with Manufacturing PMI reporting at 55.3 – a 8-year high driven by better underlying demand and strong upturn in new orders. Even auto volumes reported flat YoY growth (PV/Tractors) after 12 months of decline though pain continues in 2W/CV sales even as BS-6 transition date approaches. As always, farmers (and investors) will look up to the skies for monsoon predictions to bring back rural households’ purchasing power.


Largely, 3QFY20 earnings and management commentary remains sceptical of all-round demand revival. Aggregate revenue growth YoY has been better for Large Caps with much of the growth driven by Financials. And though their PAT margins YoY have been higher, due to tax cuts, they are lower on QoQ basis. Also, operating margin improvement turned out to be better for Mid Caps. Now that budget event has passed, market focus will again shift back to micro-macro fundamentals and global cues. Valuations are not cheap whichever we look at it and we think it is too early to call the macro bottom. Hence, we continue to remain cautious and advise to invest in a gradual manner. Near term volatility could be used to build portfolios. We maintain our Neutral stance between Equities and Bonds as the situation so demands. Mid Cap Index has rallied sharply (~19%) from its Aug lows with much of the outperformance of ~7% vs Large Cap Index coming in Jan itself. Hence, we change our stance to Neutral between Mid Caps vs Large Caps


RBI’s ‘Operation Twist’ successfully managed to keep 10Yr yields within its comfort zone. Also, certainty of FY20 fiscal target now at 3.8% and more realistic FY21 revenue and economic growth assumptions softened yields. With the Budget not providing any form of direct stimulus, the onus of demand revival falls back on the RBI. But, with headline inflation at 7.35% breaching RBI’s comfort levels of 4±2% and causing negative real rates, we consider it unlikely that RBI will cut rates at its 6-Feb meeting. A change in stance from Accommodative to Neutral is a low-probability possibility, unless RBI considers the current high food inflation as not transitory in nature.

High absolute government borrowing levels and fiscal deficit failing to meet targets as set out in the FRBM continue to be a cause for concern, and most of the G-Sec issuances are long-dated securities. This could continue to keep benchmark 10Yr G-Sec under pressure and volatile (from RBI’s active interference). Credit environment too is still some time away from stability. Hence, we continue to suggest investors to focus on Short to Medium duration funds, PSU & Bank Funds and Corporate Bond Funds.

PS: OIS spreads still price in a small rate hike – but higher than last month.


The nCoV detection across continents brought back public health crisis risks to global trade as seen in the Baltic dry and wet commodities index. Dollar being the world’s reserve currency is always sought after by investors in such times of global tensions and market downturns to minimise losses. Steep fall in Oil provides a cushion to INR along with RBI’s active intervention in the FX market. India continues to be an attractive destination for FII/FDI flows which is supportive of the INR. The risk remains runaway inflation in which case the INR will depreciate. We maintain our Neutral stance on USD-INR for now.

Source: Bloomberg. Assuming a 6% annualized yield for cash.


Source: Bloomberg Equity/Fixed Income Returns/Yields in local currencies. Commodities in USD. Numbers for Fixed Income are Yields. As of 31-Dec-20.



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