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With signing of the Phase-1 deal scheduled for 15-Jan, Trump did a truce with China. He also did not impose tariffs on European auto exports, and it seemed the world is entering a Happy (& Stable) New Year after a tumultuous and hazy 2019. But, then 2020 is a US re-election year and what better time to play the rally-around-the-flag dynamic.

Monthly Investment Perspectives JANUARY 2020

January 2020


With signing of the Phase-1 deal scheduled for 15-Jan, Trump did a truce with China. He also did not impose tariffs on European auto exports, and it seemed the world is entering a Happy (& Stable) New Year after a tumultuous and hazy 2019. But, then 2020 is a US re-election year and what better time to play the rally-around-the-flag dynamic. So, US drone-attacked Baghdad and killed Iran’s revered top military General Soleimaini in reaction to Iran’s repeated provocations. Some say it’s an impeachment distraction tactic. Rather, Trump did what he thought a weak and ineffective negotiator Obama would do in 2012 to get re-elected. Nonetheless, the World must now live with another volatile year as Iran has vowed revenge. UK voted with a fat finger to stay out of Europe and now must agree to avoid a Hard Brexit. This time no extension. China put a more pro-communist liaison officer in HK to deal with the unending pro-democracy protests. Navigating 2020 in late cycle economic backdrop and heightened geo-political uncertainty will not be easy.


Never was such dichotomy seen between capital markets performance and macro-economy than in 2019. Equities, globally, rallied to record-highs, digesting the US-China trade-war rhetoric, primarily driven by heavy monetary stimulus from central banks and fiscal support from Govt. Corporate earnings were a damp squib (adjusted for tax cuts benefit) but easy liquidity lifted all boats. Trade war affected all economic segments with manufacturing most hurt. US, Germany had a recession scare and China GDP grew at 30-year low. IMF estimates global growth for 2019 at 3% - slowest rate of expansion since GFC. Though, composite PMIs rebounded in Dec, sustainability must be seen along with rising factory activity to conclude bottoming out.

We have gone a notch overweight on EMs this month as valuations were attractive but even earnings have started to show a sustained recovery along with OECD lead indicators pointing to an improvement. On a market cap to GDP basis too, DMs have been trading expensively above 100% for years in a row making EMs look reasonably valued. Global fund managers have also steadily tilted positioning in favour of EMs


Investors were rewarded indiscriminately for their risk-management decisions (or lack of it) as traditional risk-on (Equity) and risk-off (Bonds) assets gave equally high returns. Central Banks expanded balance sheets to fight slowdown with below-zero interest rates which led to the rally in bonds. Negative yielding debt reached record levels before sanity returned – or did it not? PIGS once high-yield debt (junk rated) became investment-grade and even yielded negative – at times lower than higher-rated US sovereign. Such irrational risk-seeking behavior is unlikely to continue in 2020, unless QE continues, in a bid to shore up growth. US Fed has already indicated of a long pause in 2020 which allowed China to cut cash reserve ratio. Hope is the new chiefs at ECB and BoE too have saner policy actions in mind & the will to act.


Commodities finally rallied in Dec on optimism around global growth but have undergone a decade of beating relative to Equities. The S&P GSCI-to-S&P500 ratio is at 0.13 vs median of 0.3 and a rebound in commodity prices is likely if growth re-accelerates in 2020. This could also support EM economies as many of them are dependent on natural resources and in some cases even on a singular commodity. Oil was on a boil and Gold gained back its shine this year driven by OPEC+ supply cuts and safe-haven appeal. We went OW on Gold in Apr-19 and the trade is up +20% till date. Though, ETF holdings have fallen in Dec and demand consolidation is seen, we stay a notch OW on Gold as a hedge against any escalation in geo-political tensions and inflation.


A cold wave hit India as it lost the fastest growing tag this year to China. GDP crashed to 6.5-year low to 4.5% in Sep-19 quarter pulled down primarily by Industry. Consumption, mainstay of the Indian economy, too collapsed post IL&FS led liquidity crisis which engulfed other NBFCs. Govt. continued with its expenditure in hopes of private capex revival, but RBI’s latest surveys dashed that hope. Capacity utilisations fell to a decade low of 69% post slight recovery through last few quarters. Consumer confidence and business sentiment index have come in weaker at 11-year lows as fears of rising inflation, further demand deterioration and job cuts loom large. We believe there is more pain before gain and FY21 can see growth rebound due to RBI’s easing and Govt. fiscal boost to profits via corporate tax cuts.

But, to reach there, the Govt. will have to continue providing support – further tax benefits (LTCG, personal income tax, DDT rationalisation) are expected from the Union Budget on 01-Feb-19 – and pause on its fiscal deficit target as laid down in FRBM. Tax collections have lagged budgeted growth rates and planned major disinvestments will also get pushed to FY21. Any curtailment in Govt. capex currently is fraught with risks of further derailing the economy. The risk, on the other hand, is rating downgrade. Moody’s has already changed the stance on India sovereign rating from Stable to Negative.

The latest 8-core industries index showed a decline of 1.5% lower than -5.8% for Oct with Cement and Refineries output turning positive. Composite PMI seems to have bottomed out in Oct-19 (49.6) with Nov-19 (52.7)/Dec-19 (53.7) numbers pointing to a strong rebound led by both Manufacturing and Services. Output prices and new order growth also picked up sharply. CMIE in its Dec quarter release too painted a rosy picture highlighting new project announcements higher by 37% YoY (primarily driven by Indigo’s 300 plane order and Reliance’s refinery expansion) and dropped projects lower by 81%. Heavy rains did lead to good reservoir levels helping Rabi sowing and this together with food inflation can lead to return of rural demand.


This year will be remembered for the lack of broader markets participation in the decent gains posted by Equity. India’s total market capitalisation has hardly moved on a YoY basis but large cap benchmark indices have posted 12-15% positive returns – and that too driven by a handful of stocks. Quality vs Value argument also caught speed in a year of highly expensive coterie of quality stocks outperforming rest of the market. All eyes and ears are now on 3QFY20 earnings and management commentary to separate the chaff from the wheat. Higher current multiples are unlikely to sustain longer if earnings growth fails to meet expectations. A broadly neutral, balanced portfolio of Equity and Debt works better during such periods. Retail investors have booked profits in Dec as Mutual Funds net-flows fell to levels last seen in Apr19. Though, FIIs have been net-buyers in Indian equity for 4 months in a row they also moderated their pace of buying. We continue to be notch OW on Mid-caps vs Large-caps basis relative valuations.


RBI’s shocking pause at 5-Dec-19 (vs est. of a 25bps cut) meet was followed by announcement of an OMO of INR100bn on 19-Dec-19 (followed by 2 more). But, unlike previous OMO’s, this one categorically focused on ‘twisting’ the steepened yield curve – buying the current benchmark 10Yr and simultaneously selling shorter dated securities of 4m to 1Yr. This indicated RBI’s discomfort (or the Govt’s.) with selloff in 10Yr and the subsequent widening in the term spread. It should also send a signal to the market which has been wary of duration despite ample banking system liquidity. Non-food credit growth languished at 2-year low of 7.1% (vs Deposit growth of 10.1%) weighed down by consumption slowdown, lack of investment demand from private sector and risk aversion by banks.

Which way the 10Yr G-Sec moves is anyone’s guess now (due to RBI’s active interference), but given the FY21-23 line-up of Govt. refinancing, risks of widening fiscal deficit and higher spreads than average, we still prefer goodquality Corporate Bonds over G-Secs for a few tenures. In our view, short duration will benefit vs long, if RBI changes stance or hikes in face of recovering growth and rising inflation. PS: OIS spreads price in a small hike.


The dollar index closed flat in 2019, erasing all gains made earlier in the year, as Brexit certainty supported GBP/EUR and easing trade concerns fueled melt-up in risky assets. Fed’s long pause and rising DM bond yields will likely put pressure on USD in 2020. But rising US-Iran tensions can reverse the erosion of USD’s safe-haven status. Amongst the risk sensitive currencies, oil exporters should fare better than oil importers (INR mainly as trade deficit will widen). The RBI’s ‘Operation Twist’ was the main support for the INR in Dec. We have turned Neutral on USD-INR considering these developments.

Composite PMIs have strongly rebounded for both but higher for EM

Source: Bloomberg

On a Mkt. Cap./GDP metric, EMs look reasonably valued at below 100%

Source: Bloomberg

Fund Managers are tilting in favour of EMs – Net Over-Weight at 7m high

Source: Bank of America ML Global Fund Manager Survey

US Fed indicated no cuts in whole of 2020

Source: Bloomberg

Equity rally pushed GSCI Commodity Index/S&P500 ratio to decadal lows

Source: Bloomberg​

Capacity Utilizations have fallen to 69% (decade low); Pvt. capex recovery in H2 conditional to banks lending appetite and trust

Source: CMIE

CMIE data paints a rosy picture – but have to taken with a pinch of salt

Source: CMIE

Middle-East tensions can flare up oil which has been subdued; CPI rearing its head driven by food (vegetables/pulses), but Core is falling

Source: Bloomberg

MFs saw lowest net-flows since Apr-19 as investors booked profits; Large & Mid Cap, Contra & Thematic funds saw net outflows

Source: Bloomberg

RBI’s surprising pause at Dec meet has led to OIS spreads now pricing in a hike but RBI’s Operation Twist can Neutralise impact

Source: Bloomberg

EUR and GBP were the biggest currency winners in the month gone by

Source: Bloomberg


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-19.



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