There is no doubt that global GDP will see a sharp recovery in 2021 from the troughs of pandemic ravaged 2020. But the strong resurgence is expected to continue well beyond pre-COVID levels into 2022.
GLOBAL MACRO: FOUNDATION SET FOR A STRONG GDP GROWTH REBOUND
There is no doubt that global GDP will see a sharp recovery in 2021 from the troughs of pandemic ravaged 2020. But the strong resurgence is expected to continue well beyond pre-COVID levels into 2022. Substantial fiscal stimulus, near-zero interest rates, and significant spurt in household savings act as tailwinds. Delta variant, which is behind the current spike in cases in the UK, could move across borders to create some havoc. Though hospital admissions have not grown as much, and it seems jabs have played their part, nothing can be left to chance when dealing with an invisible and ever-mutating enemy. Growth will vary across countries depending on policy support, vaccine stocks and rollout strategy, and GDP composition. DMs have seen better than expected growth with the US at the helm. Deployment of EUR 750bn recovery fund could now see Europe taking the lead. Within Asia, China’s pace could slow down with others catching up. Hope the inequality gap between ‘asset owners’ and ‘income earners’ exacerbated by the pandemic is bridged eventually.
Global GDP growth to be strong in next two years
Source: Bloomberg; *Median Estimates
GLOBAL EQUITIES: TAPER JITTERS MANAGED WELL (FOR NOW)
Given two risks came home to roost in one month, equities behaved with a lot of maturity, or so it seems. US May inflation – CPI/core-CPI/PCE – whichever measure one looks at surprised hugely on the upside with readings at multi- year/decade highs. The second jolt came from the US Fed’s mid-June policy which sounded slightly hawkish. VIX saw a knee-jerk reaction, but investors soon anchored to the more positive bits. Officials raised inflation projections to 3.4% and growth forecasts to 7% for 2021. They also construed the spike to be transitory and driven more by base effects and one-offs. The Fed Chair also calmed the nerves by saying the dot-plot shows independent members’ views and not the central bank’s guidance. The markets seem to have learned from the 2013 taper tantrum, wherein Fed took more than six months to execute its words into action. But one must take cognizance that data is always dynamic, and when the liquidity tide turns, pockets of euphoria would be the ones to burst first. Hence, prudent asset allocation and quality investing are critical.
Even as we continue with our tactical OW stance on EU/Japan (Cyclical and Value) and stay Neutral US/Asia ex-Japan, we believe that this trade is close to running its course and Growth could start looking attractive soon.
“Economic re-opening” items driving overall rise in US inflation
Source: US Bureau of Labor Statistics, LGT
GLOBAL FIXED INCOME: HAWKISH TILT; OW HIGH YIELD
ECB turned more optimistic with its Euro area growth outlook for the next two years. But core inflation is not expected to meet its 2% target anytime soon. Lagarde stuck to her line that it was “too early” to talk about tapering asset purchases. But across the Atlantic, the story was starkly different. The US Fed acknowledged “talking about talking about” tapering in a total U-turn from its “not thinking about thinking” about tightening comments just months back. The BOE left policy settings unchanged, but its Chief Economist does believe that “it may need to start turning off the stimulus tap.” The BOJ kept its policy steady but extended the pandemic-relief program deadline of Sep-21 by six months and bought ETFs after a gap of 2 months in a continued effort to stimulate the fragile economy and tepid inflation. Hawks started to make their presence felt in June somewhat, and the bond yields did spike initially but later cooled off. We do retain our OW on HY relative to IG and Sovereign bonds, but given that HY spreads have narrowed sharply, investors could look at low beta long-short equity funds and zero beta market neutral products as well.
US Fed dot plot – 7 of 18 officials foresee rate hikes as early as 2022
GLOBAL COMMODITIES: STRENGTH ACROSS THE COMPLEX EXCL. GOLD
Overall, clean energy saw revived traction in India, with one domestic powerhouse recently betting big on the space at its AGM. Nevertheless, Oil continued its upward march, escalating ~8.5% in Jun-21. Gold tumbled -7% as risk-on sentiments prevailed across the World and DXY strengthened. While price recovery can be expected thanks to consumer demand and mining supply deterioration QoQ, MACD on technical charts indicates some correction in the yellow metal in the short term. Turn Neutral on Gold from Overweight.
Mine supply production showing slight softening QoQ
Source: World Gold Council
INDIA MACRO: THE GOOD WITH THE BAD
Central Government took up the responsibility of vaccine procurement for the States after revising its policy on 21-Jun-2021, and we saw the inoculation drive gathering steam once again. However, with just ~20% population having received at least one dose of the vaccine, there is a long way to go. Hence, the Central and State governments must work in sync to scale up the pace and size of the vaccination drives to reduce the impact and fatality of any potential third waves. The Cabinet also announced an additional stimulus package of ~INR 6tn for some of the most adversely impacted sectors by the pandemic: MSMEs, health, farm, tourism, and MFIs. Moreover, with only 8.2% of its budgeted FY22 fiscal deficit target reached by May vs. 58.6% last year, the government might limit the fiscal deficit due to higher revenue receipts from tax collections (direct and indirect) and surplus dividends transfer from RBI. However, disinvestments too need to pick up the pace.
The Manufacturing PMI contracted in June for the first time in 11 months. The reading came in at 48.1 due to falling new orders, business closures, and reduced output. The Services PMI took a hit, too, as services firms endured further losses of new business as the re-emergence of the pandemic and the reintroduction of containment measures in certain states restricted demand. However, as infections declined and mobility restrictions eased, the national unemployment rate dropped by 2.7% to 9.2%. Auto OEM wholesales surprised enormously, underpinned by the resilience shown in the rural belt as tractor sales outperformed on hopes of a regular monsoon. At the same time, PV volumes too showed a recovery due to outstanding bookings and lean dealer inventory. Another bright spot was the highest ever quarterly exports at $95bn in 2QCY21 which bodes well for overall manufacturing sector. Monsoons have been above average so far, but distribution was unequal. Important to note that mobility, power, fuel, freight data are better MoM but still below 1QCY21 levels.
Covid tracker: Daily vaccinations rose sharply and met June targets
Source: Our World in Data
Good monsoons and healthy reservoir levels have aided Agri growth
INDIA EQUITIES: VOLATILITY WANED; STAY OW EQUITY / RETAIN OW MID
The moderation in COVID-2.0 infections supported investor sentiments even as hawkish tone from Fed, Oil price rise, and INR weakness impacted. Confidence can be gauged by the 50% fall in India VIX from 25 (at peak of 2nd wave) to 12 now and the number of IPOs hitting primary markets. Most of the offerings have been OFS exits to promoters and PE funds which raised capital in 1HCY21 equal to the whole of CY20. Ten more IPOs are lined up in Jul-21, with CY21 total IPOs and fundraise expected to eclipse CY17. However, one should be mindful that sentiments can turn sour if a potential third wave erupts. Investors wary of taking tactical OW equity exposure at this juncture can execute a derivative- based portfolio hedging strategy. We believe this to be a better option than moving into cash entirely and waiting for opportunities to deploy later on corrections. Time in the markets is more important than timing the markets.
We stay Overweight on Equity vs. Bonds primarily driven by low VIX, steady FII and SIP flows, inflation risks, and healthy earnings growth. We raise conviction by a notch on our OW view on Mid vs. Large caps led by relatively better valuations, more robust flows, and higher forward EPS upgrades. One can take satellite positions in short-term thematic opportunities with a 6-12-month view. Given that reversal from the market bottom is complete, value to growth rotation could start playing out soon, complemented by EPS upgrades.
Euphoria in primary markets? Only time will tell!
Source: ACE Equity; For 2021, the light shaded bar is indicative of capital raise/issue size from 20 IPOs expected in 2HCY21
INDIA FIXED INCOME: CRACKS ARE APPEARING; OW CORP / SHORT TERM
Just like everywhere else, inflation spooked bond investors in India too. Headline CPI came in at 6.3%, sharply above consensus estimates led by core CPI and food prices. The RBI survey also highlights consumers elevated current inflation perception and expectations 3M/1Y out. MPC minutes too spoke about concerns on this front. But RBI’s actions indicate they are obsessed with keeping yields stable at low levels to avoid interest costs from swelling for the largest borrower – GOI. Repeated bond auction devolvement, cancellations, change in methodology all point towards the same. But some yield curve segments other than the 10Yr benchmark have now started to crack, with yields rising sharply in last month. Even the 10Yr SDL auction cut-off yield was higher than the 10Yr G-Sec despite SDLs being part of the GSAP program. We like top- quality corporate issuances/funds and short-duration investments for debt allocations while avoiding G-Secs and the long end of the curve.
RBI’s survey highlights household’s elevated inflation expectations
CURRENCY: FED VS. RBI; RETAIN NEUTRAL ON USD-INR
Both central banks had their moments in June, but it seems the Fed won the first round as the USD strengthened significantly since mid-Jun-21. The Fed conveyed its hawkishness to markets in a seemingly more convincing way. The short-term trade, which often is driven by earning carry yield – saw markets favouring the greenback as a more attractive haven than the INR. The RBI was not left behind and dished out its MPC minutes, highlighting sustained worries on hardening CPI. In the coming months, foreign flows to India would be driven by the PLI schemes and IPOs, while a rebounding US economy paints an equally bright picture for the USD. Net-net, remain Neutral on USD-INR pair.
India-US inflation differential seems to have bottomed out
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 30 th June 2021.
ROUTES TO MARKETS: MODEL ALLOCATIONS