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The month of April 2020 was a mixed month for the capital markets. Equities registered strong growth across all major markets on back of large monetary and fiscal stimulus announced by most major countries. However, in fixed income market, credit concerns rose due to lack of clarity regarding moratorium on NBFC debt and were aggravated on back of announcement of winding up of some debt schemes by a large mutual fund. Further, spread of COVID-19 continues to remain a concern with number of infected cases globally increasing nearly 4 times in last one month to 3.6 million by 3rd May 2020. In India, though numbers are rising, they remain relatively low in absolute terms considering the large population. The total infected cases in India reached over 42,000, up from ~1,400 cases as on end-March 2020. Government has extended the lockdown to 17th May 2020 but with some relaxations in areas where the number of cases are low.
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RBI announces measures to stabilize financial conditions: RBI announced number of measures in April 2020 primarily aimed to address the
stress faced by Non-Banking Financial Companies (NBFCs), improve liquidity, nudge rate transmission and encourage credit growth.
Following are the measures taken by RBI:
Ÿ RBI reduced the reverse repo rate by 25 bps to 3.75% while keeping the repo rate unchanged at 4.4%.
Ÿ To support liquidity for NBFCs, it announced Targeted Long Term Repo Operations (TLTRO 2.0) with 50% carve out for small and mid-size
NBFCs. The fund availed under this operation has to be deployed in CPs. NCDs or bonds issued by NBFCs only. Out of the aggregate
amount INR 50,000 crores announced, it has already conducted INR 25,000 crores (INR 250 billion) for which response was muted and
only ~51% was subscribed.
Ÿ Special refinancing facility of aggregate sum of INR 50,000 crores to National Bank for Agriculture and Rural Development (NABARD),
Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB).
Ÿ To support liquidity of mutual funds, it announced Special Liquidity Facility for mutual funds (SLF-MF). Under this scheme, Banks are
allowed to borrow from RBI at repo rate (4.4% currently) and amount availed has to be utilised for (1) lending to mutual funds and/or (2)
undertaking outright purchase of and/or repos against the collateral of investment grade securities held by mutual funds.
For detailed comment on measures announced by RBI and its possible impact, please refer to our comment published on 20th April 2020 -
Inflation moderates, outlook benign:Consumer Price Index (CPI) fell
in month of March 2020 to 5.91% YoY, down 66 bps m-o-m. The fall in
CPI was driven due to fall in food inflation (mainly vegetables,
especially onions) which moderated to 7.82% YoY, down 1.63%. Fuel
inflation was marginally higher than last month, however with sharp
fall in crude prices it is likely to moderate going forward. The core CPI&
inched up slightly on back of higher personal effect inflation but
remained within comfortable range. Core CPI has remained below 4%
for past six months now.
Lower fuel prices, weak aggregate demand and improved supply of
food grains & horticulture are likely to keep inflation benign, except
for supply disruption, if any.
Wholesale Inflation remains rangebound:Wholesale Price Index (WPI) also fell to 0.9% in March 2020 from 2.3% in February 2020 driven by
lower fuel inflation, soft manufacturing inflation and moderation in food articles inflation. Fuel inflation turned negative to -2.5% YOY
(Feb'20: 2.9%) on back of fall in crude prices whereas food articles inflation fell to 4.5% YoY (Feb'20: 7.7%). Inflation of manufactured products
(64% weightage in the index) softened slightly to 0.3% (Feb'20: 0.5%).
Industrial production improves in Feb'20 but likely to contract in near term:IIP for the month of February 2020 jumped to 4.5% from 2.1%, a
month ago. Mining grew by 10.0% (Jan'20: 5.3%) while manufacturing grew by 3.2% (Jan'20: 1.6%). Electricity production also increased by
8.1% YoY (Feb'20: 3.1%). By usage, the intermediate and primary goods grew by 22.4% and 7.4% while infrastructure goods turned marginally
positive to 0.1% after being negative for past 6 months. Consumer durables and capital goods contracted by -6.4% and -9.7% respectively.
However, going forward, IIP is likely to contract significantly on back of lockdown imposed by Government since 25th March 2020.
Core Industries contracts sharply, likely to remain weak in near term: The core industries registered degrowth of 6.5% in March 2020 driven
by contraction in all segments except coal (+4%). Cement production contracted by ~25% while Steel and Fertilizers fell by 13.1% and 11.8%
respectively. Electricity production fell by 7.2% too. Recent data indicates electricity generation has fallen between 20-25% in April 2020 due
to lockdown. In March 2020, the impact of lockdown was largely restricted to last week only. Thus, with lockdown being imposed for full
month in April 2020, the core industries growth is likely to weaken further.
Macroeconomic Update (contd...)
Market Review - April 2020
Trade Deficit stable, likely to improve going forward:India's trade
deficit for March 2020 was marginally lower at ~US$ 9,758 million
compared to last month. Net gold* imports fell sharply during the
month on back of lower volumes and weaker demand. Net oil
imports widened slightly as benefit of lower oil imports due to fall
in oil prices was set off by weaker oil exports. Excluding oil and
gold, the trade deficit increased as lower imports of electronic
goods was more than offset by weaker exports of engineering
goods and chemicals. INR appreciated by ~0.7% against USD and
closed at 75.1.
Due to disruption in demand and excess global supply, crude oil prices have fallen sharply (over past 2 months). Further, weak gold volumes
and likely fall in non-oil non-gold imports should lead to lower trade deficit and thus, improving current account position going forward. This is
likely to be offset partially by weak exports and lower remittances from abroad, especially from gulf countries.
Commodity prices mixed: Commodity prices witnessed mixed trends during the month. Brent crude prices fell below US $20/barrel due to
concerns over excess supply & storage but ended the month at US $25, up ~11% from last month. Gold prices ended the month at US
$1,687/ounce on back of demand for safe haven assets and increase in global liquidity
Summary and Conclusion
Given the evolving situation, it is difficult to assess the exact impact of coronavirus on growth. If the spread of virus is contained within a
reasonable time, impact on growth is likely to be limited for the short term and it should recover in second half of FY21. Stimulative measures
announced by major global central banks and governments of many countries should help counter the impact on growth to a certain extent.
While immediate impact of disruption is negative for India in near term but once the spread is contained, India stands to benefit in this
environment, in our opinion. Amongst the Emerging Markets (EMs), India is uniquely placed as most major EM economies have high
dependence on exports and/or are net oil exporters. Thus, weakness in global growth and fall in oil prices is likely to hurt these economies
significantly. But India is a net importer of oil and stands to gain significantly due to fall in oil prices. Further, India's dependence on exports is
relatively limited as compared to other EMs. Thus, once the situation stabilises, India could see relatively stronger recovery.
Further, disruption in global supply chain caused by this event has highlighted risk of overdependence on a single country. Thus, over medium
to long term, many global MNCs are likely to consider diversifying their manufacturing operations from China and India could be a likely
beneficiary given the low corporate tax rate, skilled population, relatively low wages and a large domestic market. For more on this, please refer
“HDFC MF Yearbook 2020” published in January 2020 and available on our websitewww.hdfcfund.com
Market Review - April 2020
3/4
Equity Market Update
In April 2020, Indian markets were up ~14.5% month on month after correcting ~23% in month of March 2020. The key drivers of rebound in
markets were global fiscal and monetary stimulus announced by major countries, positive news on favourable trial results of a particular
medicine in US for treatment of COVID-19 and relatively low number of positive cases in India, compared to other countries. The rally in
equities was broad based with mid & small caps also rising sharply, in line with large caps. Most sectoral performance was positive with
Healthcare, Auto and Oil & Gas outperforming significantly.
Globally, equity markets also rebounded in April 2020 and most major indices globally delivered positive returns. The tables below give the
details of performance of key domestic and global indices.
FPIs remained net seller second month in a row, albeit the pace of outflow
slowed significantly. FPIs sold equity worth US $0.9 billion in April 2020,
after selling US $8.3 billion a month ago. Total FPI's equity outflows in first
four months of CY20 have been US $7.3 billion as against inflows of US $9.8
billion during the corresponding period last year. Net inflows in domestic
equity oriented mutual funds stood at INR 11,344 crore in March 2020
compared to net inflows of INR 9,958 crore a month ago. For FY20, total
inflows in domestic equity oriented mutual fund stood at INR 67,035 crore.
Outlook
th As on 30 April 2020, NIFTY 50 was trading near 19.0x FY21 (e) and 14.8x
FY22 (e) price to earnings ratio. While multiples remains attractive, in
uncertain times like the current one, limited reliance can be placed on the
Price to earnings multiples for gauging valuations as earnings are difficult
to predict, especially for FY21. In our opinion, Indian market cap to GDP
and price to book value are better indicators of valuation of overall market
in current scenario. As of end-April 2020, Indian market capitalisation is
~60% of GDP, a level seen last post correction during global financial crisis
in 2008-09.
Price to book value has also corrected sharply over the past couple of
months and is now trading at significantly lower than its long term average.
Further, it is worth noting that the gap between 10Y Gsec and 1Y-Forward
NIFTY 50 Earning yield* has reduced significantly and it is now below 10
year average. This further indicates that equity markets are attractively
priced.
Markets thus hold promise over the medium to long term in our opinion.
Further, DIPAM (Department of Investment and Public Asset
Management) secretary (source: Interview dated 4th February 2020, in
Financial Express) has mentioned that Exchange Traded Funds (ETFs) are
going to be less preferred route for divestments going forward. This should
lead to better valuations of PSUs as regular supply of shares through ETFs
was a big overhang on their share prices.
*Earning yield = 1/(one year forward P/E).
Yield gap (%)
Earnings yields (%)
India 10-y G-Sec yields (%)
10Y Gsec and NIFTY Earning Yield
%
Outlook
RBI's decision of widening the policy corridor by 25 bps, announcement of TLTRO 2.0, SLF-MF, conduct of operation TWIST of INR 10,000
crore along with RBI Governor's statement about benign inflation and challenging growth outlook - indicates that RBI is open to take further
conventional and unconventional policy measures to counter the impact on slowdown due to the pandemic. The measures announced by RBI
are mainly targeted towards improving the transmission of policy measures and improving liquidity.
In other developments, amount to be raised via T-bills was increased from INR 3 lakh crore to INR 4.5 lakh crore for Q1FY21. This is
significantly positive for Gsec yields as it would reduce the supply of dated securities. Further, sharp fall in oil prices, positive outlook on
Balance of payment, benign inflation outlook, lower global rates and easing liquidity by Major central banks bodes well for lower yields in
India. Further, once the FPIs selling abates and fixed income markets stabilises, we believe, there is reasonable room for yields to decline.
However, likely significant shortfall in revenues due to lockdown and growth slowdown along with announced/planned fiscal stimulus leading
to high fiscal slippage in FY21, excess SLR (Statutory Liquidity Ratio) investments within banking system, any sharp reversal in oil prices, etc.
are key risks to our view. In view of the above, yields at the longer end of the curve are likely to trade within a range in the foreseeable future.
Considering the aforesaid factors, we maintain our view that the short to medium end of the yield curve offers better risk adjusted returns. In
view of the above, we continue to recommend investment in short to medium duration debt funds.
Source for various data points: Bloomberg, NSDL, CMIE, RBI, Kotak Institutional Research, Worldometers.info, World Bank
4/4
Debt Market Update
*Average daily liquidity infused / absorbed through Liquidity Adjustment Facility, exports refinance, marginal
standing facility and term repos/reverse repos; ^ - bi-annual yield; # annualised yields;
@ - Spreads have been calculated by subtracting non-annualised Gsec yields from annualised corporate
bond yields
Mar-20 Apr-20 Change (%)
10Yr G-Sec Yield (%, 6.45 GoI 2029)^ 6.14 6.11 -0.03
AAA 10Yr Corporate Bond Yields (%)# 7.30 7.33 0.03
@
AAA 10Y corporate bond spread against 6.45 GS 2029 Yield (bps) 116 122 0.06
Average liquidity absorbed / (infused) by RBI* (INR billion) (approx.) 2,992 4,700
MIBOR Overnight Rate (%) 4.81 4.41 -0.40
DISCLAIMER
This document is dated May 6, 2020. The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable.
Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is
for general purposes only and not an investment advice. The document is given in summary form and does not purport to be complete. The document does not have
regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data
herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based
on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those
expressed or implied in such statements. Past performance may or may not be sustained in future. Stocks/Sectors referred above are illustrative and not
recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. HDFC AMC / HDFC Mutual Fund is not
guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any
person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make
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