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Fixed Income Market Investment Outlook - November 2018
Nov 28, 2018
5 mins | Views 6790
Growth Indicators:
Most of the high frequency growth data in India continued to be fairly healthy reflecting decent growth momentum, except for weakness in PV sales and fuel consumption. Global growth data showed some decline in momentum in EMs, particularly China, and Europe even as US economic data continued to be strong. We would be closely watching for impact of recent NBFC crisis on growth numbers in upcoming months.
Headline IIP for August came at 4.3% y-y, buoyed by decent growth in manufacturing, consumer goods (both durables and non-durables) and electricity. Infrastructure index growth was also healthy with important sectors like steel, cement and coal showing healthy growth.
October Manufacturing PMI increased to 53.1 in October (from 52.2 in September) taking the expansion to 15 months. Strong uptick was a result of firms responding to stronger order inflows by scaling up production, input purchasing and employment. Job creation was at 10 month high but exports sales cooled. Services PMI for October came at 52.2 against 50.9 in September, taking composite PMI for the month at 3-month high of 53. The uptick was on back of strong growth in new orders which was at three-month high. However, business sentiment were low in both services and manufacturing PMI.
Freight traffic remained healthy in railways, airport and cargo. Airport passenger traffic growth also remained strong in mid-teens. However, there was moderation in fuel consumption and PV sales. We have to see whether the moderation in auto sales/fuel consumption data is a short-term impact of higher fuel prices/festive season base or something more long term. Banking sector non-food credit growth continue to inch up and is at highest level since March 2014. While the credit growth is still being largely driven by services and personal loans, industrial credit growth is beginning to inch up. (Source: CEIC)
Inflation:
CPI inflation once again surprised positively with September reading coming at 3.8% against market expectations and RBI’s long term target of 4%. The benign inflation reading continue to be driven by very low food inflation and some so??ness on core inflation as well. Food inflation with 45.9% weight contribute less than 15% to overall inflation and continue to be led by lower vegetables, sugar and pulses inflation. We have been highlighting the significant supply shock in food production especially in horticulture production, which has consistently surpassed population growth over the last decade and is likely a key driver for low food inflation.
Going ahead, we would be closely watching the impact of MSP hike on food inflation in next two months’ data as harvesting and procurement of Kharif crops is underway. While price of crude has cooled, the spike in USDINR and likely put upside pressure on inflation. However, the sustainability of such an inflationary impact would depend on the state of the economy and its ability to withstand the recent headwinds on growth. (Source: RBI, MOSPI)
External Account:
There was a positive surprise in India’s external account with November trade deficit declining sharply to US$ 14bn from an average of 17.6 bn in previous three months. The decline was owing to sharp decline in imports while exports numbers were in line with earlier trend. While some segments of trade data appeared to be one-off (lower oil import and higher oil product exports), but many components look more durable and we would be closely watching of the extent of likely rebound in trade deficit next month.
We note that while trade numbers show lot of volatility, the compression in trade deficit is large and positive and would provide comfort to RBI and external investors. The number suggest to justify economic approach to let trade of term shock be adjusted by weaker currency and reduces the possibility of INR being a dominant variable in future monetary policy actions (except for its inflationary implications).
INR weakened in the earlier part of the month, especially post the surprising monetary policy announcement but retraced following aggressive RBI sale of foreign exchange as well as benign trade numbers. Reduction in trade deficit is positive for INR in so far as it reduces the pressure on current account. However, FII outflows continue in both debt and equity segments, with an outflow of US$5.1bn in October, and remain a stress factor for the currency, besides the strength in Dollar index and continued weakness in EM currencies. (Source: CEIC)
Other Developments:
Global PMIs showed some moderation in both EMs and DMs with the US being the only exception showing strong growth numbers, despite some recent weakness in ISM data. However, world trade data does not show much moderation as yet, which could be due to front running ahead of trade sanctions.
US consumer confidence, wages and employment data continue to stay healthy. However, US ISM survey data is showing some moderation, but still remain strong. Chinese retail and industrial production data continue to weaken and remains one of our key area of concern. Commodity prices remained so??and crude weakened sharply owing to supply response, and some relaxations on Iran sanctions. Volatility remained elevated in October and EM currencies remain under pressure as outflows continued from EM assets.
- Portfolio Positioning:
We have seen a period of stability a??er long time in currency as global equities took center stage during the month. Sustained risk-off took a toll on global asset prices, which pushed commodity prices also lower, with Brent trading lower than $75. A combination of the above factors along with a flurry of RBI OMO purchase has created an environment of a tactical trade for going long Govt Securities. We took advantage of this opportunity to going slightly overweight duration in our funds the possibility of which we had highlighted in our previous communications. The conducive environment for playing tactical overweight through Govt Securities still prevail and we are thus maintaining that positioning in our portfolio while retaining the flexibility to quickly react to both favourable and adverse market developments.
EM: Emerging Markets; IIP: Index of Industrial Production; PMI: Purchasing Managers’ Index’; MSP: Minimum Support Price; OMO: Open Market Operations
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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