Market Review - November 2020

Macroeconomic Update

Economic recovery presented a mixed picture with some countries recovering well while for some, pace of recovery moderated. US and China continued to improve sequentially with most indicators neared pre-COVID level or higher while imposition of restrictions in select European countries resulted in softening of economic recovery. Further, due to rise in new cases in US, few states have reimposed some restrictions which can impact the pace of recovery in near term, to some extent. In , while the improvement in economic recovery continued, the pace moderated compared to the last month.

Update on Spread of COVID: The total infected cases globally rose sharply in November 2020 and were over ~64.3 million as on 30 November 2020 as compared to ~46.4 million as on 31 October 2020. The significant increase was on account of rise in new cases in US, UK, Spain, France, Germany, etc. Select European countries and US states have reimposed restrictions to curb the spread. In India, while the number of cases increased to ~9.4 million as on 30 November 2020 (~8.2 million as on 31 October 2020) but the pace of increase reduced with net addition during the month falling to 1.2 million as compared to ~2 million last month. Further, active cases have fallen to ~0.44 million as of 30 November 2020 from ~0.57 million as on 31 October 2020. Also, India's fatality rate is less than 1.5% compared to global average of 2.3%. (Source: www.worldometers.info)

Contraction in GDP narrows sharply, outlook remains positive: Driven by unlocking of economy and easing of restrictions, the pace of contraction of GDP reduced significantly in Q2FY21 to 7.5% (RBI estimate: -9.5%; Consensus: -8.2%) as compared to 23.9% in Q1FY21. A broad based improvement was visible with lower fall in private consumption and investments. Further, fall in imports continued to be higher than exports. However, Government spending declined significantly due to restraint in spending by Central government while dispute regarding GST compensation cess restricted State governments spend. On the GVA side, the key swing was led by sharp improvement in industrial activity especially manufacturing, while agriculture & allied activities continued to grow at robust pace. Services also improved, although still lagging recovery seen in manufacturing sector as being contact intensive, restrictions were eased at slower pace.

Quarter ended (YoY, %) 30-06-2020 30-09-2020 Quarter ended (YoY, %) 30-06-2020 30-09-2020 GDP -23.9 -7.5 GVA -22.8 -7.0 Private Consumption -26.7 -11.3 Agriculture, forestry & fishing 3.4 3.4 Government Consumption 16.4 -22.2 Industry -38.1 -2.1 Gross Capital Formation -47.5 -8.9 Manufacturing -39.3 0.6 Exports -19.8 -1.5 Services -20.6 -11.4 Imports -40.4 -17.2 Trade, hotels, transport, etc. -47.0 -15.6

Going forward, we expect GDP growth to improve sequentially, supported by normalisation of economic activity. On a full year basis, GDP is likely to contract in FY21 followed by sharp improvement in FY22 driven by full year of normal activity, base effect and pent up demand.

Economic recovery momentum softened: After recovering strongly over the past few months, pace of recovery moderated during November 2020. While majority of indicators continued to expand on YoY basis, pace of expansion softened. Power demand, goods movement by railway, e- way bills generated, GST collections, etc. continue to grow at a healthy, albeit lower, pace. Further, key consumption indicators like retail e- transactions (UPI+ IMPS), unemployment rate, retail auto registrations, etc. also continued to improve.

YoY Growth (%) Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Railway tonnage movement -35.2 -21.6 -7.8 -4.7 3.8 15.3 15.2 8.8 Power demand -24.0 -15.2 -10.5 -2.7 -2.1 4.6 12.1 3.5 Average E-Way bill generated -83.6 -53.0 -12.7 -7.3 -3.5 9.6 21.4 7.3 Average Daily import duty collection -49.4 -35.2 -30.1 -15.7 -18.8 -2.7 11.1 21.3 Manufacturing PMI* 27.4 30.8 47.2 46.0 52.0 56.8 58.9 56.3 Services PMI* 5.4 12.6 33.7 34.2 41.8 49.8 54.1 53.7 Gross GST Collection -71.6 -38.2 -9.0 -14.4 -12.0 3.9 10.2 1.4 Unemployment 23.5 21.7 10.2 7.4 8.4 6.7 7.0 6.5 Average Daily Retail E-transactions^ -12.6 16.5 46.7 52.1 50.2 67.4 58.3 70.2 PV registration@ -90.2 -83.9 -26.3 -5.4 11.3 31.9 4.2 10.9 2W registration@ -75.9 -88.6 -37.8 -33.4 -25.3 -11.0 -25.6 -20.8 Tractor registration@ -84.2 -74.9 6.9 42.6 28.7 88.1 62.1 12.9

Source: Raildrishti.com, MOFSL, gstn.org.in, www.icegate.gov.in, CMIE, PIB, RBI, vaahan.parivahan.gov.in * Does not reflect yoy change; number >50 reflects expansions and number <50 reflects contraction compared to previous month ^sum of UPI+IMPS; @ - November 2020 figures are preliminary data and are subject to revision

While there is some element of pent up demand in economic recovery, continued improvement in the activity suggests that economic conditions are normalizing on back of easing restrictions. Services sector, especially activities in aviation, entertainment, hospitality etc. continue to be relatively more impacted as compared to manufacturing sector as these are more contact intensive. However, we remain positive on future prospects and expect sequential improvement to continue.

1/6 Market Review - November 2020

Macroeconomic Update (contd...)

Centre's fiscal deficit widened further; to remain stretched: Fiscal deficit widened to ~120% of budgeted estimates in FYTD till October 2020 primarily because of sharp fall in revenues. Gross tax revenues declined due to weakness in both corporate tax and personal tax revenues, although the latter fared better than the former. Decline in indirect tax was lower primarily due to growth in revenue from excise on account of increase in duties on petrol and diesel. Total expenditures remained largely stable on YoY basis.

7MFY20 7MFY21 Change (YoY) (Amount in INR Billion) (Amount in INR Billion) Gross tax revenue 10,518 8,756 -16.8% Total Direct Tax 5,172 3,758 -27.3% Total Indirect Tax 5,347 4,998 -6.5% Less: Share of States & others 3,669 2,972 -19.0% Net Tax collection 6,849 5,784 -15.6% Non-Tax Revenue 2,241 1,162 -48.2% Total Revenue Receipts 9,091 6,946 -23.6% Total Capital Receipts 268 164 -38.9%

Total Revenue Expenditures 14,536 14,641 0.7% Total Capital Expenditures 2,013 1,974 -1.9% Total Expenditures 16,549 16,615 0.4%

Gross Fiscal Deficit -7,204 -9,532 32.3% Fiscal Deficit as % of BE 102.4% 119.7% Source: CMIE

Over the past few months, it has been observed that lower spending by Central Government has reduced the pace of deficit widening to a certain extent. However, we expect the spending to pick up going forward and the fiscal deficit is likely to widen to ~8% of GDP. Further, with resolution of dispute on compensation cess, State government spending should also pick up and their aggregate deficit should widen too. The aggregate fiscal deficit of States and Centre is likely to be ~12.5% of GDP in FY21 (Source: Kotak Institutional Equities). However, fiscal deficit should trend down from FY22 onwards supported by improvement in revenues on back of normalisation in activity and growth in GDP.

Inflation continues to rise in October 2020, moderation likely going forward: Change in % CPI inched up to 7.6% in October driven by elevated food inflation along with YoY, % Sep-20 Oct-20 rise in core inflation. The rise in food inflation was led by vegetable prices, while CPI 7.27 7.61 0.34 other items like eggs, fish, pulses, etc. also continued to remain at an elevated Food & Beverages 9.80 10.16 0.36 level. Core CPI also inched up driven by growth in precious metals (gold, silver Fuel and Light 2.80 2.28 -0.53 etc.), airfares, services like barber, domestic help, recreation, etc. Housing 2.83 3.27 0.44 While supply side factors continue to impact CPI, cost push factors, margin Core CPI@ 5.42 5.81 0.40 expansion, etc. also contributed towards the rise. Food inflation is expected to moderate driven by favourable base effect, fresh supply of food grains, Source: CMIE; @-CPI excluding food, fuel, improvement in supply chain, etc. However, other factors like high fuel prices, transportation & housing gold prices, services impacted due to restrictions, etc. might persist for longer. Thus, while CPI is likely to moderate going forward due to base effect, it could still remain higher than earlier envisaged.

Trade Deficit continues to widen, likely to remain range bound in near term: Trade deficit in November 2020, although lower than last year, inched up m-o-m mainly on account of rise in net gold imports and widening of deficit ex of oil and gold (NONG). NONG Imports increased driven by increase in chemical & related products, fruits & vegetables, pulses etc. along with softening in exports of , plastic, pharma and agriculture products.

Amount in USD Million October - 20 November - 20# Change (%) Trade Deficit / (Surplus) 8,717 9,960 14.3 Net Oil Imports 4,332 4,790 10.6 Net Gold Imports* 1,874 2,180 16.3 Trade deficit ex oil & gold 2,511 2,990 19.1

Source: CMIE, PIB; #Based on preliminary data *includes net imports of gold, silver and precious stones adjusted for gems and jewellery exports; NM – Not meaningful

While sequentially the trade deficit might remain at elevated levels as compared to levels seen in Q1 but on a full year basis, the trade deficit is likely to be significantly lower than FY20. Further, relatively resilient net services exports should swing the current account into surplus in FY21. This along with strong foreign exchange reserves and robust capital flows bodes well for India's external sector. INR was largely range bound and ended the month at 74.0, up 0.1% as compared to last month.

2/6 Market Review - November 2020

Macroeconomic Update (contd...)

Commodity prices increased significantly: Driven by optimism on faster vaccine implementation and improvement in the growth outlook, most commodity prices increased significantly during November 2020 and are now significantly higher than levels seen in March 2020. Gold prices declined during the month on back of improvement in risk sentiments.

% Change Market price (USD)* November 2020 (m-o-m) FYTD21^

Brent Crude (per barrel) 47.6 27.0 109.3 Gold (per ounce) 1,777 (5.4) 12.7 Steel (per tonne) 4,138 5.9 21.7 Zinc (per tonne) 2,810 11.3 50.4 Copper (per tonne) 7,675 14.6 60.0 Aluminium (per tonne) 2,036 10.2 36.4 Lead (per tonne) 2,118 18.3 23.7

Source: Bloomberg; *Market prices as on November 30, 2020; ^ change in prices since end-March 2020, m-o-m- Month on Month

Summary and Conclusion

While GDP numbers came in better than consensus expectations, economic activity continues to remain robust during the month driven by broad based improvement. In view of the above, we believe that economy is likely to continue to see sequential improvement supported by easing restrictions, pent up demand, strong rural economy along with monetary and fiscal measures.

In addition to the above, sharp fall in oil prices compared to last year along with reduced aggregate demand has helped reduce trade deficit significantly. This along with relatively lower impact on net services exports and strong capital flows has resulted in foreign exchange reserves rising to USD 575 billion, near all -time high. Thus, despite COVID-19 led disruption, India's external sector is in a comfortable position.

Over the medium term, rising wages and higher environmental compliance cost in China, disruption caused due to COVID-19, keenness of global MNCs to adopt a China plus One policy and reducing the risk of over dependence of supply chain on one country, etc. should quicken the pace of shift of manufacturing from China to other Emerging Markets. On the other hand, the Indian government has been proactively taking steps to boost domestic manufacturing, especially post Indo-China border standoff, and has unleashed a number of measures like PLI scheme for many sectors, rationalising archaic labour laws, improving ease of doing business, raising import barriers, etc. These measures along with factors like large domestic market, skilled population, abundant natural resources, competitive wages, concessionary tax rates, etc. should help attract global manufacturing to India. Thus, we remain positive on growth of domestic manufacturing over medium to long term.

3/6 Market Review - November 2020

Equity Market Update

Equity markets registered strong gains in November 2020 with NIFTY 50 gaining over 11% over last month and ended the month near all-time high. The sharp growth was driven by uncertainty of US Presidential election behind, optimism around COVID-19 vaccines & sooner than expected administration of the same, normalization of domestic economic activity supported by pent-up and festive demand and a better-than- expected 2QFY21 results. The rally during the month was quite broad based and midcaps and smallcaps outperformed largecaps during the month. Most major sector indices ended the month in positive with Metals, Banking, Capital goods, Power and Auto registering double digit growth.

Globally, most major indices also delivered strong positive returns during the month. The tables below give the details of performance of key domestic and global indices.

% Change in Indices November-20 (M-o-M) FYTD 2021^ % Change in Indices November-20 (M-o-M) FYTD 2021^

S&P BSE India Auto 14.9 87.3 S&P 500 10.8 40.1 S&P BSE India Bankex 23.7 53.7 S&P BSE India Capital Goods 20.2 55.0 FTSE 12.4 10.5 S&P BSE India FMCG 7.4 14.3 DAX 15.0 33.8 S&P BSE India Healthcare 5.5 67.3 S&P BSE India Metal 24.5 78.9 CAC 20.1 25.5 S&P BSE India Power 15.6 45.1 Nikkei 15.0 39.7 S&P BSE India Oil & Gas 9.3 32.2 S&P BSE India IT 2.7 68.5 Hang Seng 9.3 11.6

S&P BSE SENSEX 11.4 49.8 KOSPI 14.3 47.7

NIFTY 50 11.4 50.8 Shanghai 5.2 23.3 NIFTY Midcap 100 15.5 68.5

NIFTY Smallcap 13.0 82.9 MSCI Emerging Market Index 9.2 42.0

^ change since end-March 2020

FPI flows have been strong in the current financial year, following the sharp outflows (USD 8.3 billion) witnessed during March 2020. During the month, FPIs bought equity worth USD 8.1 billion, highest ever net inflows in any month, as compared to net inflows of USD 2.7 billion in the previous month. Cumulative FPI inflows into equity increased to USD 21 billion in 8MFY21 as against net inflows of USD 6.6 billion in similar period last year.

Domestic equity oriented mutual funds recorded net outflows of INR 18,262 crore in November 2020 compared to net outflow of INR 7,031 crore a month ago. In first eight months of FY21, net outflows from domestic equity oriented mutual fund schemes was INR 35,830 crore as against net inflows of INR 34,019 crore during the same period last year.

Q2FY21 results were strong with results of Metals, IT, Cement, Financials, Utilities and Consumer Staples being better than expectations. Results of Pharma, Oil & gas, Telecom and Industrials were largely in line with expectations.

Outlook

As on 30 November 2020, NIFTY 50 was trading near 26.9x FY21E and 20.7x FY22E price to earnings ratio. In our view, these are reasonable multiples, especially given the low interest rate environment. Further, the gap between 10Y Gsec and 1Y-Forward NIFTY 50 Earning yield* continues to remain below its 10-year average. *Earning yield = 1/(one year forward P/E).

While NIFTY 50 is higher than pre-COVID level, it should be kept in mind that these levels are not significantly higher than highs seen before outbreak of COVID-19. Further, a significant proportion of recovery is attributable to select set of stocks and broader market is still trading below long term averages. Again, the corporate earnings in Q2FY21, driven by cost reduction, has surprised on the upside and resulted in broad based earnings upgrade.

Hence, markets hold promise over the medium to long term, in our opinion. Source: Kotak Institutional Equities Strong sequential improvement in economic activity, favourable external scenario, monetary and fiscal measures undertaken along with relatively better placed rural economy also supports this optimism.

In view of the above, in our opinion, there is merit in increasing allocation to equities in a phased manner or in staying invested as the case may be (for those with a medium to long term view and in line with individual risk appetite). Significant rise in spread of COVID-19, unwinding of expansionary fiscal and monetary stimulus, sharp rise in crude oil prices, higher than expected NPAs post the moratorium, escalation of border tension between India and China and/or trade tension between US and China, significant policy changes post US elections, etc. are key risks in the near term. 4/6 Market Review - November 2020

Debt Market Update

The yield of 10-year benchmark Gsec was at 5.91% for the month ended November 2020, up 3 bps over the previous month end. The Gsec yields traded largely within a narrow range during the month supported by high liquidity, Operation TWIST, etc. 10 Year AAA rated corporate bond spreads over Gsec moderated and ended down 13 bps compared to last month.

Average net interbank liquidity surplus improved Oct-20 Nov-20 Change (%) during the month driven by OMO purchases, 10Yr G-Sec Yield (%, 5.77 GoI 2030)^ 5.88 5.91 0.03 foreign exchange purchases by RBI along with soft credit growth vis-a-vis deposit growth. AAA 10Yr Corporate Bond Yields (%)# 6.50 6.40 -0.10 AAA 10Y corporate bond spread against 6.45 GS 2029 Yield (bps)@ 62 49 -0.13 The FPI flows in Indian debt markets have been relatively weak in the current financial year. In Average net liquidity absorbed / (infused) by RBI* (INR billion) (approx.) 4,098 5,282 28.90 November2020, FPI investments in debt MIBOR Overnight Rate (%) 3.48 3.40 -0.08 (including Voluntary Retention Route) were * Average net daily liquidity infused / absorbed through Liquidity Adjustment Facility, exports refinance, marginal marginally positive at USD 0.3 billion (October standing facility and term repos/reverse repos; ^ - bi-annual yield; # annualised yields; 2020: USD 0.3 billion). Consequently, in 8MFY21, @ Spreads have been calculated by subtracting non-annualised Gsec yields from annualised corporate bond yields net FPI outflows from debt stood at USD 3.6 billion compared to net inflows of USD 4.4 billion during the same period last year.

In its meeting concluded on 4 December 2020, MPC unanimously voted in favour of keeping the policy Repo Rate and Reverse Repo rate unchanged at 4.0% and 3.35%. It also voted in favour of maintaining an accommodative stance as long as it is necessary - at least during the current financial year and into the next financial year - to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

Outlook

RBI's decision of leaving the policy repo rate and accommodative stance unchanged was largely in line with market expectations. While RBI revised up its growth and inflation forecast, no liquidity absorption measures were announced despite high liquidity and easy financial conditions. RBI mentioned in his speech that RBI will maintain ample system liquidity and will continue to use tools like OMO purchases, operation TWIST, reverse repo etc. at the appropriate time. This was perceived positively by the market and Gsec yields rallied to some extent.

Since the outbreak of COVID-19, RBI has been proactively taking steps to cushion the impact of the pandemic on growth. In addition to a sharp reduction in policy rates, RBI has undertaken multiple conventional and unconventional measures to improve liquidity and maintain easy financing conditions. It has conducted OMO purchases, operation TWIST, LTROs, TLTROs, increased HTM limits, on-tap TLTRO, etc. to demonstrate its commitment towards reviving growth. RBI also noted that signs of recovery are far from being broad-based and are dependent on sustained policy support. Further, rangebound oil prices, positive outlook on Balance of Payment, lower global rates and easy liquidity by major central bode well for yields in India.

However, high near term inflation remains a key risk to yields as indicated by sharp upward revision of inflation forecast for next one year by RBI. Further, RBI also recognised the same and mentioned that this “constrains monetary policy at the current juncture from using the space available to act in support of growth.” Further, large supply from Central as well as State governments, sharp reversals in oil prices, etc. can also put upward pressure on yields.

In view of the aforesaid, we believe there is limited probability of further policy rate cuts. Further, while there is some room for yields to fall from hereon, they are likely to remain rangebound, especially at the longer end of the curve. Considering the aforesaid factors, we continue to recommend investment in short to medium duration debt funds.

While credit environment still warrants caution, measures by RBI have eased the spreads on AAA rated bonds significantly. However, opportunities exist in select pockets of non-AAA rated bonds as their spreads relative to AAA rated bonds are trading at attractive level. Hence, allocation to credit oriented schemes or funds with some non-AAA exposure can be maintained / increased, to a certain extent, in line with individual risk appetite.

Long Term Average spread of AA over AAA over 10 years

Source for various data points: Bloomberg, NSDL, CMIE, RBI, Kotak Institutional Research, Worldometers.info, World , Daily valuation provided by ICRA/CRISIL 5/6 Market Review - November 2020

Glossary

CPI Consumer Price Index CPSEs Central Public Sector Enterprises CRR Cash Reserve Ratio ECB European Central Bank EMs Emerging Markets FPI Foreign Portfolio Investment GDP Gross Domestic Product GVA Gross Value Added HTM Held To Maturity IMPS Immediate Payment System LTRO Long Term Repo Operation MNC Multinational Corporation M-o-M Month on Month MPC Monetary Policy Committee NPA Non-Performing Assets PLI Production Linked Incentives PMI Purchasing Managers’ Index SLR Statutory Liquidity Ratio TLTRO Targeted Long Term Repo Operations UPI United Payment Interface

DISCLAIMER

This document contains our views as on December 09, 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. The information herein is based on the assumption that COVID19 would be behind us by March 2021 and the economy would bounce back by FY22. However, if impact of COVID19 continues after March 2021, various scenarios presented in this document may not hold good. 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 his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

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