May, 2023

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India's GDP grew 4.4% in Q3FY23 but missed expected estimates of 4.6%. India is estimated to grow at 7% in FY23 as per RBI projections.

Composite PMI came in at 61.6 in Apr'23 compared to 57.6 a year ago amid quicker expansions at goods producers and service providers.

GST collections in April is up 12% YoY to 1.9 lakh Cr from 1.7 lakh Cr a year ago and has consistently been higher than 1.4 lakh Cr for the past year

FPIs continued their buying trend in the month of April with inflows of Rs. ~11,630 Crs

Forex Reserves have gone up and now stands at ~584 Bn USD.

Mar CPI inflation was at 5.7% and is below RBIs target inflation level of 2% to 6% again.

Trade deficit widened to $19.7 Bn in Mar'23 from $18.5 Bn a year ago. The deficit widened due to jump in oil prices over last month due to OPEC+ cut announcement

Lending and Term deposit rates have been increased with increase in RBI repo rate

Macro Economic Indicator Heat Map

Macro Economic Indicator Heat Map

Growth projections have slumped due to recession concerns in US & Europe

Despite concerns of rate hikes taking a toll on growth, India is expected to be one of the fastest growing major economies in CY23.

PMI numbers reflecting impact on global recovery due to macro headwinds

Global Negative-Yielding Debt has come down from 18.5 Tn USD in Dec'20 to 1.8 Tn USD in Apr'23

Fed has resumed withdrawing liquidity from the system after a brief injection to support the banking system and avoid default crisis

CRB commodity index has corrected from May'22 highs of 644 and is currently trading at 547 indicating a cool-off in metal & other commodity prices globally

Dollar Index resumed its downward trend despite investor worries around the possibility of further rate hikes by Fed.

OPEC+ has decided to reduce the supply by ~1.6 Mn bbl per day starting May'23 on concern that a global banking crisis would hit demand.

Market is now factoring a brief pause and start of rate cuts by the end of the year.

➢ The Fed hiked interest rates by further 25bps but the Fed's outlook on inflation, economy, and further interest rate cycle will continue to keep the market volatile.

➢ Fed will have to walk a thin line as far as the way forward is concerned because

• Job market data continues to be strong & core inflation is stickier than expected
• Further rate hikes could put banking system under further stress

➢ Potential headwinds to US markets

• Earnings downgrade
• Continued rate hike cycle and interest rates remaining higher for longer.

Select sectors are showing decent earnings outlook

➢ The Chinese markets remained flat in April post rally in March. The valuations, despite expansion, are still closer to 10 yr avg. P/E levels.

➢ China's economy got off to a solid start in 2023, as consumers went on a spending spree after three years of strict pandemic restrictions ended. GDP grew by 4.5% in 1Q on led by consumption, services and infrastructure, but easing inflation and surging bank savings are raising questions over the strength of domestic demand.

➢ Potential Headwinds to Chinese markets

• Real Estate Crisis blowing out of proportion
• Geopolitical Escalations with Taiwan

MSCI GD Index is trading at ~15% discount to its 5 yr average Fwd P/E levels

Macro indicators (barring real estate) are showing signs of recovery in China

Assets managed by the Indian mutual fund industry has increased from Rs. 37.7 trillion in Mar 2022 to Rs. 40.1 trillion in Mar 2023 with proportionate share of Equity schemes increasing from 48.9% to 51.6% with contributions from both MTM movement and positive inflows

SIP Flows have crossed 14k Crs for the first time. And, overall MF Flows bounced to 20,534 Crs in Mar'23 from 15,865 Crs a month ago.

Benchmark, Factor Indices & Sectoral Performance

Equity MF Category wise Performance (in %)

➢ Nifty Smallcap outperformed Nifty 50 & Midcap in April

➢ Auto & Banks led the sector rally while IT was the major drag for the market

➢ High Beta and Momentum factor rallied further compared to other factor indices

Developed Market Performance

Emerging Market Performance

➢ Global markets rallied in April as Fed took a dovish stance despite inflationary concerns.
➢ Geo-political tensions & fear of recession can keep the equity markets volatile in the near term

The market is now trading below its long-term 12-month forward. The composition of the index has also changed in favor of high quality, higher P/E stocks in the past few years.
The yield gap (diff. of bond & earnings yield) has narrowed from Oct highs and is within historical range, with rise in earnings yields

Nifty 50 Index valuations have tapered down from their November highs and are now trading below historical averages

Source: Bloomberg
Data is as on 30^th April, 2023

Nifty 50 levels at different P/E bands

Source: KIE, Bloomberg Estimates
Data is as on 30^th April, 2023

Indian markets rallied in April and are trading in the historical average range

Majority of the benchmarks and sectoral indices are trading at a discount to their historical averages after consolidation in the last 15 - 18 months

Market cap to GDP levels are still trading above their historical average but has come down from September 2021 highs

Earnings recovery is expected to remain uncertain amidst global macro concerns

The above material has been prepared solely for informational purposes and does not constitute or form part of any recommendation or advice.
Source: Bloomberg
Data is as on 30^th April, 2023

Majority of global markets advanced and are trading below their long term historical averages

Most of the global markets are trading at a discount relative to their historical 5 yr. Fwd P/E avg.

Indian markets are trading at relative premium compared to their peers but the premium has come down in the last 3 months

The above material has been prepared solely for informational purposes and does not constitute or form part of any recommendation or advice.
Source: Bloomberg
Data is as on 30^th April, 2023

Global Mkt Forward P/E

Source: Bloomberg
Data is as on 30^th April, 2023

Key events to watch out for

India

➢ Quarterly earnings report and management commentary

➢ Macro economic indicators

• ➢ GDP
• ➢ CPI, WPI
• ➢ PMI (Service, Manufacturing and Composite)
• ➢ IIP, Bond Yields
• ➢ Unemployment rate

Global

➢ Fed Monetary policy meeting

➢ Macro economic Numbers

• ➢ Inflation, Services & Manufacturing PMI, GDP, CPI, WPI, IIP from various geographies
• ➢ Unemployment rates across major economies

➢ Crude and Energy prices

➢ Evolving situation of geopolitical conflict between Russia and Ukraine

Source: Bloomberg

Key risks to the markets

➢ Impact of policy tightening & stimulus withdrawal (slowdown and earning downgrades)

➢ Inflation start rising again due to China re-opening and Central banks take longer to pause

➢ Escalation of geopolitical tensions between Russia & Ukraine.

➢ Adverse weather forecast amid predicting high probability of El Nino which can impact food inflation.

Source: Bloomberg

Equity Strategy

India

• The Q3 results and management commentary has been in line with expectations as far as domestic sectors are concerned (Banks, Consumption etc). Export oriented sectors, such as IT, Chemicals which are susceptible to subdued global demand have toned down their outlook and guidance.
• Global Economy is not in great shape; demand may remain muted.
• Although, there has been margin expansion (~11.8% vs. expectation of 11.5% reported so far), companies will struggle to maintain topline growth (which was supported by high inflation environment last year).
• On ground feedback is suggesting slowing demand in consumption sectors as rural recovery has been slow.
• Valuation have come to more reasonable range now due to time & price correction in the last 15 -18 months. India has underperformed global markets in last 3-5 months and thus premium to EMs have also come down. This has been corroborated by FII buying in the last couple of months.
• Apart from earnings disappointment, and global geo-political uncertainty, most of the headwinds are priced in and the possibility of further downside looks limited. A time correction for a quarter or two will bring the valuations to more sanguine levels.
• Markets may remain range bound. Next couple of quarters could provide good deployment opportunities from 2 - 3 year perspective. Companies with predictable and sustainable earnings outlook are expected to do well.

US

• US Fed hiked the rate by 25bps in May policy meeting and indicated pause in tightening cycle. Interest rates are expected to remain higher for longer before pivot as inflation remains well above Fed target of 2%.
• Core inflation continue to remain sticky. Barring housing market, which is showing signs of slowdown, the US economy and labor market continues to remain healthy.
• The Q1 results and commentary of the S&P companies which reported their numbers has been above. Almost ~80% of the companies (who have declared results) beat their earnings estimates. The quantum of earnings downgrade factored in valuations might continue to remain as potential headwind to the market.
• Fed has injected liquidity in order to stabilize the banking system (especially the smaller regional banks). But the defaults of regional banks has indicated that Fed might have to be cautious.

Source: Bloomberg

Equity Strategy

Source: Bloomberg

▮	Recommended Equity Funds' Performances

Source: MFI Explorer Returns are CAGR as on May 09, 2023 and for Regular Plans with Growth option. Corpus size is as on Mar, 2023.

▮	Recommended Equity Funds' Performances

Source: MFI Explorer Returns are CAGR as on May 09, 2023 and for Regular Plans with Growth option. Corpus size is as on Mar, 2023.

▮	Recommended Hybrid Funds' Performances

Source: MFI Explorer Returns are CAGR as on May 09, 2023 and for Regular Plans with Growth option. Corpus size is as on Mar, 2023.

▮	Policy Rates Movement Across the Globe

Source: Bloomberg, RBI, SBIMF Research

▮	India G-Sec Curve Movement - Unexpected Bullish Flattening

Source: Bloomberg, RBI, SBIMF Research

▮	External Sector pressures ease substantially

Source: Bloomberg, RBI, SBIMF Research

▮	Real Rates Movement Across Years

Source: Bloomberg, RBI, SBIMF Research

▮	Fixed Income Outlook

• RBI paused in the April monetary policy against market expectation of 25 bps rate hike.
• The Federal Open Market Committee (FOMC) announced another 25bps hike, taking its key fed funds rate to a target range of 5.00 to 5.25%. This unanimous decision of the FOMC is the 10th straight hike in the past twelve months. Several factors point to a likely pause from US Fed going forward:
  • The current rate is in line with median expectations of FOMC.
  • Fed has dropped references like "ongoing tightening will be appropriate", in its policy statement and instead said "will take into account various factors in determining the extent to which additional policy firming may be appropriate". Fed Chair added that tightening of bank lending standards is an additional headwind for economy.
• Bond yields have come down by close to 20-30 bps over last month post pause in RBI policy, demand from foreign banks, indication of no further rate hike from US central banks and falling crude prices (corrected by more than 20% in last month)
• Any global shocks aside, inflation levels in India are likely to remain below 6%. Erratic weather conditions can be a risk to food inflation and need to be watched out for.
• Considering all of the above mentioned points, we expect an extended pause from the MPC, as it evaluates evolving growth-inflation dynamics.
• Liquidity surplus has wiped out in FY23 and liquidity is near neutral as of Apr'2023. It could hover around these levels for the next few months as currency leakage is muted and FX related flows could be sideways.
• Credit spreads may see widening, with banking liquidity surplus close to nil. Incrementally the evolution of actual inflation and liquidity management will drive market trajectory.
• In the above backdrop, we expect the 10-year yield to trade in the range of 6.95-7.20% in the near term.

Source: Bloomberg, RBI, CCIL, Kotak Economist/SBIMF Research Reports

▮	Fixed Income Strategy

• G-Sec yields have come down by close to 20-30 bps over last one month
• Going forward, yields should stabilize in near term, short term investors should continue to prefer products with duration lower than investment horizon. Given the recent tax changes following is preferred strategy
• For investment horizon upto 12 months: Prefer allocation to arbitrage funds, ultra short term/ money market funds
• For investment horizon of 1-3 years: Active funds (Short Term Funds / Banking & PSU / Corporate Bond Funds), target maturity funds (roll down strategies)
• For investment horizon of 1-3 years -
  • Equity Savings Fund, a mutual fund scheme, which had a 3 year median rolling return between 7-8%* and attracts tax alike equities (15% short term if held for less than 1 year, 10% long term if held for more than 1 year) can be considered as an alternative option as it has potential to provide similar gross returns as short term/corporate bond funds, albeit slightly higher volatility, with better post-tax returns

Source: Bloomberg

▮	Indicative Prevailing Yields across Investment Options

Arbitrage funds can be looked at from a 6 months to 1 year perspective. Select quality issuer's corporate FDs can be considered for short term investments of up-to 3 years, subject to concentration and liquidity factors. Each categories should be looked at as per the above matrix in their respective mentioned tenures. All rates are tentative pre-tax estimates based on yields as of 4th May 2023. These are only indicative results and the actual returns may differ depending on underlying schemes, tenure of holding etc.

Source: Kotak bank website for Bank FDs, Others from NSE/BSE traded data

▮	Recommended Debt Funds' Performances

Source: MFI Explorer. Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. Returns as on May 09, 2023 and for Regular Plans with Growth option. Corpus size is as on Mar, 2023.

▮	Disclaimer

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