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Equity Market
Update
Equity markets globally told a tale of two halves from February to June 2020
Monthly Report
with the first half in February and March witnessing a sharp unprecedented
fall while the second half since then witnessed a sharp recovery.
Both the ~40% fall in headline indices and ~35% recovery was
unanticipated and took most market participants by surprise. While volatility
in the market is a known fact, many investors time and again get swayed by
the noise around them and forget the basic principle of investing more
during a fall and not shying away from it. Investors who followed the basic
principle of systematic accumulation at every market level again stand
vindicated.
As Covid-19 remained at the forefront and economies continue to reopen,
in May there was particular strength in the US and other markets like Japan
while Asia underperformed. European markets were mixed. Developed
markets outperformed emerging markets as can be seen below, mainly on
account of larger stimulus programmes.
New Covid-19 cases peaked in most developed countries though cases still Global markets, after witnessing a sharp fall, seem
continue to rise across the developing world. In this situation, it seems to be stabilising on the back of strong monetary
developed countries will be successful in rebooting their economies, support from major central banks across the globe.
sparking optimism in investors and pushing markets higher. Indian equity markets, following a global trend, after
falling sharply by ~35-40% in February, March, have
Outlook
Overall, markets are likely to undergo healthy consolidation in the near term
post a sharp recovery since March lows. Empirically, most prominent
observation seen post major correction (~40%) is that, the index has
undergone a basing process for the next six to nine months that have offered
portfolio building opportunities from a long term prospective. Hence, any
dip from here on should be capitalised on to accumulate quality stocks in a
staggered manner.
Warren Buffett, one of the most respected investors of all time, once said
that as an investor, it is wise to be “Fearful when others are greedy and
greedy when others are fearful.” The current environment is surely reflecting
the fear in market. Hence, it is up to an investor to decide whether she wants Research Analyst
to follow Warren Buffet or not. Sachin Jain
sachin.ja@icicisecurities.com
Equity markets perform in cycles. While investing, one needs to ensure that
investment is made at the lower end of the market cycle. Conversely,
lumpsum investment should be done when historical returns are negative
or lower than long term average. The current environment offers an
opportunity to invest at the lower end of the market.
From a tactical perspective, given the markets have rallied sharply since
March lows, lumpsum investment may be avoided. It is better to follow a
buy on dip investment approach.
Monthly Report | Mutual Fund Review ICICI Direct Research
Debt Market
Update
The Monetary Policy Committee (MPC) had yet another out of policy
meeting and delivered a 40 bps repo rate cut on May 22, 2020.
The RBI assessment is that CPI will fall over the second half of the year and
fall below the 4% target over Q3 and Q4 of the financial year. Importantly,
the forward guidance is strong noting space for further easing will open up
if CPI behaves as expected.
Although the RBI has not provided an explicit growth forecast, it has now RBI estimates that the risks to growth are acute
acknowledged a negative print for FY21. The silver lining they noted is in while those to inflation may be temporary. Hence,
agriculture where Kharif sowing is robust. Hence, effectively the focus is on effectively the focus is on reviving growth through
reviving growth through rate cuts and other liquidity measures as inflation rate cuts and other liquidity measures as inflation is
is not a concern. The market, however, continues to await any concrete plan not a concern
on OMOs to counter higher G-Sec (both central and state) supply.
The Government of India also unveiled a stimulus package totalling almost
| 21 lakh crore including around | 8 lakh crore worth measures announced
by the RBI. A substantial portion takes the form of liquidity and lending
support programmes run by entities in the public sector as well as support
in the form of guarantees by the sovereign that is aimed to incentivise
commercial lending to parts of the economy. Debt market took the overall
announcement as positive as the cash outgo for the year is far lower and,
accordingly, may not impact the supply as higher as was earlier expected.
Due to difficulty in data collection and limited number of transactions, full Central government raised its targeted gross market
data related to CPI was not released for April 2020. However, data of some borrowing by | 4.2 lakh crore to | 12 lakh crore for
sub-components (~62% of original index), mainly consisting of food, FY21 to cover the expected shortfall in revenues and
housing and health etc, was published. The limited data suggests there was to fund the proposed stimulus. However, yields
broad based pick-up in food inflation. This could be partly due to supply remained soft on back of high system liquidity, weak
disruption and hoarding up by consumers during the lockdown. Supply side credit growth and expectations of interventions by
disruption can keep CPI at elevated in near term but it should moderate in RBI
H2FY21 on account of base effect and easing of supply restrictions.
Outlook
RBI's decision to reduce the policy repo rate by 40 bps during the month was
largely in line with market expectations. Over the past few months, RBI has
conducted operation twist, LTROs, TLTROs, open markets purchases, etc.
These actions along with the RBI Governor's statement about benign
inflation and challenging growth outlook indicates that RBI is open to
undertaking further conventional and unconventional policy measures to
counter the impact on slowdown due to the pandemic.
Overall, weak oil prices, positive outlook on balance of payment, benign
inflation outlook, low global rates and easing liquidity by major central banks
bodes well for yields in India and there is some room for yields to decline.
The 10 year G-Sec yield currently trades ~6.0%, down by around 10 bps
since the RBI rate cut announcement. The overhang of larger supply from
both central and state government is preventing yields from trending lower.
As the monetary policy stance remains accommodative, RBI will continue to
provide more than adequate liquidity and continue its focus on transmission
of rates. The major focus for the RBI now is transmission of rates. Hence, it
could continue to use all tools possible to keep yields lower.
Industry Synopsis
The mutual fund industry AUM rose 2.6% in May 2020 to ~| 24.5 lakh crore
from | 27.2 lakh crore in February 2020.
Debt markets witnessed inflows across category apart from liquid fund as
heightened risk aversion returning to normalcy. Most category of debt funds
receive inflows during May as better outlook of further rate cuts and liquidity
measures push yields lower. Funds with relatively higher lower rated papers
like credit risk funds and medium duration continue to witness outflows.
Credit funds have seen continuous outflows since April 2019, resulting in a
significant reduction in the AUM of the category from around | 80000 crore
in April 2019 to | 30000 crore in May 2020. Similarly, medium duration fund
category has declined from around | 36000 crore to around | 20000 crore
during the same period. On the other hand, banking and PSU fund and
corporate bond fund category saw their AUM rising to | 90000 crore from
| 36000 crore and to | 92000 crore from | 61000 crore, respectively.
The inflows into equity funds continued but the pace has declined over the
last two months with May seeing inflows of | 5257 crore compared to | 6213
crore in April and | 11723 crore in March 2020.
363420
317550
169046
136150
106312
137192
77306
61%217181
72%
80% 400000
182499
350000
59%
55%
53%
60% 300000
49%
48%
47%
47%
46%
46%
45%
44%
43%
42%
250000
37%
| crore
34%
33%
40% 200000
31%
150000
18%
20% 100000
11%
11%
11%
10%
10%
9%
9%
8%
8%
6%
50000
0% 0
ICICI Pru
UTI
Franklin
HDFC
Nippon Life
Kotak
Aditya Birla
SBI
Axis
IDFC
Exhibit 2: Among major AMCs, Axis, Mirae, Invesco witness Exhibit 3: In debt, Axis, IDFC, HDFC see highest AUM
growth in equity schemes while rest saw decline growth in last one year
Kotak
DSP
Nippon Life
Tata
IDFC
Axis
Kotak
ICICI Pru
UTI
DSP
SBI
Axis
Invesco
Motilal Oswal
Birla Sunlife
40000
20000
-20% 0
-20% 10000
Category Analysis
Equity Funds
The last four months of February-May witnessed a roller coaster ride for the
equity markets with markets correcting around 40% from February highs to
March lows. From the lows in the last week of March, markets bounced back
more than 35% from the lows.
While investor’s seem so much worried about Covid-19 related market fall,
in the last six months, market cap funds (large/mid/small/multi cap) category
average return is between -12% and -14%.
Sectorally, it has been an extremely polarised market with the pharma sector
outperforming significantly while banking witnessed the brunt of NPA
concerns due to the countrywide lockdown.
Exhibit 4: Significant outperformance by pharma funds in last few months while banking funds underperform significantly
30
20
10
Returns (%)
-10
-20
-30
Midcap
Small Cap
Multicap
ELSS
Large Cap
Pharma Funds
Focused Funds
Technology Funds
Consumption Funds
Banking Funds
Infra
International Funds
0.0
-10.0
-20.0
-34.8 -35.6 -35.9 -34.7
-30.0 -36.9
-40.0
Feb High to March Lows March Lows to 10th June
Large Caps Multicap Large&Midcap
Source: ACE MF
Exhibit 6: Monthly flows: Large cap funds receiving higher inflows in last two months
2,500
2,000
1,500
1,000
500
-
-500
Large Cap Fund
Focused Fund
Fund/Contra
Dividend Yield
Cap Fund
-1,000
Value
Fund
Fund
May-20 Apr-20 Mar-20
Source: Amfi
Exhibit 8: ETF AUM declines despite inflows due to mark to Exhibit 9: While inflows continue, pace decline with reduced
market fall in value inflows in last three months
20000 16344
200000
15000 12353 12673
Net Inflow ( | Cr )
150000 10000
5383 5906
| Crore
4835
5000 2432 2954 1873
1033 1018
100000
0
-179
50000 -5000 -1718
Oct-19
May-19
Nov-19
Mar-20
May-20
Sep-19
Jun-19
Jul-19
Aug-19
Dec-19
Jan-20
Feb-20
Apr-20
-10000
Nov-19
Oct-19
May-19
Jul-19
Mar-20
May-20
Sep-19
Jun-19
Aug-19
Dec-19
Jan-20
Feb-20
Apr-20
Equity ETFs
Equity ETFs
Hybrid funds
The hybrid funds category is dominated by aggressive hybrid funds
(erstwhile balanced funds) and balanced advantage or dynamic asset
allocation funds.
The trend of outflow continues in the aggressive hybrid category. The
category has witnessed outflows of | 23000 crore since April 2019.
Dynamic asset allocation category, on the other hand, witnessed inflows for
most months since April 2019.
Arbitrage funds witnessed inflows of | 10800 crore in May. The category has
witnessed consistent inflows over the last many months now.
Exhibit 12: Outflow in aggressive category continues Exhibit 13: Trend of outflow in aggressive hybrid funds,
inflows in balanced advantage fund continues
10000
Inflow/(Outflow)
8000 Hybrid Category AUM
during May 2020
6000
Balanced Hybrid Fund/Aggressive Hybrid Fund (978) 107,221
Net Inflow ( | Cr )
4000
Dynamic Asset Allocation/Balanced Advantage (401) 81,510
2000
Arbitrage Fund 10,806 69,311
0
Equity Savings (393) 10,955
-2000
Multi Asset Allocation (40) 10,765
-4000
Conservative Hybrid Fund (342) 10,495
-6000
Source: AMFI
Feb-19
Nov-19
Feb-20
May-18
Nov-18
May-19
May-20
Aug-18
Aug-19
Aggressive Hybrid
Source: AMFI
Debt Funds
Exhibit 14: Sharp fall in G-sec yields led duration/gilt funds to outperform significantly last year. Average return of credit funds
negative due to negative returns in few funds
20
19.5
17.5
14.4
13.4
15
12.7
10.8
10.6
10.5
10.5
11.2
9.7
10.6
8.5
10
8.0
7.6
7.1
7.1
7.1
6.9
7.3
6.8
6.6
6.5
6.2
6.0
5.8
5.7
Returns (%)
5.3
5.3
5.3
4.9
4.6
4.5
4.4
4.4
4.3
3.8
5
2.6
2.2
1.8
0
-0.2
-4.5
-5
Medium Duration
Low Duration
Short Duration
Liquid
Overnight
Credit Risk
Medium to Long Duration
Long Duration
Gilt Funds
Money Market
Dynamic Bond
Corporate Bond
Interest rates are different for every nation, with varying impact upon their
economies and the price of gold in those countries. Rates in the US have a
greater influence than most. As gold is predominantly traded in US dollars,
its interest rates have a significant impact on gold price.
Currently, where around 25% of developed market sovereign debt is trading
with negative nominal rates and, once adjusted for inflation, a significantly
higher amount trades with negative real rates, the opportunity cost of gold
almost goes away, even providing what can be seen as a positive “cost of
carry” relative to sovereign bonds.
Gold prices have responded to the surge in negative real-yielding debt, as
evidenced by the strong positive correlation between the amount of debt
and price of gold over the past four years. To some degree, this illustrates
the erosion of confidence in fiat currencies related to monetary intervention.
Gold is the best way to hold US dollar asset in the portfolio. Future US dollar
requirement also necessitates gold requirement for an Indian investor’s
portfolio. US dollar may be required for financial goals like children’s study
in a global management or other institute, foreign vacation, buying any
foreign asset in future, etc. Gold is the best way to own a dollar asset as all
other asset classes like overseas funds, gold mining companies, etc, have
higher underlying volatility. Sovereign gold offers one of the best way to
hold gold if interment liquidity is not in consideration.
12.0%
11.6%
11.2%
%
11.0%
11.0%
10.0%
Source: ACE MF. Since inception (May 2009) CAGR return as on May 31, 2020
6.0%
5.0%
0-6 Months 6Months - 1Year Above 1yr
Portfolio Index
Source: ACE MF. Since inception (May 2009) CAGR return as on April 17, 2020
Note: Index: 0-6 month’s portfolio – Crisil Liquid Fund Index; six months-one year – Blended Index with 50% weight to Crisil
Liquid Index, 50% weight to Crisil Short Term Bond Fund Index; Above 1 year: Crisil Short Term Bond Fund Index
Disclaimer
ANALYST CERTIFICATION
We, Sachin Jain, CA, Research Analyst, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject
issuer(s) or Funds. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
ICICI Securities Limited (ICICI Securities) AMFI Registration. No.: ARN-0845. Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India. ICICI
Securities Limited is a Sebi registered Research Analyst having registration no. INH000000990. ICICI Securities Limited Sebi Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of
ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund
management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.
ICICI Securities is one of the leading distributors of Mutual Funds and participate in distribution of Mutual Fund Schemes of almost all AMCs in India.
The selection of the Mutual Funds for the purpose of including in the indicative portfolio does not in any way constitute any recommendation by ICICI Securities Limited (hereinafter referred to as ICICI
Securities) with respect to the prospects or performance of these Mutual Funds. The investor has the discretion to buy all or any of the Mutual Fund units forming part of any of the indicative portfolios on
icicidirect.com. Before placing an order to buy the funds forming part of the indicative portfolio, the investor has the discretion to deselect any of the units, which he does not wish to buy. Nothing in the
indicative portfolio constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the investor's specific circumstances.
The details included in the indicative portfolio are based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy
or completeness guaranteed. The funds included in the indicative portfolio may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives,
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liabilities for any loss or damage of any kind arising out of the use of this indicative portfolio.
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commission rates earned by ICICI Securities from Mutual Fund houses on our website www.icicidirect.com. Hence, ICICI Securities or its associates may have received compensation from AMCs whose
funds are mentioned in the report during the period preceding twelve months from the date of this report for distribution of Mutual Funds or for providing marketing advertising support to these AMCs.
ICICI Securities also provides stock broking services to institutional clients including AMCs. Hence, ICICI Securities may have received brokerage for security transactions done by any of the above AMCs
during the period preceding twelve months from the date of this report.
It is confirmed that Sachin Jain, CA, Research Analysts of this report have not received any compensation from the Mutual Funds house whose funds are mentioned in the report in the preceding twelve
months.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.
ICICI Securities or is associates may be holding all or any of the units included in the indicative portfolio from time to time as part of our treasury management. Hence, ICICI Securities or its associates may
own 1% or more of the units of the Mutual Funds mentioned in the report as of the last day of the month preceding the publication of the research report.
Research Analysts or their relatives of this report do not own 1% or more of the units of the Mutual Funds mentioned in the report as of the last day of the month preceding the publication of the research
report.
Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies/ AMCs including the AMCs whose
funds are mentioned in this report or may have invested in the funds mentioned in this report.