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Economy and Markets Current Context

Aggregation of Monetary measures and Fiscal stimulus announced by RBI

Measures announced by RBI

MONETARY MEASURES
Liquidity Measures by RBIAmount (Rs. lac crores)Remarks
LTRO1Conduct at the Policy repo rate
TLTRO 1.01Liquidity availed under this facility has to be deployed in investment grade CP’s, Corporate Bonds and NCD’s over and above their investments in Bonds with 50% each in Primary and Secondary
TLTRO 2.00.5Liquidity availed under this facility has to be deployed in investment grade CP’s, Corporate Bonds and NCD’s of NBFC’s over and above their investments in Bonds with at least 50% of the total amount availed going to small and mid-sized NBFCs and MFIs
Refinance facilities0.5Advances to NABARD, SIDBI and NHB at the policy repo rate at the time of availment to enable them to meet sectoral credit needs.
CRR1.37CRR reduced by 100 bps to 3% of NDTL for all banks to release primary liquidity of Rs 1.37 lac crores uniformly across banks in proportion to their liabilities of constituents and Minimum daily CRR maintenance reduced from 90% to 80%
MSF1.37Additional Rs 1.37 lac crore available under LAF window at times of stress - Increase in overnight borrowing limit from 2% to 3% (discretionary overnight borrowing by dipping into SLR) applicable upto 30th June 2020
Special Liquidity facility for mutual funds0.5Special 90-day liquidity facility for mutual funds to ease the liquidity strains which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects.
Liquidity Coverage Ratio1.37LCR requirement for Scheduled Commercial Banks is being brought down from 100% to 80% with immediate effect to be gradually restored back in two phases
OMO purchases0.4Conducted OMOs
USD-INR Sell Buy Swap Providing dollar liquidity by having conducted US$4bn worth of USD-INR sell buy swap
Moratorium on Term Loans All commercial banks and NBFC’s to allow moratorium of 3 months on payments of installments in respect to all term loans, now extended by another 3 months upto 31st Aug 2020
Deferment of Interest on Working Capital Facilities All commercial banks and NBFC’s permitted to allow deferment on payments of Interest on Working capital facilities by 3 months, now extended by another 3 months upto 31st Aug 2020.
Easing of Working Capital Financing  All commercial banks and NBFC’s may recalculate drawing power by reducing margin and / or by reassessing working capital cycle for the borrower - time extended from 31st Aug 2020 to 31st March 2021, Reassessment of working capital cycle – time extended from 31st Aug 2020 to 31st March 2021
WMA limit WMA limit of states has been increased for Central govt and state governments
Total Liquidity quantum8.01 
Rates Measures announced by RBI
RatesPrior to 27th March 202027th March 202017th April 202022nd May 2020
MSF Rate (Marginal Standing Facility)5.40%4.65%4.65%4.25%
Repo Rate – Rate at which Banks borrow from RBI5.15%4.40%4.40%4%
Reverse Repo Rate – Rate at which banks park monies with RBI or lend to RBI4.90%4%3.75%3.35%
Policy Corridor – difference between Reverse repo and MSF0.50%0.65%0.90%0.90%
LAF Corridor – difference between Repo and Reverse Repo0.25%0.40%0.65%0.65%
  • Impact of the RBI announcements have been positive for rates. We expect overall yields to come down further, with bull steepening of the yield curve- shorter tenure rates coming down more than longer tenure.
  • Given the impact on growth (resultant of lockdown) is more adverse and severe, we expect GDP growth rates for the next year would be sub-zero (negative growth) and CPI inflation to be around 4 % by March 2021.
  • We expect RBI to cut repo rates further by another 50 to 75 basis points, in the next few months
  • 10 year benchmark g-sec yield expect to be range bound in the coming month with yields drifting lower gradually with the ten-year G-sec yield moving towards 5.50 % levels.

Fiscal Stimulus

FISCAL STIMULUS
SegmentAmount (Rs lac crores)Fiscal cost (Rs lac crores)Remarks
MSMEs
Collateral free Automatics Loans30Definition of MSMEs has been revised and investment limit hiked to incentivize MSMEs to grow, global tenders disallowed for tenders upto Rs 200 crs, E Market linkage across board to MSMEs , 7. CPSEs and Govt of India will clear all o/s payments due in next 45 days
Credit guarantee to Subordinate Debt0.20.04
Equity infusion in MSMEs0.50.1
EPF
Liquidity relief for all EPF establishments0.0960.028EPF contribution to be paid by govt for establishments with upto 100 employees with 90% paid lower than 15k per month, support extended till 31st Aug 2020 Statutory contribution by employers reduced from 12% to 10% (for those establishments not covered above) – for next 3 months till Aug 2020
NBFCs / HFCs / MFIs
Special liquidity scheme0.30Investments in both primary and secondary market for buying investment grade debt securities fully guaranteed by Govt.
Additional liquidity infusion through partial credit guarantee scheme for NBFCs0.450Additional liquidity infusion through partial credit guarantee scheme for NBFCs vide Primary debenture and / or CP issues participation, 20% first loss guarantee by govt, no rating criteria
DISCOMs
Liquidity infusion0.90PFC and REC to do it against all the receivables - Guarantees will be given by States, Discoms will get funds and will pay to generation companies, who in turn will pass the benefit back to customers.
Real Estate
Measure for Real Estate  Extension upto 6 months for registration and completion dat
Direct Taxes
Reduction in TDS and TCS rates0.50TDS and TCS rates reduced by 25% from existing rates for all non-salaried residents – applicable on all payments
Other Measures
Migrant Workers - Free food grains0.0350.035Technology systems to be used to access PDS. Additionally, affordable rental accommodation for Urban poor
Street Vendors - Special Credit facility0.050
MUDRA Loans0.0150.015Interest subvention support of 2% under Mudra Shishu loan
Housing0.70Credit linked subsidy scheme for affordable housing expended till March 2021
Farmers0.30Additional Emergency Credit Support for farmers
Concessional Credit20Concessional credit to PM-KISAN beneficiaries through Kisan Credit Cards
MNREGA0.40.4Increased allocation by Rs400 bn to provide employment boost, to address need for new work including returning migrant workers in monsoon season
Infrastructure and Capacity building1.50.48For agri infrastructure, micro-food enterprises, Fishermen, Animals and animal husbandry, herbal cultivation, beekeeping, Extention of operation green,
Social Infrastructure0.0810.081Enhance viability gap funding for social sector projects
Total11.0271.179 

Countries – Size of fiscal stimulus, Current Debt levels

CountriesSize of fiscal stimulus (% of GDP)Public Debt to GDP FY20EFiscal deficit as a% of GDP FY20E
India1.069.0(4.1)
US8.0101.9(5.8)
UK2.9105.7(2.1)
Canada5.783.9(0.4)
Australia7.041.7(3.7)
Germany4.968.11.4
Japan3.8229.8 (2.8)
Source: Bloomberg
  • In case of India, given the constraints on the fiscal deficit as well as the tightrope walk on the credit rating, the size of fiscal stimulus announced is the optimum quantum of response which maximizes the support while minimizing the actual fiscal cost

Impact on Sectors - India

OutlookSectors
Mild Impact / Quick recoveryMild Impact / Quick recoveryTelecomPower and gas UtilitiesConsumer StaplesSpecialty Chemicals
Sharp impact with medium term growth resumption and better risk reward nowLarge banks with liability franchiseWell capitalised NBFCs in auto financeConsumer discretionaryIT ServicesInsurance
Sharp impact with long drawn recoveryHotelsTravel and AviationCommercial real estateSME and retail lendersMultiplexes
 Very HighHigh Credit RiskMediumLowVery Low

Our Equity Portfolios – Current Context

  1. Gradual deployment of idle cash in equity mutual funds on corrections; equities exposure in BAF to be calibrated with PER model taking into account the cut in FY21 EPS.
  2. Mindful of the need to maintain balance between Defense (stability of the portfolio in current times) and Offence (beta of the portfolio in case the pace of the recovery surprises positively).
  3. The diversified equity schemes of Tata Mutual Fund had Neutral to Overweight position in the consumption sector which helped performance although positioning in the discretionary consumption (including Autos) has become lighter. Consumer staples weight has remained largely constant through the post-Covid period. d) In the BFSI sector we have reduced weight especially in weaker and liability-challenged banks to de-risk the portfolio. We are currently Underweight to Neutral as compared to Overweight/Neutral earlier. This has been brought about by primarily reducing our exposure to weaker private banks and cyclical NBFCs. Some of this has been offset by increase in exposure to General Insurance within the Financials space. In the Banking sector fund, we have tactically added weight on large private sector funds at recent lows. Our exposure to NBFCs, which was low to start with, has reduced further (we hold couple of strong NBFCs only).
  4. We have added to the pharma weight in the diversified equity schemes of Tata Mutual Fund, from being Underweight earlier, with the new additions being primarily in the large cap generics space.
  5. In IT Services, we remain UW across all diversified funds with only minor change in the past 3 months. In addition, our weights are dominated by toptier IT companies which are more resilient to a potential global downturn in IT spending.
  6. Telecom, Utilities – Telecom weight has been increased directly through pure play listed telecom operator as well as conglomerate exposure (with large telecom presence). Similarly, lower gas prices and relative insulation to the lockdown has led u to increase weight on Gas and Power Utilities.
  7. Completely avoiding sectors which are leveraged and where growth impact is very high - like Hotels / travel, Construction, and Micro-Finance.

Update on Tata Balanced Advantage Fund

  • At present the scheme is using P/E based model for net long equity allocation. This model takes into account the forward PER and not just the trailing PER based on static trailing EPS. This gives the model an advantage over other trailing PER based-only models that can result in higher allocations into equity, and earlier than warranted. Tata BAF had the lowest equity allocation of approx. 40% as the markets entered the corrective phase in March. This led to much smaller drawdown in the fund NAV during March relative to the benchmarks. The subsequent correction in average PE during March has led to higher equity allocations during March. This trend has continued further in April).

Our Debt portfolios- Current Context

  • We have maintained that the credit environment looks challenged and we had anchored our portfolios to safety. Our premise of Safety, Liquidity and Returns (SLR) in that order has held us in good stead and we are confident that it can help us navigate this turn of events very well.
  • Our portfolios consist of companies which are sovereign, PSU or high quality corporates with strong balance sheets, parentage and corporate governance.
  • Out of the current AUM of 100% fixed income open-ended funds, 99% of our AUM is high quality in A1+/AAA, Sovereign and Cash & cash equivalent. Our portfolios have a skew towards high quality PSU Issuers.
  • Corporate bond yield spread is expected to come down as RBI does more Targeted Long Term Repo Auctions for the corporate sector (increase in demand) even though supply in this segment is expected to remain high due to the lockdown. Given we are positioned overweight on short and medium end of the yield curve in the corporate bond space, we expect spreads to compress further, thereby positively impacting our medium term oriented funds.
  • Shorter end of yield curve (1-3 years) would be greater beneficiary as ample liquidity and lower reverse repo rate would boost allocations here. Our funds at the very short end of the yield curve are positioned well to take advantage of the same.

Economic Activity

Year ending March 312017201820192020E2021E
Agriculture6.85.92.43.5 - 3.72.9 - 3.0
Industry7.76.32.43.5 - 3.72.9 - 3.0
Mining9.84.9-5.81.2 -1.4 
Manufacturing7.96.65.70 - 0.1 
Electricity1011.28.23.5 - 3.6 
Construction5.956.11.2 -1.5 
Services8.56.97.76.8 - 6.8(3.0-3.5)
Trade, Hotel, Transport, Communication7.77.67.75 - 5.1 
Financial, Real Estate, Professional Services8.64.76.87 - 7.1 
Public Admin, Defence, Others9.39.99.48.3 - 8.7 
Real GDP8.376.14.5 -4.7(4.0 - 6.0)
Source: Bloomberg (for actual figures)
  • Degrowth in GDP in 2020 is expected to be contributed more by Industry followed by Services while Agriculture will be least impacted.
  • Gradual recovery post lockdown will lead to a decline in manufacturing and construction and is expected to bear a 13-14% negative growth in FY2021.
  • Agriculture growth will slow down but still witness positive growth this year and next.
  • Services would be impacted by the second order impact of lockdown resulting in a negative growth zone in FY2021, albeit modest compared to Industry/Manufacturing.
  • As a result, India’s GDP is expected to be negative 4-6% in FY2021

Credit Growth Outlook

Sub segmentGrowth OutlookAsset Quality Stress
Near term (3 months)Medium Term (12-18 months)
Infrastructure FinanceLowLowLow
Housing FinanceLowMediumLow
Auto Finance - CarsLowMediumLow
MSME FinanceLowLowHigh
Wholesale FinanceMediumMediumMedium
Gold FinanceLowHighLow
Micro FinanceLowHighLow
Loan growth impactHigh / Medium / Low
Passenger carsMedium
Commercial vehiclesHigh
Two wheelersMedium
Consumer durablesMedium

Valuations

Nifty Trailing Price Equity Ratio (PER) declined sharply in line with the market correction and bouncing up from the -1SD levels witnessed in end-March. In comparison, the Nifty forward PER did not approach the -1SD levels as the sharp cut in FY2021 EPS (approx. 20% so far; Source; Bloomberg Consensus) resulted in a slightly less decline in forward PER. As a result the forward PER is trading closer to the long term average presently.

Nifty Trailing Price to Earnings
Nifty Trailing Price to Earnings

Nifty Forward Price to Earnings
Nifty Forward Price to Earnings

Nifty Earnings Per Share (EPS)
Nifty Earnings Per Share

Nifty midcap index Price to Earnings Ratio (PER) valuation - Premium/Discount over Nifty 50

In this context, it is interesting to note that the Nifty Midcap PER is trading at a reasonable 15-20% discount to Nifty 50 implying that the risks associated with midcap segments are seemingly factored in.

Nifty midcap index Price to Earnings Ratio (PER) valuation - Premium/Discount over Nifty 50

 

One year forward P/E multiple of Nifty-50 Index and MSCI EM Index
India’s valuation premium to MSCI EM has come down to 30% which is at the lower end of the historical range as seen in the chart below. This signifies that despite the near term pressure on GDP growth and corporate earnings (a combination of Covid spread, lockdown removal and modest fiscal package), the present valuations are beginning to factor in the risks. While further volatility cannot be ruled out, any further correction in the Indian markets relative to the other EMs will; make it further attractive from the present levels.

Economy and Markets Current Context Banner

Macro - Global

Global MacroCurrent Period FY20-21 Previous Period FY19-20
Advanced Economies GDP Growth-6.11.7
Emerging and Developing Economies GDP Growth-13.7
Value of global trade (in USD Trillion)12.86 to 16.4518.886
Global Manufacturing PMI (April'20 vs March)39.847.3
Global Services PMI2436.8
Source: Bloomberg

Macro - Domestic

Domestic MacroFY20-21FY 19-20
GDP recent actual and estimates (Growth in %)-1.54.4
Inflation recent actuals and further estimates (YoY)4.84.8
Fiscal deficit (Central Govt as a % of GDP)5.53.8
Current account balance as % of GDP0.2-0.8
Forex Reserve in USD Billion487.9477.8
External debt In USD Billion (Actual - Dec'19) 563.9
Exchange rate – Rupee Dollar75.665(current rate)75.39
10 year yield5.74 (current 10 year)6.14
Manufacturing PMI27.452.4
Services PMI5.451.9
Credit Growth9.56.5
IIP -0.7

Asset Prices
(All Data as on 22nd May 2020)

Global Equity Markets

Index NameCountryClosing price as on 31st Dec 2019Closing price as on 22nd may 2020% change
Dow Jones Industrial AverageUSA28,538.4424,465.16-14%
NASDAQ CompositeUSA8,972.609,324.594%
Eurostoxx50Eurozone3748.472905.47-22%
FTSE100UK7,542.446015.25-20%
Hang SengHong Kong/China28189.7522926.82-19%
Nikkei225Japan23656.6220394.06-14%
Source: Bloomberg

India Sectors

Index Name3 Months1 Year3 Years5 Years
S&P BSE AUTO-24.73%-29.70%-17.13%-7.38%
S&P BSE Bankex-43.95%-41.80%-8.16%-1.24%
S&P BSE Consumer Durables-33.88%-25.54%5.33%11.83%
S&P BSE Consumer Disc Goods &
Services
-27.33%-23.00%-8.41%1.30%
S&P BSE FMCG-10.06%-11.58%1.37%5.65%
S&P BSE Capital Goods-33.25%-40.82%-14.45%-7.77%
S&P BSE Energy-10.04%-8.76%8.97%11.83%
S&P BSE Finance-41.86%-38.63%-7.82%-0.15%
S&P BSE Healthcare6.76%16.76%2.02%-1.90%
S&P BSE Industrials-32.96%-36.87%-16.58%-9.24%
S&P BSE IT-14.18%-7.74%11.39%4.84%
S&P BSE METAL-35.72%-41.88%-17.78%-8.88%
S&P BSE Oil & Gas-19.99%-26.93%-7.09%3.19%
S&P BSE Power Index-23.02%-26.24%-14.46%-7.17%
S&P BSE Realty-44.79%-38.05%-14.05%-3.83%
S&P BSE Telecom5.53%33.88%-0.23%-2.96%
S&P BSE Utilities-21.03%-24.28%-10.69%-2.36%
S&P BSE Sensex-25.50%-21.57%0.11%1.87%
S&P BSE 500-25.49%-22.58%-3.32%1.30%
Nifty 50-25.18%-22.99%-1.43%1.34%
Nifty Midcap 100-30.05%-26.98%-10.58%-0.65%
Nifty Smallcap 100-37.51%-39.74%-19.07%-7.01%
Source: MFI ICRA

Fixed Income – Yield movement

SecurityYield as on 22-May-20Yield as on 31-Mar-20Yield As on 1-Apr-19Fall in yields between 31-Mar -20 and 22-May -20Fall in yields between 1-Apr-19 to 22nd May-20
3 Month CD3.154.826.75-167-360
3 Month CP45.36.9-130-290
3 Month G-Sec2.74.256.31-155-361
6 Month CD3.555.227.33-167-378
6 Month CP5.16.47.6-130-250
6 Month G-Sec3.434.66.26-117-283
12 Month CD4.15.477.48-137-338
12 Month CP5.86.727.65-92-185
1 Year AAA (PSU)4.555.977.76-142-321
1 Year G-Sec3.554.86.56-125-301
3 Year AAA (PSU)5.356.547.79-119-244
3 Year G-Sec4.675.396.7-72-203
5 Year AAA (PSU)5.757.028-127-225
5 Year G-Sec5.435.586.87-15-144
10 Year AAA (PSU)6.87.158.41-35-161
10 Year G-Sec5.966.147.35-18-139
Source: Bloomberg

Disclaimer: The views expressed are of Tata Asset Management Ltd. and are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed may not reflect in the scheme portfolios of Tata Mutual Fund.

Balanced Advantage fund

Schemes strategies are subject to change without prior notice.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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