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Monthly commentary

July 2020

Opinions and commentary provided by Aditya Birla Sun Life Asset Management.

(Note: In India, the Financial Year runs April 1 to March 31, so the current period is FY 2020-21)

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Equity Market Recap

Domestic equity markets extended their rally in July, 2020, despite persisting concerns over the COVID-19 pandemic as market participants remained optimistic that a coronavirus vaccine would be developed. Better-than-expected corporate earnings for the quarter ended June, 2020, also added to the gains.

The fact that domestic equity markets continued to gain momentum reflects confidence among investors that the short-term tremors caused by the COVID-19 pandemic will be overcome and optimism that a long-term boom in the domestic economy could begin in the near future. Investors' behaviour also reflects the stock market’s tendency to look forward and past current events, which has helped to drive its recent recovery. A rebound in the domestic economy might not come about as easily because some existing structural issues have somewhat worsened due to the pandemic. These issues need to be addressed after the pandemic to foster a sustainable recovery. A report from IHS Markit indicates that the Indian economy is likely to rebound in the second half of 2020, as the impact of the pandemic recedes, and is projected to grow by 6.7% in the next fiscal year. Accordingly, investors will continue to monitor India’s economic health and improvement by closely tracking its indicators.

The global economy is going through a grave health crisis and a vaccine is the only solution. Until an effective vaccine becomes available, the road ahead will be bumpy, and countries may continue to shift their response back and forth between business as usual and lockdown as usual. Thus, looking forward, market performance will be dictated by how quickly the pandemic can be contained. Until then, the recovery is expected to be slow, steady and gradual.

Newsflow and Market Performance

Indian equities continued their upward momentum in July, with markets rebounding by 46% from their March lows to only 10% below their year-to-date all-time peak in mid January. Markets continue to move higher despite the relentless increase in daily new COVID cases and sharp earnings downgrades.

We are still seeing a rising trend in the number of COVID cases, although the fatality rate remains low. There are signs of reflation in the economy – pent up demand is evident—although it remains to be seen if this will be sustainable.

India’s Rural economy is a bright spot, with a normal monsoon and Kharif sowing higher year-over-year. Global macro-economic factors, such as low oil prices and stable currencies also continue to be in India’s favour.

Equity valuations are reasonable, with India’s Nifty 50 stock index trailing its price/book ratio about 13% below its long-term average.

Mid- and small-cap stocks are trading at relatively attractive valuations. Low interest rates and high liquidity can justify higher equity valuations going forward.

Equity markets are expected to remain volatile due to a resurgence of the coronavirus. However, accommodative fiscal and monetary policy and high liquidity should provide some support to stocks.

In the current environment, instead of a short term 1-year view, we feel it best to take a 3-year view as the economy and corporate earnings will likely have normalize within that timeframe.

Key events

Quarterly indicators Q4FY20 Q3FY20 Q2FY20 Q1FY20
GDP (%) 3.10 4.10 4.40 5.20
CAD as % of GDP 0.10 -0.20 -0.90 -2.00

Source: Refinitiv

FY2020 = Fiscal Year ending March 31st ,2020

Q4FY20: Quarterly ending March 31st, 2020
Q2FY20: Quarterly ending December 31st, 2019
Q1FY20: Quarterly ending September 30th, 2019
Q3FY20: Quarterly ending June 30th, 2019

Return Monitor

Indices, commodities & currencies   Returns (in %)
  Value as on
Julu 31, 2020
1 Month 6 months 1 year
MSCI India NR 568.64 8.56 -6.41 -1.45
MSCI India Small NR 378.24 5.63 -15.49 -6.28
Brent Crude (CAD/bbl) 58.67 1.70 -24.04
INR (per CAD) 55.84 0.37 3.31 6.98
INR (per USD) 74.81 -0.91 4.86 8.75

Source: Morgan Stanley, Refinitiv. Values and Returns as on July 31, 2020

Valuation Ratios

Ratios MSCI India NR MSCI India Small NR
P/E 24.61 43.65
1 Year forward PE 20.81
P/B 2.87
Dividend Yield 1.21% 1.34%

Source: Morgan Stanley. Values and Returns as on July 31, 2020

Market Outlook

Key Factors Analysis Impact
Global Economic Growth
  • Globally, economies are seeing a recovery with indicators lke PMI showing an improvement although resurgence of the virus has been seen in a few countries.
  • Fiscal and monetary policy will remain highly accommodative and liquidity will remain high, which should support the economic recovery.
arrow showing no change
India Macroeconomic Growth
  • Rising trend in number of COVID cases although fatality rate remains low.
  • Sings of reflation in economy – pent up demand seen, although needs to be seen if it will sustain.
  • Key high frequency indicators showing improvement although some are flattening out.
  • Rural economy is a bright spot with normal monsoon and Kharif sowing higher YoY.
  • Global macro factors such as low oil prices and stable currency continue to be in India’s favour.
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India Corporate Earnings Growth
  • Q1 FY21 earnings are expected to be weak and further earnings downgrades can be expected.
  • However, coporate earnings should bottom out in FY21. Recovery projected in FY22 and economy and earnings expected to normalize by FY23.
  • Companies re-designing business processes to take advantage of technology, remove inefficiencies, and reduce costs which may lead to faster recovery in earnings and ROE.
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India Equity Valuations
  • Valuations are reasonable with Nifty Trailing P/B ~13% below its LTA.
  • Mid-and-small caps are at relatively attractive valuations.
  • Low interest rates and high liquidity can justify higher equity valuations going forward.
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Sentiment and Investment Flows
  • USD has entered a bear market and a weaker USD boosts EM flows and assets.
  • India continued to see strong FII inflows in July. However, domestic flows have turned negative, even though SIP flows have been steady.
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Views expressed are those of Aditya Birla Sun Life AMC Ltd., sub-advisor to select Sun Life Excel emerging markets mutual funds for which Sun Life Global Investment (Canada) Inc. acts as portfolio manager. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by Sun Life Global Investments (Canada) Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

This commentary is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this commentary has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This commentary may contain forward-looking statements about the economy and markets, their future performance, strategies or prospects or events and are subject to uncertainties that could cause actual results to differ materially from those expressed or implied in such statements.  Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Investors should read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

© Sun Life Global Investments (Canada) Inc., 2020. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life group of companies. Aditya Birla Sun Life AMC Ltd. is a joint venture between the Aditya Birla Group and Sun Life Financial Inc.