MONTHLY UPDATE OCTOBER 2020 - HDFC Life
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MONTHLY UPDATE OCTOBER 2020
HDFC Life Insurance
October 2020
“If you really look closely, most overnight successes took a long time.”
- Steve Jobs
Equity markets
Indices 1 Month 1 Year
30th Sept 2020 30th Oct 2020
Return (%) Return (%)
BSE Sensex 38067.93 39614.07 4.06% -1.28%
S&P CNX Nifty 11247.55 11642.40 3.51% -1.98%
BSE 100 11391.75 11720.76 2.89% -2.32%
BSE Mid Cap 14705.17 14904.62 1.36% 0.27%
BSE Small Cap 14867.36 14888.08 0.14% 9.81%
Source: Bloomberg
During Oct’20, domestic equity indices posted gains- large cap indices outperformed the
mid and small cap indices. BSE Sensex was up 4.1% during the month and Nifty gained
3.5%. Mid and small cap index gained 1.4% and 0.1% respectively. On a 1-year basis
the trend is opposite; Sensex and Nifty are down 1.3% and 2.0% respectively while Mid
cap and small index are up 0.3% and 9.8% respectively.
During Oct’20, Banks and IT sector gained the most - 12.5% and 5.4% respectively.
Healthcare followed by Auto declined the most. On a 1-year basis, Healthcare and IT are
the best outperforming sector – gaining 45.6% and 36.8% respectively while Capital
goods, Oil and gas and Banks and FMCG sector are the worst.
The yield of benchmark 10-year G-sec (issued in late Jul’20), moved from 6.02% at end
Sept’20 to 5.88% at the end of Oct’20
All the major global equity indices except Hangseng and Shanghai declined during the
month of Oct’20. Hangseng gained 2.8% during the month while Dax declined the most
by 9.4%.
Commodities 1 Month One Year The performance of all the major
(USD) Return (%) Return (%) commodities was mixed during
Gold -0.37% 24.18% the month of Oct’20. Zinc was the
Silver 1.81% 30.65% best performer while Crude
Crude Oil -11.01% -33.94% declined the most.
Copper 0.70% 15.90%
Primary Aluminum 4.73% 5.33% On a YoY basis, performance of
Lead -0.25% -15.66% the major commodities was
Nickel 4.40% -8.95% mixed. Silver and Gold
Tin 1.32% 7.26% appreciated the most while Crude
Zinc 4.99% 1.63% declined the most.
Source: Bloomberg
1HDFC Life Insurance
Macro Economic Data
Indicators Jul-20 Aug- Sep- Oct- Comments
20 20 20
IIP (%) - - Industrial output declined by a slower pace of 8%
10.80 8.00% in Aug’20, following 10.8% contraction in Jul’20,
% mainly led by the fall in manufacturing output (-
8.6% in Aug'20 vs. -11.6% in Jul'20) and mining
output (-9.8% in Aug'20 vs. -12.8% in Jul'20).
Core Sector (%) - - - Core sector output contracted by a slower rate of
8.00% 7.30% 0.80% 0.8% in Sep’20, following 7.3% decline in Aug’20,
led by the shrank in cement output (-3.5% in
Sep'20 vs. -14.6% in Aug'20) and refinery output (-
9.5% in Sep'20 vs. -19.2% in Aug'20).
RBI monetary policy 4.0% 4.0% 4.0% 4.0% RBI kept repo rate unchanged at 4% in Sep'20.
(Repo Rate) (%) During Feb'19- May'20 RBI cut the repo are by
250bps.
CPI inflation (%) 6.70% 6.70% 7.30% CPI inflation rose to 7.34% in Sep’20 from 6.69%
in Aug’20 led by increase in food inflation to 9.7%
in Sep’20 from 8.3% in Aug’20
Trade Deficit ($, bn) -4.8 -6.8 -2.7 -8.8 In Oct’20, exports declined by 5.4% to $24.8bn,
while imports contracted by 11.6% to $33.6bn, as a
result trade balance turned deficit of $8.8bn in
Oct’20 vs. $2.7bn in Sep’20.
GST Collection ($, 874 864 955 1052 Total gross GST revenue collections in Oct’20
bn) stood at Rs. 1,052bn, following Rs. 955bn
collection in Sep’20.
FII Flows-Equity ($, 1.02 6.29 -1.05 2.66 On equity side, FPIs purchased $2.7bn in Oct’20,
bn) following an outflow of $1.05bn in Sep’20. On
debt side, FII purchased $0.23bn in Oct’20,
following inflow of $0.54bn in Sep’20.
FII Flows-Debt ($, -0.33 -0.45 0.54 0.23
bn)
Exchange Rate 74.77 73.6 73.8 73.97 Indian Rupee depreciated by 0.2% during Oct'20,
(INR/USD) as it closed at 73.97 in the end of Sep’20 from 73.8
at the end of Sep’20 per dollar.
2HDFC Life Insurance
Outlook
Global equity markets took a pause in October with most large developed markets
correcting by 2-5%. Part of the reason is a fresh spike in virus infection cases in parts of
Europe and the US. Also, the much anticipated fiscal stimulus package in USA has been
delayed because of failure to arrive at a consensus. Now markets are looking forward to
clarity emerging from the upcoming Presidential elections in the US before deciding it
course. Indian markets which have thus far been very coupled with global markets broke
free from the trend for the month.
Despite an increase in testing to ~1.1 million tests per day, the number of daily new
Covid cases has started declining with average new cases falling to ~60,000. Lower new
cases, coupled with higher recoveries, has led to a decline in active cases. The share of
cases in rural districts, as a proportion to total new cases, stands at roughly 50%. With
lockdowns having been lifted and activities normalizing, the trajectory of infection rate
remains a key monitor able. There have been a few positive developments with regards
to finding a medical solution, and while efficacy and timelines are unclear at present, the
progress has given rise to some optimism. Another heartening fact is that % mortality is
low, especially in India, despite the infection rate being very high.
Normalization of activities continued to reflect in positive sales trends across several
sectors like consumer staples, consumer discretionary including auto and durables,
cement, power consumption, fuel consumption, et al. Rural economy is chugging along
well, helped by very good and well-distributed monsoon rains. Given that reservoir levels
are healthy, outlook for Rabi is also good. Most rural focused categories like tractors,
fertilizers and pesticides, and agricultural pumps have continued to show good growth.
But segments like airlines, retail, hospitality, media & entertainment and real estate are
still reeling under significant stress. For the financial sector, while the collection
efficiencies have continued to improve sequentially and anecdotal evidence on
restructuring suggests better trends than feared earlier, the clouds over asset quality
concerns have still not cleared. The good news though is that the government has
proposed to compensate banks for ‘interest on interest” waiver and the court seems
agreeable to government’s proposal, thereby hopefully drawing a curtain on this
uncertainty. While there is an optimism of overall economic situation improving as we
head into the crucial festival season, there is also a lingering fear of the infection
spreading as people start moving out of their homes and subsequent lockdowns.
Under the Production Linked Incentive (PLI) scheme for mobile phones, government
approved investment proposals from 10 mobile manufacturing companies which include
five global and five Indian companies. In addition, government cleared six companies
under the component manufacturing scheme. There are plans to give similar incentives
to several other sectors in order to attract investments targeted towards catering to
global exports from India.
Some of trends witnessed in Q1 results have continued in the ongoing Q2 result season
as well with companies from IT, Pharma, Cement, Consumer durables, FMCG,
Fertilizers & Chemical sectors showing good results with impressive performance on
margins. Even large banks have shown encouraging trends on asset quality with
slippages being lower than earlier feared. While there is still a reasonable number of
companies that are yet to report, the trends are definitely better than low expectations
that market has had. What is unclear, however, is how much of these costs savings
driven margins benefits can be carried forward on a sustainable basis. While a large
3HDFC Life Insurance
section of the market is yet to report, these early trends provide confidence to future
outlook for Nifty earnings. Given that FY21 earnings have borne full brunt of what has
transpired during the pandemic and the uncertainty during the recovery phase of next
few months, markets are anyway focused more on FY22 and beyond.
FII were buyers in October with net inflows of USD2.7bn. DIIs were, however, net seller
to the tune of USD2.4bn. Cumulatively, FIIs have bought USD13.3bn of equities so far in
this fiscal year which has more than compensated for huge outflow of USD8.4bn seen in
March. DIIs have, on the other hand, have sold to the extent of USD3.5bn in this fiscal.
We expect markets to remain volatile with limited upside in the short term due to still
uncertain outlook on the trajectory of infections and concerns on valuations post the run-
up. On the downside however, markets are likely to get support from expectations of
more stimulus from the government, strong liquidity and improving economic outlook.
RBI is quite supportive and should maintain a benign interest rate environment. Reforms
like GST, IBC, cut in Corporate income tax rates and agriculture/labor reforms augur well
for the long term outlook. Nifty's valuation of 18.7x FY22 earnings, though above long
period averages, is not expensive, given the hit that the denominator has taken and
expectations of improvement continuing into FY23. So, while we are cautious on an
immediate basis, we remain optimistic from a medium to long term point of view.
4HDFC Life Insurance
Fixed Income Market
Fixed Income Market Review –
Bond yields eased during the month amid continued volatility. The RBI Monetary Policy
announced at the beginning of the month, maintained status quo on policy interest rates
mainly due to the elevated inflation. However, RBI announced a more comprehensive
OMO programme, by increasing the size of each OMO as well as extending it to SDLs.
Later during the month, the release of the minutes of the policy reinforced the RBI’s
dovish tilt as the members were concerned on the steepness of the yield curve. RBI’s
explicit support to the markets through enhanced OMO purchases and secondary
market intervention helped soften the yields. The 10-year benchmark Government
security ended the month at 5.88%, lower than 6.01% at the end of the previous month.
Headline CPI accelerated to 7.34% in September vs. 6.69% YoY in August, primarily led
by higher food inflation. Food inflation printed at 10.7% on a y-o-y basis, primarily due to
a spike in vegetables and protein-based items, as compared to 8.29% in August 2020.
Core inflation (CPI Ex-Food Ex-Fuel) was marginally lower in September at 5.67% as
against 5.77% in August. However, the rise in inflation failed to dent the markets, as the
RBI has forecast an easing of inflation over the second half of the current financial year
and mentioned that the current rise in inflation was transient.
India’s trade deficit narrowed to US$2.9 bn in September led by a sharper recovery in
exports relative to imports. For 1HFY21, trade deficit stands at US$23.5 bn as against a
deficit of US$88.9 bn in 1HFY20.
The Government’s borrowing calendar for H2FY21 was increased by 1.1 trn to
operationalize the Special Window to States for meeting the GST compensation cess
shortfall and the additional borrowing is scheduled to be raised equally under the 3 year
and 5 year tenors.
Among other economic data, the Index of Industrial production contracted to 8% year-
on-year in August of 2020, following the 10.8% fall in July. WPI surprised on the upside
by rising 1.32% YoY in September vs. 0.16% in August mainly due to inflationary
pressures emanating from primary articles and manufactured products. Core WPI shot
up to 1.07% in September as compared to 0.63% in August. Goods and Services Tax
(GST) revenue collection in October stood at Rs 1,05,155, surpassing the 1lakh mark for
the first time since February 2020, compared to September collection of Rs 95,480
crore. India's Nikkei Market Manufacturing PMI accelerated to 58.9 in October vs 56.8 in
September to reach the highest in over a decade, and the Services PMI increased to
49.8 in September 2020 from 41.8 in the previous month.
RBI Monetary measures and Bi-monthly Monetary Policy meeting
In the MPC meeting held on October 7-9 2020, the MPC unanimously voted to keep the
policy rates unchanged and extended its accommodative stance into FY2022. MPC
clearly stated that it will look through recent inflation prints, in order to remove the
confusion created by the October policy and minutes. The RBI MPC had released its
growth (-9.5%) and inflation projections (6.8% for 2QFY21, at 5.4-4.5% for 2HFY21 and
4.3% for 1QFY22) for the first time in FY2021. RBI assured that the borrowing
programme of the centre and states for rest of FY2021 will be completed in a non-
disruptive manner and access to liquidity and easy financing conditions. The MPC
decided to increase the size of its Open Market Operations from Rs. 10K cr. to Rs. 20K
cr and also to conduct OMO in state papers for the first time.
5HDFC Life Insurance
Market Outlook –
The RBI’s decision to look through the current inflation and to retain the accommodative
stance through FY2022 coupled with increase in weekly OMO purchases has provided
the much needed respite to the market. As a result, the interim increase of Rs 1.1 trn in
the borrowing calendar of H2 FY21 did not have any meaningful impact on yields.
However, the market continues to be wary of the elevated supply and is dependent on
RBI’s continued support measures. This wariness dampens the softening of yields.
Moreover, large fiscal stimulus in the large developed economies and the impact of the
previous stimulus measures have helped a number of economies recover from the
depths of the economic contraction. The large stimulus measures have revived
expectations of growth and have led to a rise in bond yields in a number of economies.
As the global bond yields rise further, on expectations of faster recovery, the
environment for lower bond yields could turn adverse. As a result, bond yields are
expected to trade within a narrow range in the near term. However, a strong ‘second
wave’ of Covid-19 infections in the coming winter could derail this growth outlook.
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