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Dear Investors,

Warm Greetings!

The BSE Sensex rallied by 8% during June outperforming global markets. Gradual opening of economic activities, early signs of normalisation in some consumption sector and likely improved demand in rural sector led by expectations of normal rainfall  and sowing pattern led to Indian markets outperformance during the month. Key concerns though were fears of second wave of Covid in US and escalating tensions between India and China.

Despite the smart rally during the month, on YTD basis BSE Sensex is down 15%. During the month of June, Midcaps and Small caps outperformed the broader markets. Amongst sectors Banking, Financials, Auto and consumer durables outperformed while Healthcare and Consumer staples underperformed.

A key development has been the recent flare up on the Indo-China border in the Galwan Valley of Ladakh. It has heightened geopolitical tensions between the two nations leading to reports of potential escalation. These events have caused significant backlash in India, giving rise to a narrative of reducing dependence on China – both on business and commercial fronts. There are media reports about Government asking industry to prepare a list of products imported from China. Some State Governments have already cancelled contracts awarded to Chinese firms. Government of India has banned 59 Apps for security reasons.

 

India’s imports from China have risen steeply from just 2.6% of total imports in FY20 to an all-time high of 16.4% in FY18 before easing to 14% (USD65bn) in FY20. India runs a trade deficit of USD49bn with China. From a sectoral perspective Auto, Consumer Durables, Pharmaceuticals, Telecom, Chemicals and Renewable Power sector (Solar) seem to be the most dependent in terms of sourcing from China. Any potential escalation between the two nations could increase operational/supply-chain risks in the current economic backdrop, even as economies look to recover from the pandemic.

 

IIP in Apr'20 contracted by 55.5%, the sharpest fall in the history. The decline was severe in 21% of IIP, largely concentrated in consumer durables (-95.7% yoy) and capital goods sectors (-92% yoy), These two sectors have been struggling way before the Covid-19 lockdown.

As in April the National Statistical Office (NSO) did not release the provisional CPI inflation data for May owing to difficulties in data collection. It, however, managed to release the data for certain sub-groups/groups, following the principles of adequacy. Consumer food inflation moderated by 120bps to 9.3% in May’20 from 10.5% in Apr’20. This was led by sharp fall in vegetable inflation to 5.3% against 23.6% in Apr’20. It was expected as lockdown restrictions have been eased. Apart oils and fats and non-alcoholic beverages, deceleration was seen across the food group.


In terms of flows, FPI were net buyers to the tune of USD2.7bn, while MFs sold stocks worth USD493mn. On YTD basis FPIs are negative USD2.2bn while MFs have bought equities worth USD4.9bn.

 

Post recent 4Q result season, street has further cut FY21 EPS estimates by 2-3%. However, current expectations are for recovery from 2Q/3Q FY21 onwards leading to sharp growth in FY22. Nifty is trading at 22x FY21E and 16x FY22E vs long term average of 17x. While valuations look fair, it is on back of expectation of strong FY22 which can be challenging. We remain cautiously optimistic.

Sanjay Chawla

Chief Investment Officer

Sources : Bloomberg, Economic Times

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