• The MPC met for its bi-monthly monetary policy. This meeting comes after the Government had maintained a status quo on the inflation targeting at 4 % with a margin of 2 percent for the MPC for the next five years.
  While the consensus of a no change in policy rates and a continued accommodative policy stance remained unaltered, there were certain key elements in the policy statements.
  • The accommodative policy was not time dependent (like the previous policies which had talked about being accommodative through FY 22) but was dependent on pursuing accommodative policy till durable growth was observed
  • The inflation forecast for 1HFY22 has been raised very mildly, at 5.2% per cent in Q1-Q2 of FY22, 4.4% Q3 and 5.1% in Q4, with risks broadly balanced -- strong food production output and to be countered by possible cost push pressures. The FY22 real GDP growth projection stays unchanged at 10.5%
  • Launch of a secondary market buying of GSec of INR 1 trillion for the quarter It was a dovish policy with possible hints of a gradual flattening of the yield curve
• However, we remain apprehensive of a gradual rate rise as we move through the year. We believe that the markets may stop coat tailing the RBI, and are not ignoring a commodity prices rise induced inflation and a larger borrowing program
• The possibility of a bear flattening of the yield curve exists with long term rates rising lesser than short term rates
• Liquidity being in sustained surplus mode, the extreme short end of the yield curve may remain stable.

Indian markets had a volatile month with reasonable swings on both side and ended with marginal gains. During the month, India started experiencing second phase of Covid cases in few states. Rapid rise in the financial capital -- Mumbai -- as well as in many parts of Maharashtra, led to fears lockdown. Due to these fears, stock markets actually gave up much of the gains seen during last month post-Budget, but rallied towards month-end to post marginal net gains. Mid- and Small-Cap indices fared slightly better than Nifty as focus has shifted on broader markets with economy traction visible. This is again quite similar to broader trends across the global markets where recovery is broad-based. Among large sectors in market; FMCG, IT, Metals and Pharma outperformed Nifty while Financials, Auto, Energy underperformed Nifty. The broad trend of rotation amongst sectoral indices continues in Indian markets as leaders change almost every month. We present below the monthly sectoral as well as market-cap based leadership details for FY21 9 (Index Performance - Month on Month) that can best be rationalised as a relay race where every participant (sector) does their bit before passing the baton to next participant. From FII flow perspective, India’s stock markets continue to attract flows though it has moderated vis-a-vis last 4-5 months.

Globally, equity as an asset class continues to remain in bullish mode as the expectations of economic recovery gets stronger along with the rising pace of vaccination. The economic data flow too has entered an extremely favourable phase as disruption during lockdown has now set into the base year. The commentary by US Federal Reserve clearly suggests that the monetary policies are likely to remain benign despite inflationary expectations. As usual with all economic data, there are two camps on expectations on inflation. The dovish camp has a view that inflation is caused more due to supply constraints and logistics issue. As these gets normalised the demand supply equilibrium would be met and inflation would moderate. The hawkish view on inflation is emanating from the higher fiscal deficit that many countries (especially US with US FED focusing more inflation) are likely to resort to tide over the growth concerns caused by Covid-19. Another reason for inflationary expectations is due to the rising commodity prices as fiscal deficit is expected to be driven by capex cycle and infra spend in quite a few countries. The inflation debate is quite relevant for financial markets as low interest rates (due to low inflation) has been a primary driver of valuations that has led to higher asset valuations. From pure equity market perspective, the interest rates direction is also critical as that can set the market preference for growth v/s value stocks. Lower interest rates favour growth stocks as investors are willing to look more long-term to justify valuations while higher rates favour value stocks as immediate earnings get more attention.

Indian economy continues to see strong normalisation with improving data across parameters. As mentioned earlier, we have entered a favourable base period so we can continue to expect a series of good growth data across sectors for next 4-5 months. The consensus has now shifted towards a strong growth in FY22 with estimates ranging from 8% to 13%. These estimates put India as amongst the fastest growing economies in FY22.

Government continues to focus on key initiatives on creating infrastructure as well as conducive policy framework to attract private sector participation in capex cycle by offering growth opportunities under “PLI schemes”. While the real benefits are more likely over next 2-3-5 years the sentiments are far more positive for now.

The corporate results for Q4FY21 would commence now and key area to watch would be the results declared by Banks and NBFCs. They would be required to disclose true picture on NPAs, as per the asset quality norms post Supreme Court’s verdict in March. The impact of a bad FY21 (de-growth of around 8% expected in GDP) on asset quality is worth monitoring as it would set base for lender’s ability to participate in credit growth going ahead. In terms of other sectors, key trends to be monitored would be impact of rising commodity prices. The corporate profits have been quite strong in 9M FY21 where a significant contribution has been from cost savings. Key challenge for corporate profitability for FY22 would arise from the impact of commodity costs as well as normalisation of operating costs (in line with normalisation of economic activities). The commentary from corporates would provide some indications on this front.

While the benign phase has begun on the economic front, the resurgence of Covid-19 cases in many countries has created some clouds of worry. Clearly, the markets are not prepared for any fresh clampdowns on economic activities. We hope that virus spread is contained quickly and there is no damage to the fundamental recovery in economic activity.

From valuations perspective, inflation scare in US and its impact on interest rates remain a key monitorable as it can impact asset prices.

The market behaviour in last 12-months has been quite stark and interesting. A closer look at top 10 outperformers and underperformers among NIFTY companies in two years, FY20 and in FY21 as shown in the charts below (Leaders and Laggards of Nifty Index in FY 2019-20 ), throws some interesting data points. Six of the top 10 outperformers of FY21 were among the top 10 underperformers in FY20! Equally interesting is that four of the top 10 underperformers of FY21 were among the top 10 outperformers in FY20. The data again re-iterates that markets undergo phases of greed and fear, where preferences and likings go through volatile phases.

Risk (Uncertainty in Markets) has its own relationship with Returns and there are perhaps two ways to manage such greed and fear phase. Investors with lumpsum investments could have an asset allocation strategy (equity as a % of portfolio) to try and benefit from greed and fear phases. Alternately, the strategy is to really stick to longer term outlook rather than focussing on 1-2 years volatility. For investors with SIP investments however such phases are not so relevant as investor is still in accumulation phase for potential wealth creation over the 5-7 years. SIP may be a good alternate to avoid the behavioural traps during the extreme phases of markets. We maintain that Investors may use SIP as part of core investment philosophy and use the lumpsum route during the extreme phases to top-up on their SIPs during the fearful times amidst the volatility.

For investments in debt oriented products:

• We believe that the investors with a shorter investment horizon may continue investments in ultra-short term and low duration funds
• For a medium to long term investment horizon and with a suitable risk appetite, an allocation to short term fund merits attention

For investments in equity oriented products:

• Our view is that volatility may continue and SIP may be a good way to increase equity market allocations
• We believe investors with shorter investment horizon and lower risk appetite, may invest in arbitrage fund to hedge against volatility
• Investors looking to invest for a longer period, can consider SIPs or STPs into focused, multicap or hybrid funds based on risk appetite.
• Investors looking for a better return opportunity and with a suitable risk appetite, may consider part allocation in the mid cap scheme as well.

Select Mutual Fund Regulatory Updates from April 2021

New Nomenclature for Dividend as Income Distribution Cum Capital Withdrawal (IDCW)

As per SEBI Circular dated October 5, 2020, Dividend option will be now known as Income Distribution cum Capital Withdrawal option, to add clarity that certain portion of the capital (Equalization Reserve) can be distributed as dividend. Accordingly, investments in dividend plans, will appear in new nomenclature:

• In account statements and capital gains statements
• Across all AMC investment platforms – AMC website & mobile application
• Across all CAMS, MFU, BSE, NSE and other investment platforms

HUFs and Sole Proprietors Have to Provide Non-Individual CKYC Details

For the purpose of completion of new KYC or modification to the existing details in KYC records as per new regulations, HUF and sole proprietors shall be required to submit new non-individual CKYC form at any of the cams service centres. However, existing folio(s) can be operated without any hassle.

Fund’s Legal Entity Identifier (LEI) Is Mandatory for All Non Individual Investors for transactions of Rs 50 crores and above

Investors can contact our service team to get the LEI of Mahindra Manulife Mutual Fund’s (Fund) for payment transactions of value of Rs 50 crores and above, initiated through RTGS or NEFT systems and also provide their LEI to the Fund for redemptions of value of Rs 50 crores and above.