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Bond And Money Market

We present a matrix detailing some movement in some key market rates (domestic and global) and key events:

Parameters 31-July-20 30-June-20 31-July-19
RBI Repo Rate % 4.00 4.00 5.75
5Y AAA % 5.85 6.14 7.37
5Y AAA-5Y Gsec Spread bps# 106 129 97
10Y Gsec % 5.88 5.89 6.37
CPI (%) 6.09 NA 3.18
IIP (FYTD) % -34.7 -57.6 3.7
US 10Y % 0.56 0.68 2.01
Japan 10Y % 0.02 0.05 -0.15
EUR 10Y % -0.52 -0.44 -0.44

Source: Bloomberg; Data as on July 31st, 2020, #Gilt annualised

Debt Markets

The Debt market was fairly stable with a benign bias. The benchmark 10-year gilt moved down by around 5 basis points to close at 5.83 percent. However, the AAA credits saw a sharp rally of around 30-40 bps and the 5-year AAA credits closed around 5.67 percent. While liquidity continued to be in a surplus mode, the short-term money market rates remained stable.

The retail inflation number released showed a jump in the headline numbers of inflation. The CPI inflation moved up to 6.09 % (YoY) as food inflation (weight of 45.86 %) rose by 7.29 %. The Rupee had the strongest month since March-end and closed at around 74.82. FPIs continued to remain net sellers in debt to the tune of around INR 4200 crores in July.

Scheme Strategy - Debt schemes
  • Mahindra Manulife Low Duration Fund
  • Mahindra Manulife Ultra Short Term Fund
    • The average maturity of the portfolio moved down to around 156days
    • We would continue to hover around and increase the average maturity
    • The YTM of the portfolio is around 4.40%
    • With surplus liquidity conditions, we expect the money market rates to remain benign
  • Mahindra Manulife Liquid Fund
    • We continue to maintain a healthy mix of certificate of deposits and commercial papers
    • We will attempt to ensure adequate liquidity, safety and accrual
  • Mahindra Manulife Credit Risk Fund
    • The portfolio continued to pare certain credits and has a substantial cash & cash equivalent holding. We intend to hold the same for some time in the future and redeploy as uncertainties recede and investor confidence returns in debt markets.
    • Credit Spreads continue to remain elevated for lower credit rated papers. The YTM of the portfolio has decreased to around 7.40% because of substantial cash holdings
    • The Average Maturity of the portfolio was around 2.25 years with Modified Duration of around 1.80
    • We will continue to take tactical approaches to duration in the future
  • Mahindra Manulife Equity Savings Dhan Sanchay Yojana –Debt
    • The Modified duration of the portfolio is around 4.00
    • We will move to an equal split between credits and sovereigns
    • As AAA credit spreads have contracted meaningfully, we will continue with this strategy with a possible shift towards a bias to gilts
  • Mahindra Manulife Hybrid Equity Nivesh Yojana –Debt
    • The Modified duration of the portfolio is around 4.00 for the debt portion
    • The current asset allocation has an equal split between AAA credits and GoI securities
    • As AAA credit spreads have contracted meaningfully, we will continue with this strategy with a possible shift towards a bias to gilts
Looking ahead
  • The MPC met again in August and kept all policy rates unchanged. While the bond yields inched up after the policy; the MPC reiterated that “the stance of monetary policy remains accommodative as long as it is necessary to revive growth”. It further said that “space for further monetary policy action in support of this stance is available, it is important to use it judiciously and opportunistically to maximize the beneficial effects for underlying economic activity.”
  • Gilts may continue to rally in the short term; However, Gilts may face resistance over a longer-term, given the scale of borrowing and uncertainty of potential future borrowings. Moreover, an incremental credit growth could also put pressure on Gilts as the economy opens up
  • What is interesting in the term structure of the Gilt yield-curve. The steepness of the curve depicted by the difference in 5-year gilt and 10-year gilt is around 80 basis points (bps). This steepness is an outlier in the last two decades and the probability of mean reversion has interesting implications in the portfolio construction
  • We would be careful on supply constrained induced commodity inflation
  • Public Sector Credits (implicit sovereign backup) would continue to be a preferred choice amidst the risk-aversion. Our bias remains towards AAA credits, followed by GoI Securities
  • While AAA credits have rallied meaningfully in the last quarter, we believe a large part of the rally was the LTRO induced. As banks gradually move away from the LTRO buying, it would be interesting to watch the trajectory of AAA credits. The further drop in yields of AAA credits have made spreads on these credits very tight and they appear to be richly priced now
  • Liquidity being in sustained surplus mode, all short-term categories would be investor choice
  • While RBI and the Government’s measures seem to have a positive effect on the borrowings of NBFCs, Non-PSU financial services credits would require a careful look and the bias towards strong parentage would continue
Equity Markets

We present charts tracking domestic index and sector, and global indices movements:

India Index
S&P BSE SENSEX Index Nifty 50 BSE Midcap BSE Smallcap Nifty Midcap 100 Nifty Smallcap 100
1 Month 7.7% 7.5% 5.4% 5.2% 5.2% 8.6%
1 Year 0.3% -0.4% 0.8% 2.6% -2.8% -9.3%
World Index
DOW JONES INDUS. AVG S&P 500 Index NASDAQ Composite Index
1 Month 2.4% 5.5% 6.8%
1 Year -1.6% 9.8% 31.4%

Source: Bloomberg Performance - Absolute returns | Data as on July 31, 2020

Equity Market update

The global equity markets continued its buoyancy, led by USA. Indian markets too participated with Nifty gaining 7.5%, Nifty Midcap 100 and Nifty Small cap 100 indices gaining 5.2% and 8.6% respectively. Among large sectors in market, IT, Pharma and Auto outperformed Nifty while FMCG, Banks and Energy underperformed Nifty.

Globally, the sentiments for equity as an asset class continue to remain positive. The positivity is on medical front (news flow about vaccine development efforts) and hopes of unwavering policy support. We have seen massive support on fiscal as well as monetary fronts. The fiscal spend is directed towards replacing income lost due to lockdown-led disruptions. The monetary response has been to release unprecedented liquidity, some of it directed towards lending facilities to create confidence. The monetary response has seen extremely low levels of interest rates that are expected by policy-makers to support growth over long-term. However, this excess liquidity at nearly zero cost has created a situation where more money is directed towards equity markets, driving up valuations further with earnings outlook is still gloomy. As the virus spread has extended amidst the fears of a second wave, the impact on economic activities is now seen much deeper than earlier anticipated. Economic growth and corporate earnings have seen reasonable downgrades in past 3-4 month. While markets especially in USA are rising, it is a narrow rally, driven more by select sectors and very few stocks, with high weights in indices.

High liquidity and hopes of more policy support have created a sentiment that is not looking at challenges we could see in next 12 months. While there are still hopes of a strong economic rebound in CY2021 that can offset the losses of CY2020, this appears more challenging. The sentiment-led rally fuelled by policy actions can be challenged when the policy response starts looking inadequate to investors.

Indian economy and markets too are on similar directions as global environment. There has been a strong sequential increase in economic activity in July. Some high frequency data (electricity generation, petrol & diesel sales, automobile sales, credit growth, GST collection etc.) shows improvement, but economy is still not out of the woods. Rating agency ICRA have forecasts a 9.5% de-growth in FY2021 GDP. Our base expectations are that economic activities may start reverting to a flattish YoY data by September/October 2020.

Markets remained buoyant with quite a few of the companies reporting better than expected results for Q1FY21. The results for banks and NBFCs have been good, but shielded by the moratorium that has prevented any asset quality issues to be reported in Q1. Many other companies reported a sharp decline in expenses (advertisement, sales promotion etc.) that supported profitability. While the cost cuts are good for these early results, but it does convey a trouble for many other companies/unlisted SMEs who would bear the brunt of lower spend by large companies.

Amidst quite a few gloomy news points, some of the emerging bright spots are rural economic growth, supportive policies to attract investments to reduce the imports (electronics, chemicals, pharma etc.), relaxation in labour law applicability etc. The monsoon has been quite good till now and with availability of labour, India’s area under cultivation has seen a big rise over past years. While a significant portion is likely to be a preponing (early cultivation), it still helps in maintaining balance of economic activities and driving rural consumption. Government launched production-linked incentive schemes for chemical, pharma and mobile phones seeking application from interested companies. These schemes have evinced interest from many applicants and we expect announcement of selected companies in near-term. The investments made under these schemes are expected to help revive capex cycle, create credit growth as well as create jobs.

The macro-economic data declared in July shows fiscal deficit for Q1FY21 at 83.2% of the budgeted FY21estimate and gross tax collection down by nearly 33% (v/s 52% in same period for FY20), Current Account Surplus at 0.1% of GDP for Q4FY20 (0.9% deficit in FY20). The output of eight core sectors was down by 23.4% (Y-O-Y) in May 2020. The south-west monsoons have covered India ahead of estimates and this brightens the prospects for agricultural crops and rural economy.

Scheme Specific Strategies For Equity Schemes
  • Mahindra Manulife Multi Cap Badhat Yojana
  • Mahindra Manulife Mid Cap Unnati Yojana

    This scheme among other things would aim to invest in companies that have a strong product line and leadership position in that sector and can take advantage of the India’s growth story. The portfolio will focus on mid-cap stocks apart from some exposure to small and large-cap stocks. The portfolio will have a mix of top-down and bottom-up approach to investing, depending on market conditions.

  • Mahindra Manulife ELSS Kar Bachat Yojana

    The portfolio will have allocation to stocks across market capitalization and may focus on companies that have the power to take advantage of the opportunities the economy offers. The stocks in the portfolio are likely to have a superior product line, manageable debt and leadership in their respective sectors.

  • Mahindra Manulife Rural Bharat and Consumption Yojana

    The portfolio is a focused portfolio with around 30 stocks. The aim of the portfolio is to have a rural bias and look for opportunities in rural consumption, rural infrastructure and rural lending.

  • Mahindra Manulife Large Cap Pragati Yojana:

    The portfolio is a focused portfolio with around 25 -30 stocks. A top-down approach would be adopted to identify sectors with potential across different periods based on emerging macro trends. In addition, a bottom-up stock selection would also be followed, to identify companies with good governance and strong leadership

  • Mahindra Manulife Top 250 Nivesh Yojana:

    The scheme focusses on investing in companies that have demonstrated strong leadership and sustained growth. The portfolio has a focus on large caps and midcaps which are currently at around 48% and 42% of net equity holdings respectively.

Scheme Specific Strategies For Hybrid Schemes
  • Mahindra Manulife Hybrid Equity Nivesh Yojana
  • Mahindra Manulife Equity Savings Dhan Sanchay Yojana

    Equity:

    • The approach of the portfolio would be to minimize the volatility and provide steady returns
    • The portfolio may have a large-cap bias that focusses on growth stocks having reasonable valuations and value-stocks having a near to medium-term trigger

    Debt:

    • The Modified duration of the portfolio is around to 4.00
    • We will continue with the current split between credits and sovereigns
Looking ahead

Globally, the US Fed meeting has commented that economic growth path depends on the course of the virus and that while economic activity and employment have picked up from lows, they remain below their levels at the beginning of the year.

As the result season progresses, the real impact of the lockdown as well as the management’s expectations of recovery will be quantified. With the lockdown having extended longer than anticipated earlier, we do expect few companies to emerge stronger-led by strong balance-sheets and demonstrated execution through product adaptability. But this is likely to be at the expense of a majority of companies/unorganised business units/SMEs which face business challenges. The digital journey for many businesses will be much quicker and like every disruption, there will be few winners and many losers.

We continue to believe that leaving aside Covid-19 and lockdown-led concerns for FY21, there are some real medium to long-term positives for India. Lower oil prices, favourable policy action to attract global capital, looking to diversify supply base away from China and the structural reforms ushered in by Government are something that we should not ignore as a long-term investor. The path is clearly highlighted by large FDI investments made by strategic investors, who have the long-term vision, willingness to commit and ability to wait for the outcome.

Considering the time-gap between potential of structural upside and near-term concerns for FY21, we believe that market volatility is likely to remain and this period may be utilised for increasing the asset allocations to equities through SIPs. The lump sum route may be utilised to top-up on the SIPs during the fearful times amidst the volatility.

Webcast
Equity Market Outlook
Debt Market Outlook
Scheme Name Product Suitability Riskometer
Mahindra Manulife Liquid Fund
An Open Ended Liquid scheme
This Product is suitable for investors who are seeking*:
  • Regular income over short term
  • Investment in money market and debt instruments
Mahindra Manulife Low Duration Fund
An open ended debt scheme - An open ended low duration debt scheme investing in instruments such that the Macaulay duration of the Portfolio is between 6 months and 12 months (Please refer page 31 of SID)
This Product is suitable for investors who are seeking*:
  • Regular income over short term
  • Investment in money market and debt instruments
Mahindra Manulife Ultra Short Term Fund
An open ended ultra-short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3 to 6 months (please refer to page no. 31 of SID)
This Product is suitable for investors who are seeking*:
  • Regular Income over short term.
  • Investment in a portfolio of short term debt and money market instruments.
Mahindra Manulife Credit Risk Fund
An open ended debt scheme predominantly investing in AA and below rated corporate bonds (excluding AA+ rated corporate bonds)
This Product is suitable for investors who are seeking*:
  • To generate regular returns and capital appreciation over medium term.
  • Investment predominantly in AA and below rated corporate bonds, debt, government securities and money market instruments while maintaining the optimum balance of yield, safety and liquidity.
Mahindra Manulife ELSS Kar Bachat Yojana
An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit
This Product is suitable for investors who are seeking*:
  • Long term capital appreciation
  • Investment predominantly in equity and equity related securities
Mahindra Manulife Top 250 Nivesh Yojana
Large & Mid Cap Fund - An open ended equity scheme investing in both large cap and mid cap stocks
This Product is suitable for investors who are seeking*:
  • Long term wealth creation and income
  • Investment predominantly in equity and equity related securities of large and Mid cap companies.
Mahindra Manulife Equity Savings Dhan Sanchay Yojana
An open ended scheme investing in equity, arbitrage and debt
This Product is suitable for investors who are seeking*:
  • Long term capital appreciation and generation of income
  • Investment in equity and equity related instruments, arbitrage opportunities and debt and money market instruments
Mahindra Manulife Multi Cap Badhat Yojana
Multi Cap Fund- An open ended equity scheme investing across large cap, mid cap, small cap stocks
This Product is suitable for investors who are seeking*:
  • Medium to Long term capital appreciation;
  • Investment predominantly in equity and equity related securities including derivatives.
Mahindra Manulife Mid Cap Unnati Yojana
Mid Cap Fund – An open ended equity scheme predominantly investing in mid cap stocks
This Product is suitable for investors who are seeking*:
  • Long term capital appreciation;
  • Investment predominantly in equity and equity related securities including derivatives of mid cap companies
Mahindra Manulife Large Cap Pragati Yojana
Large Cap Fund - An open ended equity scheme predominantly investing in large cap stocks
This Product is suitable for investors who are seeking*:
  • Long term capital appreciation;
  • Investment predominantly in equity and equity related securities including derivatives of large cap companies.
Mahindra Manulife Hybrid Equity Nivesh Yojana
An open ended hybrid scheme investing predominantly in equity and equity related instruments
This Product is suitable for investors who are seeking*:
  • Long term capital appreciation and generation of income;
  • Investment in equity and equity related instruments and debt and money market instruments
Mahindra Manulife Rural Bharat and Consumption Yojana
An open ended scheme following Rural India theme
This Product is suitable for investors who are seeking*:
  • Long term capital appreciation;
  • Investment predominantly in equity and equity related securities including derivatives of entities engaged in and/ or expected to benefit from the growth in rural India.

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them

The views expressed here in this material are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. This material has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. While utmost care has been exercised while preparing this material, Mahindra Manulife Investment Management Private Limited (formerly known as Mahindra Asset Management Company Private Limited) (AMC) does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The data/statistics given in this material are to explain general market trends in the securities market, it should not be construed as any research report/research recommendation. Readers of this material should rely on information / data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Neither Mahindra Manulife Mutual Fund, the AMC nor Mahindra Manulife Trustee Private Limited (formerly known as Mahindra Trustee Company Private Limited), its directors or associates shall be liable for any damages that may arise from the use of the information contained herein.

Cno. 00781

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