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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-May-20 30-Apr-20 31-May-19
RBI Repo Rate % 4.00 4.40 6.00
5Y AAA % 6.34 6.86 7.50
5Y AAA-5Y Gsec Spread bps# 128 170 54
10Y Gsec % 6.01 6.11 7.03
CPI (%) 5.84 5.91 2.92
IIP (FYTD) % -0.7 0.9 3.6
US 10Y % 0.65 0.61 2.12
Japan 10Y % 0.00 -0.03 -0.09
EUR 10Y % -0.45 -0.59 -0.20

Source: Bloomberg; Data as on May 29th, 2020 | * bps - basis points below the table on debt market | #Gilt annualized

Debt Markets

The month started off on an ominous note as the Government of India announced an additional borrowing of INR 4.20 lac crores for this year taking the total Gross Borrowing of the Central Government to INR 12 lac crores. However, the hopes of an RBI intervention for monetizing the fiscal deficit kept any upward movement of Sovereigns in check. In fact, the benchmark sovereign 10-year gilt moved down by 10 bps during the month and a new benchmark of 10-year sovereign was also established around 20 bps lower. There was a sharp drop in AAA credits by around 50 bps through the month. What helped the AAA credits was steady inflows back to the mutual funds, buying by banks as a part of TLTRO and certainly the attractive spreads. Liquidity continued to remain abundant and short-term money market rates dropped by around 100 bps.

Scheme Strategy - Debt schemes
  • Mahindra Manulife Low Duration Fund
  • Mahindra Manulife Ultra Short Term Fund
    • The average maturity of the portfolio moved up to around 181 days
    • The average maturity of the portfolio is at the higher end of the permissible average maturity
    • 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 exited certain assets and has a substantial cash & cash equivalent holding. We intend to hold the same for some time in the future and redeploy as uncertainties recedes
    • Credit spreads continue to remain elevated for lower credit rated papers. The YTM of the portfolio has decreased to around 9.01% because of substantial cash holdings
    • The Average Maturity of the portfolio was around 2 years with Modified Duration around 1.60 years
    • We will continue to take tactical approaches to duration in the future
Looking ahead
  • We may see further cuts going ahead as the RBI hinted at the possibility.
  • Gilts may continue to rally in the short term; while the market was expecting a commentary on the monetization of the Government’s large borrowing program, there was no statement forthcoming.
  • However, over a longer-term gilt may show resistance given the scale of borrowing and uncertainty over potential future borrowings. Moreover, as economy opens up incremental credit growth could also put pressure on gilts.
  • We would be careful on commodity inflation induced by supply-side constraints.
  • Public sector credits (those with implicit sovereign backup) would continue to be a preferred choice amid the risk aversion. Our bias remains towards AAA-credits than Government securities.
  • Liquidity being in sustained surplus mode, all shorter-duration schemes (with holdings of upto five-year maturity) would be preferred by investors.
  • 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 may 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 NSE Midcap 100 NSE Smallcap 100
1 Month -3.8% -2.8% -1.4% -1.9% -1.7% -1.8%
1 Year -18.4% -19.6% -21.5% -26.7% -26.1% -38.9%
World Index
DOW JONES INDUS. AVG S&P 500 Index NASDAQ Composite Index
1 Month 4.3% 4.5% 6.8%
1 Year 2.3% 10.6% 27.3%

Source: Bloomberg, data as on May 29, 2020 | Performance – Absolute Returns

Equity Market update

The global equity markets continued to rally, led by USA. Indian markets however had a negative return with Nifty losing 2.8%, BSE Midcap and BSE Small cap indices losing 1.4% and 1.9% respectively. 13.7%and 15.5%. Among large sectors in market, Auto, Pharma and FMCG gave positive returns, while financials lost nearly 10%. In a way, high weightage of financial stocks in Indian indices (Nifty and Sensex) is a significant reason for underperformance of Indian indices vis-a-vis the S&P, Dow and Nasdaq indices in US

Globally, the market sentiments are being influenced by a multitude of factors namely; 1) spread of coronavirus and research going on for a medical solution to virus, 2) economic losses and the compensating stimulus on fiscal and monetary front in every country, 3) geo-political discussions regarding implications for China going ahead, 4) equity as an asset class in a scenario of negative or low interest rates over a medium term and 5) expectations about revival of economic activities post lockdown being opened up by a majority of countries in June, 2020.

Coming to Indian economy and markets, some additional variables are

  • Extension of moratorium on loan repayments by another 3 months. While this can provide help to some borrowers who are experiencing financial difficulties, it is likely to put stress on lenders and equity markets (financials constitute nearly 35% weight in Nifty/Sensex)
  • Expectations of far severe impact on economy vis-a-vis earlier estimated. In a major revision CRISIL in May 2020, put estimates on FY21 GDP at a –ve 5% from a +ve 1.8% in April 2020. The change in estimates reflect both the supply-side constraints (interlink of supply chain) as well as demand issues (reduction in employment and income). From various growth estimates on global as well as India, it seems economic implications of lockdown are likely to be heavier on India vis-a-vis many other countries.
  • Stimulus route adopted by Government that focusses more on structural reforms rather than immediate relief to industry. While the headline number of stimulus at 10% of GDP is impressive, the finer details show a direct fiscal impact at around 1.2% of GDP, monetary action by RBI at 3.8% of GDP and other support (guarantees, loans, etc) at 5% of GDP. The focus of the stimulus package when seen on time-horizon front:

a. Short-term : easing the pain in the most vulnerable sections of the economy, simplification of process, 1 year deferment of insolvency proceedings etc.

b. Long-term : Reforms in core areas of land, labour, laws and liquidity to address key sectors like agriculture, coal mining, electricity and privatization of PSUs. In a way, the Government has utilized the current crisis to take those bold initiatives that are required on a structural basis. Going ahead, some of these initiatives, implemented in true spirit can attract active participation by private sectors/FDI and support economic growth and employment creation in the long run. The only constraint here is that these reforms would benefit the economy only over a medium to longer period of time.

Indian government announced “Unlock 1.0” as a path towards gradual re-opening from June 1, 2020. The measures announced include opening up of all activities outside of containment zones. For containment zones, the lockdown is extended till June 30, 2020. While state governments do have a role in imposing any restrictions, the Central Government has virtually removed all restrictions including the red, green and orange zone classifications.

The fiscal data declared on May 29th, reported a GDP growth of 3.1% for Q4FY20 and 4.2% for full year FY20 with fiscal deficit at 4.6% of GDP. The economic activity in Q4FY20 was impacted by nearly 2 weeks of lockdown. The output of eight core sectors was down by 38.1% on a Year-On-Year basis in April, 2020 against 9% Y-O-Y dip in March, 2020.

Source: Crisil

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

    The scheme looks to invest in companies having one or more of the following attributes - high growth runway, robust return profile with well-established business moats and/or strong earnings visibility. The scheme would look to benefit from improving outlook for capex in the country as also widening of the consumption basket. Reduction in corporate asset quality challenges is another theme that the portfolio would look to benefit from.

  • Mahindra Manulife Rural Bharat and Consumption Yojana

    The portfolio is a focused portfolio with around 30-35 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 diversified focused portfolio with around 25 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

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

    Debt:

    • The Modified duration of the portfolio is around 4.20 years for the debt portion
    • The current asset allocation has a higher component of AAA credits to Government securities
    • We intend to follow this strategy as we think credit spreads may contract

    Equity:

    • Portfolio construction has preference for growth style of investing. Bottom up approach adopted to identify companies that have ability to scale up, gain market share and/or are present in sunrise/high growth sectors.
Looking ahead

Globally as well as in India, the markets would be focussed on tracking key indicators like electricity consumption, fuel consumption, air-flight traffic, etc, once the lockdown is removed in June across countries. While the markets have rallied with a sharp re-bound from lows made in March, 2020, the actual economic data (GDP, corporate earnings, etc.) for quarter-ending June along with assessment of economic activity post opening up would provide a meaningful understanding of the impact of lockdown on growth. We believe that the markets globally as well as in India, are likely to remain volatile in CY2020 as they swing between two corners of hope and fear.

On investment front, we continue to evaluate various companies on parameters of whether there is a long lasting impact (business model or balance sheet) or a temporary impact that could be covered-up once economic activity starts to normalize. On financial front, we expect companies with healthy balance sheets, with low/no leverage to tide over this period and will emerge well-placed to be a big beneficiary post the uncertainty getting over.

We believe that amidst many of the concerns going around for FY21, there are some real medium to long term positives for India. Lower oil prices, global corporates looking for an alternate supply base away from China and the structural reforms ushered in by government are something that we should not ignore as an investor. These create a window of structural upside in times of downturn created by lockdown. 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 utilized for increasing the asset allocations to equities through SIPs. The lumpsum route may be utilised as a top-up on the SIPs during the fearful times during 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 29 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 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 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. 00613

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