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5 noteworthy trends - May 2020

Mutual Fund Industry | June 13
Ah, May 2020! We never thought we would find it so difficult to describe months, as tricky as it has proven to be in the first half of 2020. However if we were to put our necks out, May was like one of those times when the economy began to rouse again from the deep slumber of April. Like any long slump of inactivity, this attempted reversal of status quo had it’s creaks and woes but still promises the start of a much-longed for revival. Before we get all poetic or misty-eyed prematurely, let’s see what the numbers had to say.

India’s credit rating

When it comes to India’s sovereign credit rating, Moody’s made news by downgrading the rating marginally from Baa2 to Baa3. It’s the first time in over two decades that Moody’s has resorted to this action. This down grade comes on the back of a definite contraction in economic output or a negative GDP growth. Baa2 had been a recent elevation accorded to India in November 2018. Now, after a short break, the two big ratings giants, S&P and Moody’s seem in agreement on India’s credit rating, placing it just a notch higher than ‘junk status’. Currently, this has not raised any alarm bells or panic as we are quite used to this status in the global market. 

PMI Index shows a slight uptick

From the historic low figure of 27.4 for the Manufacturing PMI last month, May 2020 saw a gradual improvement to 30.8. However, this is still far below the 50 mark which signals an expansion or growth in the economy. The PMI services index showed a healthy improvement from the unprecedented 5.4 in April to 12.6 in May. All experts are pretty certain that this is going to be the first quarter since 1990s, when the Indian economy is going to register a contraction. Niti Aayog CEO Amitabh Kant sees growth starting to pick up only in the second half of the fiscal year which signals towards October. So, rather than a big burst of activity, we might as well brace up for slow inching towards growth in the coming few months. 

Two-wheeler sales picking pace

There are two factors being touted for the high probability of this sector seeing major resurgence in the wake of corona virus. One, rural and semi urban areas in the country are not as badly hit and a normal monsoon means they could very well remain less hit. Two, with the objective of rubbing shoulders with least number of people, public transport is no longer a preferred means of travel. As far as possible, consumers might prioritise saving and buying a vehicle to avoid contact with strangers. May 2020 was the month when domestic sales finally saw the light of day, albeit at 80-85% contraction in year-on-year trends for most manufacturers. However, a research report by carandbike.com  has forecast a V-shaped recovery for the automobile sector (2 and 4-wheelers) suggesting pent-up demand and robust first-time ownership. This is on the back of 75% respondents claiming intent to buy a vehicle post lockdown and 66% of the respondents putting this action in a time frame of the next 3 months! Either way, the automobile sector remains one to watch out for.  

The GDP see-saw continues

In all this humdrum activity, the one number which still has everyone guessing is India’s projected GDP number for the coming year. The one aspect everyone agrees on now is the fact that FY21 GDP in India will be in the negative terrain. The quantum though is where the numbers still vary by quite a bit. World Bank was the latest to join the bandwagon shifting from a positive estimation to a -3.2% forecast for FY21. Not just that, it went further ahead to estimate a 3.1% growth for FY22 as well. Taken together, if those numbers come true, then it would mean that the Indian economy would take two full financial years to come back to the base of FY20. What’s worse is the fact that the base of FY20 itself is slightly lower coming on the back of a slower growth rate of 4.2%. If it’s any consolation, the same report expects US contraction to be about 6.1% and that of the Euro Zone at 9%. The only country projected to have a positive economic growth of 6.9% after a lack lustre 1% in FY 20 is, you guessed it, China!

Mutual fund report card

Considering we are seeing quite a few layoffs and pay cuts around us, short term liquidity is a key concern for a lot of people. May 2020 was the second consecutive month when the market volatility gave jitters to retail investors leading to a drop of Rs. 253 Crores in SIP inflows, to bring the figure to Rs. 8123 Crores. The silver lining was a slight increase in the number of SIP accounts. The overall mutual fund industry registered a net inflow of Rs. 70,813 Crores as compared to an inflow of Rs. 45,999 Crores in April 2020. The flight to safety was also be seen in the fact that in the same period, debt funds registered a more than 100% net flow to a number of Rs. 94,224 Crores! Clearly, we are still some distance away from the shift of investor sentiment to optimism.

 So, that was the month of May 2020. Some small green shoots of hope among the swirling darkness of contagion that we as a human race are fighting to control. With the ongoing market rallies, a lot of the market participants seem to believe the worst is behind us. However, we at Moneyfront retain our stance to be cautiously optimistic. Things are showing signs of improvement but our guard remains up to traverse this situation in a calm and collected manner. 
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