investment outlook may 2020...may 13, 2020 · investment outlook 213 th may 2020 getting back on...
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Investment Outlook
1
13th May 2020
Investment Outlook
May 2020
Investment Outlook
2
13th May 2020
Getting back on feet, slowly and cautiously!
Summary: India’s COVID-19 trajectory so far has been more flattish than other nations, but it has been
achieved at a significant economic cost. As unemployment rises and the government’s tax collections falter,
we expect the GDP in FY21 to see a contraction in real terms.
We also expect rural output growth to outpace urban as most of COVID-19 free geographical areas (green
zones) are rural and good FY20 Rabi output is also expected to support Q1FY21 GDP, while urban demand
as well as output would continue to struggle on account of mobility restrictions. We expect economy to
return to normalcy only post vaccine or cure development and availability. Vaccine development will take
at least take 1 year, in our view.
PM has announced a package worth Rs20trn (~10% of India’s GDP), details of which are yet to be
announced. This package likely includes already announced monetary measures and support package for
the vulnerable. Given the limited fiscal space, current package is expected to be mix of credit guarantee,
income tax relaxation, existing budgeted spends being re-purposed rather than fresh spending , which
would imply a slower U-shaped recovery, rather than a V shaped one. However, key reforms on land, labor,
liquidity, and laws coming out from this package would mean more for India’s medium to long term growth
story.
We are also expecting earnings downgrades in H1FY21, which, we believe are not priced in by the markets
yet. Consequently, we expect equity markets to remain range bound with a downward bias and expect
quality and non-quality performance polarization to continue.
RBI is expected to cut repo rate by 50-75bps in CY 2020 to provide support to growth and revive economy.
Given the continued risk aversion of lenders and liquidity crunch in AA- & below rated corporate bond
space, we believe that corporate bonds space will continue to see polarised performance too.
• Equity - Staggered investments over 6 months in funds or portfolio with bias towards high quality
businesses.
• Preference for mutual funds and Portfolios with large cap and quality mid cap holdings.
Recommended mix is 65% large cap, 25% mid cap and 10% small cap.
• Select stocks in consumer staples, health care, telecom, Insurance and select private banks and
quality NBFCs, who manage the economic downturn and post earnings growth, will deliver positive
returns.
• Avoid highly leveraged companies, companies with high fixed operating cost structures, wholesale
lenders, consumer discretionary companies and real estate players.
• Fixed Income – Prefer AAA corporate bonds & Government Securities with 3-5 years maturity profile
with > 1-year investment horizon.
• International Investments – recommend International equity and fixed income opportunities to
diversify country and currency risk. Prefer US equities, Technology oriented funds and Emerging
market US Dollar Bonds.
• Gold - In light of heightened global economic uncertainty and low/negative interest rates across
the globe, Gold as an asset class should do well.
Investment Outlook
3
13th May 2020
India’s COVID trajectory remains relatively comfortable so far India’s COVID trajectory so far has been relatively flatter and much more comfortable compared to other
countries in the world with 63,400 cases as of 1.30pm, 10th May (source: Covid19India.org). It’s been 57
days (as of 10th May), since India recorded its 100th case and most European countries were inching close
to 2,00,000 cases at this benchmark while number of cases in US has just crossed 1million cases on the
comparable day. Only handful countries like Switzerland, Singapore, South Korea, Israel, Japan, Australia
have had less cases than India on 57th day after the number of cases reached 100 in the respective country.
Also, current pace of doubling in India is 12 days against while it was about 2.5 days when lockdown was
instated on 25th March (based on data sourced from Bloomberg).
Exhibit 1: Total cases growth trajectory:
India’s curve relatively much flatter…
Exhibit 2: and deaths’ trajectory even more
comfortable, with around 2000 deaths
Source: Bloomberg Source: Bloomberg
Exhibit 3: Number of cases across countries on 54th Day (7th May for India) after they marked their 100th case
Numbers
in ‘000s US UK Italy Spain Germany France Iran China Belgium
Cases on
54th day
939 158 169 206 153 185 82 81 47
Canada India Switzerland Singapor
e
South
Korea Israel Japan Australia
61 56 29 10 11 16 8 7
Source: Bloomberg
0
50
100
150
200
250
0 6
12
18
24
30
36
42
48
54
60
66
72
78
84
90
96
10
2Total cases, '000s
Days since 100th case
India USUK ItalySpain GermanyFrance IranChina Brazil
US: 1.26mn
0
5
10
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20
25
30
0 6
12
18
24
30
36
42
48
54
60
66
72
78
84
90
96
10
2
Total deaths, '000s
Days since 50th death
India US UKItaly Spain GermanyFrance Iran ChinaBrazil Belgium CanadaIndonesia Netherlands Portugal
US:76k
Investment Outlook
4
13th May 2020
The flatter trajectory has been achieved at a significant economic cost and human
hardship Despite frail health infrastructure and being home to world’s most populous cities, India’s flatter COVID-19
trajectory has been achieved on back of the hardest lockdown in the world (Exhibit 4) which in turn has
been achieved with maximum restriction on movement. With this, a major part of daily wage earners, small
businesses and self-employed people have seen a significant impact to their earnings. Consequently, the
economy is simultaneously experiencing demand and supply shock, making it more difficult than the crises
seen earlier. While there has been partial opening since 20th April, which has further expanded from 3rd
May onwards, return to normalcy looks difficult as most metro cities and demand centers have been
classified as red zones, leading to a stricter lockdown in these areas, than rest of the country. Unfortunately,
the wide opening may still be sometime away. Amidst the nation-wide lockdown, we have also seen
significant rise in unemployment (unemployment rate at 27% on 3rd May 20 as per CMIE), while few
agencies expect India’s Q1FY21 GDP to see a decline with estimates ranging from -10% to -20%yoy decline.
Exhibit 4: Lockdown stringency across
governments
Explaining the chart:
• The index is based on 17 indicators including
travel bans and emergency health care. The
Data is compiled and analyzed by Blavatnik
School of Government at the University of
Oxford
• The chart indicates that India reinstated the
strictest lockdown in the world at early
stages of the spread, given the high
population density and weak health care
infrastructure in the country.
• India’s current index value stands at 93.6
against 97.1 at peak
• While India has contained the spread of the
disease, it has come at a significant economic
cost
Source: University of Oxford; Dated 7th May 20
0
20
40
60
80
100
120
1
10
50
10
0
50
0
1,0
00
5,0
00
10
,00
0
50
,00
0
70
,00
0
1,0
0,0
00
2,0
0,0
00
3,0
0,0
00
5,0
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00
10
,00
,00
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20
,00
,00
0
Stri
nge
ncy
Ind
ex
valu
e (
#)
Number of cases
India Italy Spain
South Africa United States China
South Korea Japan
Investment Outlook
5
13th May 2020
Exhibit 5: India’s unemployment rate at a high of 27% as of 3rd May
Exhibit 6: Mar-20 GST collection down 8.4%yoy
Source: CMIE Source: PIB
Expect a contraction in GDP in FY21 Exhibit 7, lists out the GDP forecast for FY21 and FY22 (wherever available) by key global agencies (IMF,
World Bank, ADB), rating agencies and broking institutions. While on an average these agencies expect
0.25%yoy GDP growth in FY21 and 6.9% yoy growth in FY22 (due to low base effect), of these forecasts by
global agencies are most optimistic and broking institutions are least optimistic.
Exhibit 7: GDP growth expectations across institutions
India's GDP forecast (%) FY21 FY22 FY21 FY22
Global Agencies Broking Institutions
IMF 1.87 7.40 Axis Capital -1.70 9.90
ADB 4.00 6.20 UBS -0.40 7.00
World Bank 2.80 5.00 CLSA 2.80 7.00
Average 2.89 6.20 Barclays 0.80 7.70
Goldman Sachs -0.40 Rating Agencies Citi 0.60 8.0
CRISIL 1.80 7.50 Kotak -2.00 Moody's 0.20 5.80 Nomura -5.20
Fitch 0.80 6.70 Average -0.69 7.92
ICRA -1.0 to -2.0 CMIE 0.10 4.50 Average of all 0.25 6.89
Average 0.18 6.13 Source: Incred Research, IMF, ADB, WorldBank, Rating Agencies, Broking Institutions
In our view, the GDP output may be even lower than the forecasts available above and we expect to see a
contraction in GDP this year. The contraction will be driven by mobility restrictions, which will remain in
place till a vaccine or a cure treatment is found and made available to public at large. While, social
distancing will be a new normal for FY21, a quick containment of the infection and development of vaccine
would be the two key factors guiding the economic activity, in our view
While we expect industries in general to recover to their 60-70% output compared to pre-covid levels by
June end, but social distancing norms and transient lockdowns will continue to impact supply. Also,
economic hardship/unemployment would continue to impact demand and particularly discretionary
consumption during the year.
0
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10
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25
30
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10
20
30
40
50
May
-19
Jul-
19
Sep
-19
No
v-1
9
Jan
-20
Mar
-20
May
-20
UER
(%
)
LPR
(%
)
Labour participation rate (LPR)
Unemployment rate (UER)
-12
-6
0
6
12
18
24
800
900
1000
1100
1200
Sep
-17
Dec
-17
Mar
-18
Jun
-18
Sep
-18
Dec
-18
Mar
-19
Jun
-19
Sep
-19
Dec
-19
Mar
-20
Total GST Collection (Rs bn)
yoy (% - RHS)
Investment Outlook
6
13th May 2020
In terms of components of economic recovery, we expect Agriculture on value added
side and Government spend on expenditure side to support the economy. While
Industries such as hospitality, discretionary consumption and private capex would
see the biggest blow. Consequently, rural economy is expected to stand out by
very virtue of significant weakness in urban consumption.
Expected divergence in rural and urban performance, provided upcoming Kharif
season holds well On 3rd May, MHA allowed partial opening of the country, while dividing it into zones (green, orange and
red zones) based on spread and growth rate of COVID-19 cases. There are total of 130 districts in red zone
while about 603 in green and orange zone combined, implying significant movement restriction in 18% of
the country while rest of it opens up to a large functional extent. Top fifteen districts in red zone account for
64% of the of covid-19 cases and out of these, 5 account for 50% of the cases, as per Niti Aayog. Top five
COVID-19 contributors are Mumbai (17%), Delhi (11.3%), Ahmedabad (9.8%), Chennai (5%), and Pune
(3.4%) and these happen to be the major demand drivers as well as important stops in supply chains across
the country. Given the high population density in most metros, containment efforts are expected to
continue to be challenging and we expect only a portion of economy to become fully operational, even
when these areas seeing opening up at a later date, implying a contraction in urban consumption and
output.
On the other hand, if Kharif output pans out normal, it will support the demand in rural areas. Also, in
Q1FY21, we expect Agri GVA to find support from strong Rabi output in end FY20 (Exhibit 8).
Hence, even though the growth in Agri and allied GVA standalone may not be very strong but it will outpace
the urban by the very virtue of decline in urban demand and possibly output too.
Exhibit 8: Strong Rabi output in FY20 to support Q1FY21 Agri GVA growth
Output growth, yoy (%)
Exhibit 9: Geographical spread of Red, Orange and Green zones in India
Source: CMIE
Source: MapmyIndia.com, as of 11th May 2020
-15
-10
-5
0
5
10
15
20
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
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-15
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20
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-17
20
17
-18
20
18
-19
20
19
-20
yoy (%) Rabi Kharif Total
Investment Outlook
7
13th May 2020
Road to recovery: all eyes on vaccine development timelines Vaccine or treatment development is going to be the biggest monitorable in our view, as that is a single
determinant for normalcy to return in the economy, globally. Typically, clinical trial of a vaccine takes about
5-6 years alone, with average time taken to develop a vaccine are 10.8 years, as per IFPMA (International
Federation of Pharmaceutical Manufacturers and Associations). Vaccine for Ebola was the fastest
developed vaccine so far, which took about 5 years. As per The Economist, Ebola vaccine went in from
phase 1 to phase 3 trials in just ten months.
For COVID-19 vaccine development, wide set of healthcare players are touting the time of vaccine
availability to come down to 12-18 months with an all hands-on deck approach and accelerated production,
while vaccine is still in clinical trial stages. Most of the global pharma majors and research institutes are
collaborating with around 123 vaccines and 200 treatments under development, as per Milken Institute on
9th May. Remdevisir and Favilavir are two antiviral treatment candidates, where hopes are high. Of the 123
vaccines mentioned in Milken Institute tracker, 8 are under clinical trials already. Given a simultaneous
production (along with clinical trials) and quick conditional approvals, the essential supplies (for health care
workers and vulnerable patients) could start as early as Sep-Dec-20, while they will be available to larger
public by mid of CY 2021, in our view. At best, these timelines may be pushed by 3-6 months because of
out of control delays, which would mean an economic would return to normalcy in last quarter of FY22.
Exhibit 10: Progress across key vaccine candidates
Source: Bloomberg
Stimulus is key for survival Of the two levers for stimulating the economy, monetary and fiscal – monetary has done majority of heavy
lifting so far (Exhibit 11). Through various measures RBI has tried to ensure that there is enough liquidity in
the system along with a focus on the transmission of liquidity by means of rate cuts, widening the corridor
between repo rate and reverse repo rate, by bringing CRR & LCR down, but the biggest road block has
been risk aversion in banks to lend to real economy as well as finding enough investable small and mid-
sized NBFCs for TLRTO2.0. We believe that monetary measures by most means are far and enough and RBI
is constantly expanding its tool kit to ensure that India’s financial system remains stable and doesn’t freeze.
Investment Outlook
8
13th May 2020
Exhibit 11: Key Measures announced by RBI so far
Measures So Far Extended Impact Incred Comments
Measures by RBI
3 months moratorium for all
term loans To keep the businesses and retail
loanees solvent, while cash flows dry up Positive as keeps financials system
afloat amidst lockdown
Cut repo rate by another 75bp
bringing total rate cut of
210bp To bring the costs of borrowing down
Very limited transmission to lending
rates so far.
Widening the corridor
between repo and reverse
repo rates to 65bps
To encourage banks to lend more,
instead of parking cash with RBI Limited impact, banks have been risk
averse in general
CRR cut by 100bp and easing
of MSF conditions Intended to free up liquidity for banks
Should help with cash availability for
banks while borrowers avail
moratorium
TLTRO for investment grade
corporate bonds, CPs and
NCDs
To support liquidity in corporate bonds
markets Limited support with AAA rated
corporates receiving the lions share
TLTRO2.0 for smaller NBFCs
and MFIs To support liquidity for smaller NBFCs,
where the money has been scarce
First auction invited only part bids on
account non-availability of investment
grade small size NBFCs and risk
aversion from banks
Refinancing facility to SIDBI,
NABARD and NHB worth
Rs500bn (to start with)
To support vulnerable segments with
lower liquidity access This way may be more supportive of
liquidity transmission in our view
Increasing ways and means
advances limit for states To help states tide through the lockdown
as tax collections dry up Positive
10% provisioning for loans
overdue on 29th Feb 20 and
availing moratorium To keep banks healthy
Negative from costs perspective, but
positive for health of overall banking
system
Source: RBI
However, the other part of the recovery requires intervention and stimulus from the government, without
which the recovery would be slow. The PM (on 12th May) has announced a stimulus package worth Rs20trn
(~10% of India’s GDP), which likely includes measures announced by RBI so far(discussed above) and PM
Gareeb Kalyan Scheme (including food security and DBT cash transfer), pegged at Rs1.7trn by the
government. The details of this package are yet to be announced.
Investment Outlook
9
13th May 2020
All eyes on contours of announced stimulus package, which are to be announced shortly:
The central government increased it’s borrowing expectations (on 8th May) from Rs7.8trn to Rs12trn (an
increase of Rs 4.2trn) to manage expenditure as tax collections run dry. With a 2% nominal GDP growth in
FY21, it will imply a fiscal deficit of 5.8% of GDP, against 3.5% earlier budgeted. While 30bp fiscal slippage
can be attributed to the weak GDP growth on nominal basis, 200bps slippage would be on the back of miss
in revenue collection for the year (tax collection and disinvestment target miss, combined) and recently
announced stimulus.
In upcoming announcements by FM, we will watch out for: a) what percentage of this package is monetary
in nature, assuming RBI measures are included here, b) what portion of the package will comprise credit
guarantee scheme (a relatively lower expense), c) we will look out for bank recapitalisation number too
(which will be broadly fiscal neutral in our view), and d) what percentage of this package will be the fresh
expenditure and what will be the restructuring of existing expenditure. e) temporary tax break for impacted
sectors like MSMEs, aviation, retail, real estate etc., f) direct monthly income support to the impacted labour
(larger than what is being offered now), g) immediate investment on health infrastructure to fight the
disease.
Managing the delicate balance between borrowing and growth, while trying to save
sovereign credit rating: Also, though India’s sovereign debt rating currently is investment grade, but
it’s just a notch above junk rating, except in the case of Moody’s, where it is two notches above junk grade
(Exhibit 12). Hence, any downgrade in S&P and Fitch ratings may turn out costly for the economy, while
downgrade in Moody’s may be unavoidable now, in our view. Borrowing by the government and India’s
growth expectations would be the two key factors being monitored by rating agencies globally.
Consequently, A weak growth would also eventually pose a risk to rating downgrade across all agencies as
much as increased borrowing does. This makes, treading this path, a very delicate act. However, as fiscal
deficit of economies globally will balloon this year (owing to the unprecedented crisis), we don’t see an
imminent downgrade risk for S&P and Fitch ratings, if the expansion in fiscal deficit is prudent and
measured. Current borrowing targets remain comfortable, in our view. We believe the risk of outlook
downgrade would be higher than rating downgrade, here. However, if at a later stage the borrowing is to
grow beyond a certain limit or growth fails to recover, the risks of rating downgrade will be materially
higher.
Exhibit 12: India’s Sovereign Debt Rating
Outlook
Long term foreign currency
debt
Long term local currency
debt
Moody's Negative Baa2 Baa2
S&P Stable BBB- BBB-
Fitch Stable BBB- BBB-
Source: Rating Agencies, InCred
Investment Outlook
10
13th May 2020
Valuations and Outlook - Polarisation in equity performance to continue:
Equities: Focus on large cap and quality mid-caps
Though Nifty50 fell 38% from YTD highs to 7610 levels, it has traced backed back up 22% from the lows,
as of 8th May. At 18.2x current trailing PE, it is below lower 1 standard deviation band for last five year’s
average at 22.4x (Exhibit 13, we are looking at trailing earnings from Bloomberg as next 12 months earnings
outlook remains clouded). The quick retracement of headline index over last one month, is probably pricing
in a quick recovery. However, we believe that in light of limited fiscal space, stimulus would be more
measured, the recovery would be slower U-shaped rather than a V-shaped one. Consequently, even though
the valuations may look attractive now, we feel that the market still hasn’t priced in the earnings downgrade
that are expected in H1FY21, which would leave the equity markets range bound in near term with a
downward bias.
Lenders also seem to be averse to lending at a broader level and smaller corporates below AAA grade
investment rating continue to struggle for liquidity and funds. This would imply that polarization in market
returns will continue with strong and quality corporates continuing to perform well while mid and small cap
will continue till struggle till either there is fiscal support to the distressed or economy gets back on track
again.
Exhibit 13: Nifty 12 month trailing PE below lower 1 standard deviation band for last 5 year’s average…
Exhibit 14: … trailing P/B as well looks comfortable
Source: Bloomberg
Source: Bloomberg
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10
12
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22
24
26
28
No
v-0
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May
-02
No
v-0
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May
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No
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6
May
-08
No
v-0
9
May
-11
No
v-1
2
May
-14
No
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May
-17
No
v-1
8
May
-20
Nifty, 12 month trailing PE ratio
Last five year's average P/E
+1/-1SD
1.5
2
2.5
3
3.5
4
4.5
May
-00
Jan
-02
Sep
-03
May
-05
Jan
-07
Sep
-08
May
-10
Jan
-12
Sep
-13
May
-15
Jan
-17
Sep
-18
May
-20
Nifty 50, 12m trailing P/B
Last 5 year's avearage
+1/-1SD
Investment Outlook
11
13th May 2020
Exhibit 15: Gap between 10 year G-sec yield and Nifty earning yields lowest in last 10 years
Exhibit 16: BSE Mid cap valuations have corrected too, but still away from previous bottoms
Source: Bloomberg
Source: Bloomberg
Fixed Income: Continue to prefer quality and short tenure • RBI is expected to cut repo rate by 50-75bps in CY 2020 to provide support to growth and revive
economy.
• Given a) the continued risk aversion of lenders and b) liquidity crunch in AA- & below rated
corporate bond space, c) along with a very limited success of TLTRO 2.0 by RBI, we believe that
with corporate bonds space will continue to see polarised performance too. Consequently, we
continue to like AAA corporate bonds within 3-5 years maturity (with > 1 year investment horizon).
Even after the recent rally, spread between 3 year AAA and 1 year T-Bill is 220 bps as compared
100 bps, 3 months ago.
• We believe overall yields remain attractive as RBI will continue to do the heavy-lifting towards revival
of economy, thus by focusing on keeping the interest rates low in near to medium term. We believe
benefit of lower yield will flow to the shorter end of the curve while longer end of the curve (10 year
Govt Security) will continue to see stickiness (range bound between 5.8-6.3%) on account of weak
tax collection and a pressure of (even if) mild fiscal stimulus, needed for the economy.
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
No
v-0
0
May
-02
No
v-0
3
May
-05
No
v-0
6
May
-08
No
v-0
9
May
-11
No
v-1
2
May
-14
No
v-1
5
May
-17
No
v-1
8
May
-20
10 year G- Sec yield - 12m trailingEarnings yield
Last 5 year's average
8
13
18
23
28
33
38
43
48
May
-06
Jul-
07
Sep
-08
No
v-0
9
Jan
-11
Mar
-12
May
-13
Jul-
14
Sep
-15
No
v-1
6
Jan
-18
Mar
-19
May
-20
BSE Mid cap, 12m trailing PE
Last five year's average
+1/-1SD
Investment Outlook
12
13th May 2020
Investment Recommendation • Equity - Staggered investments over 6 months in funds or portfolio with bias towards high quality
businesses.
• Preference for mutual funds and Portfolios with large cap and quality mid cap holdings.
Recommended mix is 65% large cap, 25% mid cap and 10% small cap.
• In terms of sectors,
o Healthcare to continue to do well on account better earnings visibility and demand.
o FMCG is not pricing in the bad Q1 expectations probably, hence we expect a near term
weakness in the space. We believe that over medium term, consumer staples will be better
placed on earnings visibility, hence would recommend accumulation on weakness.
o Telecom will be a beneficiary of the new interim normal as people practice social
distancing, data and digital content consumption goes up, and work from home continues.
Also, in near future digital interactions will continue to be preferred over travelling.
• Stocks - Prefer market leaders, companies with dominant market share and good cash position.
Avoid highly leveraged companies, companies with high fixed operating cost structures, wholesale
lenders, consumer discretionary companies and real estate players.
• We believe that select financials will resume uptrend after NPA concern is addressed and well
managed Banks and NBFCs should do well over long term. Hence, recommend accumulating
private retail banks and good quality NBFC over next few quarters. Post Covid-19 both Life &
general Insurance companies will do well due to focus on risk cover.
• Fixed Income – Prefer AAA corporate bonds & Government Securities with 3-5 years maturity profile
with > 1-year investment horizon.
• International Investments – recommend International equity and fixed income opportunities to
diversify country and currency risk. Prefer US equities, Technology oriented funds and Emerging
market US Dollar Bonds.
• Gold - In light of heightened global economic uncertainty, we expect risk-off sentiment of investors
to sustain. Moreover, low/negative interest rates across the globe bode well for returns on Gold as
an asset class, as investors favor it. We believe that the central banks will continue accumulating
gold too, in line with trend observed over last few years. All these factors bode well for gold as an
asset class.
Investment Outlook
13
13th May 2020
Disclaimer
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