Monthly Outlook ( Equity, Debt & Gold) by Quantum AMC Fund Managers

Monthly Gold Outlook – June 2022

International gold prices closed at $1,837 in May, 3% lower compared to April as the geopolitical premium from the Russia-Ukraine war continued to wane and the Federal Reserve’s monetary tightening gathered pace. Domestic prices were down 2%, closing the month at Rs 50,847 levels.

The U.S Central bank - Federal Reserve hiked the benchmark interest rate by 50 bps in May to 0.75% to control rising inflation, which grew by 8.3% y/y in April. Although the inflation number is marginally lower compared to the 8.5% in March, it is still historically high and way above the Fed’s 2% average inflation target. To that effect, the market has priced in two more 50 bps hikes in the subsequent meetings, which is reflected in the weakness in gold prices. The Fed Fund Futures rate suggests a rate hike of more than 200 bps by December 2022 in the next five meetings, which if materialized, will be a headwind for gold. Gold will also have to navigate the trimming of the Federal Reserves’ balance sheet by an anticipated trillion dollars, which is set to begin in June, as this puts upward pressure on interest rates.  

The FOMC’s primary concern is controlling inflation and at the same time supporting the job market to check unemployment. While the employment rate currently is robust, excessive inflation is playing a spoilsport which may hurt the economy going forward. Rising inflation reflects the price surge in key commodities such as Brent oil, which is hovering around $120/bl, up 58% YTD. Food prices have also shot up leading to inflation as evidenced by the CRB Food Index which is up by 20% YTD. Overall, the CRB commodity index surged 9% since the start of this year.

The Fed’s aggressive stance to curb inflation has put upward pressure on the US Dollar. The dollar index (DXY), which is the dollar currency index measured against a basket of leading currencies, strengthened to 105 during the month, the highest level since 2002. Given the fact that historically, gold has negatively correlated with the US dollar, gold prices came under pressure, temporarily falling below the key level of $1,800.

Additionally, the yield on US 10Y TIPS, which are inflation-indexed bonds that factor in the expected nominal yield and average inflation over the next 10 years, has also turned positive for the first time in two years, indicating positive inflation adjusted returns for the investors. This has further acted as a headwind for the gold prices as investors take money out of the non-yielding asset to lock in positive real returns.

However, there was a reversal in the above trend by the end of May as fears of a recession overtook concerns about rising inflation. The DXY retreated to 101, US TIPS yield declined to 0.11 from a two year high of 0.34. This made gold more appealing to the investors taking the price to a high of $1,870 from the low of $1,787 during mid-May. The recent volatility in equities is also increasing the lure of gold from a portfolio context.

Looking at the domestic gold prices, gold has given a return of 6% YTD compared to Sensex which is YTD negative by 5%. The positive return on gold in the domestic market is also a result of the Indian Rupee (INR) depreciation against the US dollar. INR has depreciated by around 4% YTD. This puts gold in a sweet spot.

 

Going forward, gold looks better placed fundamentally given the fact that sustained supply shock inflation will act as a tailwind to gold prices. Moreover, as widely anticipated, a “policy mistake” by the Fed, where the central bank fails to achieve a soft landing with the gradual tapering program, will hurt the economic growth. To that effect, there have been GDP growth forecast cuts by financial institutions. Goldman Sachs Group has lowered the US GDP growth forecast to 2.4% from the earlier 2.6% in 2022, and 1.6% from the projected 2.2% in 2023. JP Morgan has also cut its forecast for the H2.22 to 2.4% from 3%. Continued high inflation, given much of it is aided by supply side pressures, along with slowing economic growth may result in a stagflation-like scenario. This bodes well for gold prices.  

Additionally, any escalation in the Russia-Ukraine war will reignite risk aversion, creating demand for the yellow metal. On the contrary, even if the situation eases on the war front, the negative impact of the imposed sanctions on the economy will keep commodity prices elevated and abate growth in the medium term until countries adjust to the new normal. This uncertainty is reflected in the gold price as the YTD return on gold is still marginally positive compared to other asset classes such as equities and bonds, which have generated negative returns.

The prices may continue to remain rangebound for the next few months as investors gauge the impact of policy on economic growth. Moreover, if inflation persists or becomes entrenched, we can see a repricing of inflation expectations going forward which could again bring down yields on the TIPS, giving gold a push. Also, with the RBI again expected to increase rates in June and beyond, volatility in stock and debt markets will persist. Therefore, allocating some part of the portfolio to gold can help investors tide through the macroeconomic and geopolitical uncertainties.

Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video 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. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). 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. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article 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. 
Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Equity monthly view for June 2022

S&P BSE SENSEX declined by -2.16 % on a total return basis in the month of May 2022.

It has underperformed developed market indices like S&P 500 (+0.18%) and Dow Jones Industrial Average Index (+0.32%). S&P BSE SENSEX has also underperformed MSCI Emerging Market Index (0.46%). The broader market has been weaker, S&P BSE Midcap Index has declined by -5.5% for the month & S&P BSE Small cap Index declined by 7.8%. The Power & Metal Sectors which have been hogging the limelight over the past few months were the biggest losers falling by 11.3% and 15.5% respectively. The BSE Auto Index was the only sectoral indices in the green moving up by 4.9%.

Quantum Long Term Equity Value Fund (QLTEVF) saw a decline of -1.1% in its NAV in May 2022. This compares to a -4.15% decline in its Tier I benchmark S&P BSE 500 & -3.78% decline in its Tier II Benchmark S&P BSE 200. Some of our stocks in the Auto & Financial sector showed resilience in an otherwise weak market & contributed to the outperformance. Cash in the scheme stood at approximately 2.3% at the end of the month. The portfolio is attractively valued at 13.6x FY24E consensus earnings vs. the S&P BSE Sensex valuations of 18x FY24E consensus earnings.

FPI outflows remain unabated

Month	FPI Flows (in USD mn)
Mar-20	-8,348.38
Mar-22	-5,384.94
May-22	-5,178.19
Feb-22	-4,742.25
Jan-22	-4,459.82

Source: NSD

May-22 has seen FPI outflows of US$ 5.17 bn. This has been the thirst worst month of FPI flows since FPI investments were allowed to invest in India in 1991. Interestingly, of the five ‘worst ever’ months of FPI flows, 4 have come in this calendar year. Domestic institutional investors (Mutual Funds & Insurance put together) have been net buyers for May 2022 to the tune of US$ 6.57 bn.

Interest rates are expected to continue to move up in response to rising inflation

Geopolitical challenges & supply chain disruption are ensuring unabated inflation pressure across the globe. India’s inflation problems are mostly imported & higher crude prices largely explain the same (India imports 85% of its crude oil requirement). To tackle rising inflation central banks are increasing interest rates & sounding hawkish. In India, the consensus expects RBI to increase repo by 180 bps increase in the current financial year. This should take repo to approximately 6-6.5%.

The repo rates have been at 6-6.5% levels many times in the past & Indian businesses & investors should not have a problem adjusting to this increase in the cost of capital after initial hiccups. Even history suggests that equity markets quickly adjust to higher rates. In fact, since 2005 in every rate hike cycle Indian equities have given positive returns.

Interest Hike Cycles		NIFTY
	Hikes (bps)	Hike Period Return	T-3 returns	T-6 Returns
Oct'05-Jul'08	300	66.0%	29%	23%
Mar'10-Oct'11	375	6.2%	1%	3%
Sep'13 - Jan'14	75	11.3%	-3%	1%
Jun'18-Aug'18	50	9.2%	6%	3%

Source: Bloomberg.
T-3 is three months return prior to the first-rate hike
T-6 is six months return prior to the first-rate hike

FY2021-22 ends with an earning upgrade for Sensex

From FY2013-14 till FY20-21 the reported earnings of Sensex have always fallen short of expectations at the start of the year for reasons that are both manmade & natural. In 2016 it was demonetisation, 2017-GST, 2018-IL&FS crisis, 2020 & 2021 covid-19 induced lockdown. FY2021-22 has been the first year in the last nine years where reported earnings of Sensex have been higher than what was envisaged at the start of the year. Trends in residential real estate sales & hiring in the IT sector gives us the confidence to believe that this corporate earning upgrade cycle will continue for the next three-four years. The current environment of higher inflation might delay but will not derail it

EPS estimates	FY14	FY15	FY16	FY17	FY18	FY19	FY20	FY21	FY22
Start of the year	1467	1557	1793	1625	1720	1887	2044	1910	2291
Actuals	1343	1516	1390	1432	1526	1681	1829	1543	2321
Deviation	-8.5%	-2.6%	-22.5%	-11.9%	-11.3%	-10.9%	-10.5%	-19.2%	1.3%

Source: Bloomberg

Equity investors who have invested in equity markets in the last two-three years have seen mostly positive returns & a swift recovery after every correction. The current volatility & slow grind of the markets will test their patience. The new-age investors need to reset their expectations & also understand that equity investing is a long-term game. They should have a 3-year + view while investing in equities. Investors also need to align the asset allocation plan to long-term financial goals. The near-term volatility in the market should be used by investors to increase allocation to equities in a staggered manner to align with the asset allocation plan.

Product Labeling

Name of the Scheme	This product is suitable for investors who are seeking*	Risk-o-meter of Scheme	Tier 1 Benchmark	Tier 2 Benchmark
Quantum Long Term Equity Value Fund (An Open Ended Equity Scheme following a Value Investment Strategy) Tier I Benchmark: S&P BSE 500 TRI	• Long term capital appreciation • Invests primarily in equity and equity related securities of companies in S&P BSE 200 index.	Investors understand that their principal will be at Very High Risk

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
The Risk Level of the Scheme in scheme Risk O Meter is basis it's portfolio as on May 31, 2022.
The Risk Level of the Tier I Benchmark & Tier II Benchmark in the Risk O Meter is basis it's constituents as on May 31, 2022.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video 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. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). 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. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article 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.

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

Please visit – www.QuantumAMC.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956

Monthly Debt View – June 2022

The MPC (Monetary Policy Committee) of the RBI raised the policy repo rate by 50 basis points from 4.40% to 4.90%. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65%, and the marginal standing facility (MSF) rate, and the Bank Rate to 5.15%.

The MPC also dropped the phrase “staying accommodative” from its forward guidance and guided it to “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”.

Consumer price inflation has been running above the RBI’s upper threshold of 6% since the start of this year averaging at 6.72% between January-April 2022. RBI’s own estimate of average inflation in the fiscal year 2022-23 has been revised higher from 5.7% to 6.7%.

The RBI is now squarely focused on bringing down inflation. The MPC statement noted - “Continuing shocks to food inflation could sustain pressures on headline inflation. Persisting inflationary pressures could set in motion second round effects on headline CPI. Hence, there is a need for calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures.”

Taking into account the introduction of the SDF in the April monetary policy at rate of 25 basis points below the repo rate, the RBI has raised the effective overnight interest rate by 130 basis points over the last two months. The floor policy rate before the April monetary policy was at 3.35% (the reverse repo rate). It has now moved to the SDF rate of 4.65%.

This clearly shows a sense of urgency within the RBI to withdraw the ultra-easy monetary policy.  

Given the fact that the policy repo rate is still significantly lower than the expected inflation rate, the RBI may continue with the rate hikes in the remaining MPC meetings in 2022. However, the pace of rate hikes (quantum of hike in each policy) may slow down after the covid time the ultra-accommodative monetary policy is reversed.

Before the Covid shock, the Repo rate was at 5.15%. With another 25-50 basis points hike in the August meeting, the repo rate will get to the pre-covid level. Overall, we expect the repo rate to peak around 6% by early 2023.

On liquidity, the RBI reiterated to normalise the pandemic-related extraordinary liquidity surplus over a multi-year time frame though it kept the CRR (Cash Reserve Ratio) rate unchanged in this policy.

The bond market was already pricing for a 40-50 basis points rate hike in this policy. So, the policy outcome was broadly in line with the market expectation.

However, after the surprise repo rate and CRR hike on May 4, 2022, the market had built in some premium for another CRR hike and/or an outsized repo rate hike in this policy. To that extent, there was a positive surprise for the bond market.

Bond yield came down 3-9 basis points after the policy announcement. The 5-year government yield came down from 7.36% to 7.28% during the day.  

Much of the potential rate hikes are already priced in the current bond valuations. The yield spread between the 3-year bond (6.94%) over the 3 months treasury bill (4.98%) is around 196 basis points vs its long term 20 year average of around 70 basis points.

Thus, the bond market may not be too sensitive to RBI’s rate hikes going forward. However, high uncertainty over global monetary policy, rising crude oil prices, and unfavourable demand-supply dynamics will continue to put upward pressure on medium to long-term bond yields.  

Lending rates have already moved up as most loans today are linked to benchmarks like Repo rate or MCLR. We should expect further upward revision in lending rates. The interest rate on fixed deposits will also move higher in the coming months.

From an investor's perspective, the return potential of liquid and debt funds has improved significantly after the sharp jump in bond yields over the last six months. The gap between the bank savings rates and liquid fund returns will widen and remain attractive for your surplus funds. Investors with a short holding period and low-risk appetite should stick to categories like liquid funds of good credit quality portfolios.  

Medium to Long term interest rates in the bond markets are already at long-term averages as compared to fixed deposits which remain low. Investors with more than 2-3 years holding period can consider dynamic bond funds which have the flexibility to change the portfolio positioning as per the evolving market conditions. However, such investors should be ready to tolerate some intermittent volatility in the portfolio value.  

In the Quantum Dynamic Bond Fund, we have been avoiding long-term bonds for some time due to our cautious stance on the markets. After the steep sell-off in the last two months, valuations have become attractive on medium to long-term bonds. However, given the high uncertainty as mentioned above, we will continue to be cautious in adding into long-duration bonds as a core portfolio position.

We continue to like the 3-5 year segment of the bond market, the bulk of the QDBF portfolio is in 3-4 year maturity government bonds.

We would remain open and nimble to exploit any market mispricing by making a measured tactical allocation to any part of the bond yield curve as and when the opportunity arises.

We stand vigilant to react and change the portfolio positioning in case our view on the market changes. 

Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video 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. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). 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. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article 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. 
Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.