While trade had taken a huge setback under lockdown, we also analyzed how the Mutual Fund industry is experiencing certain headwinds.

Fresh skirmishes at Galwan Valley, in Ladakh, spoilt the mood at so many levels. It goes without saying that regional peace is of paramount importance for the safety of citizens as well as overall sentiments of investors.

The market recovered after reports that India and China have engaged in talks to defuse the situation. But, aggressive posturing from Beijing could continue to weigh on investor sentiments.

Shrinking fiscal deficit a big positive: Well, not exactly:

Last month, while the economy was trying to find its feet, India's trade deficit fell to an 11 year low. This is usually good news when an economy is thriving. However, under the current COVID-19 disruption, it only signifies the deep pain that our economy is in.

Shrinking trade deficit in May indicates a complete standstill in trade and the economy. India's exports contracted for the third consecutive month with a decline of 36.5% to USD 19 bn. Import decline was even more significant at 51 % since last year to USD 22 bn.

Petroleum imports decreased by 72% since last year to USD3.5b and non-oil imports 43.1% since last year to USD18.7b in May’20. Gold imports were down 98.4% for the month.

Retail investors throwing in the towel?

Certain headwinds are bothering even the domestic mutual fund industry.

It is evident in overall net equity inflows which dropped to a 5 month low in May (from Rs 6,700 crore to Rs 5,600 crore month over month). Notably, SIPs have also declined for the second successive month to Rs 8,120 crore (down 3% MoM) in May after hitting a high of Rs 8,640 crore in March.

Mutual Funds have also started increasing their investments in defensive stocks. Private Bank’s weightage at the same time has hit the 20-month low of 16.7%. Telecom’s weightage has increased for the seven consecutive months now to hit an all-time high of 3.9% in May.

Key takeaways:

A low fiscal trade deficit is usually good news, but in this case, highlights the impact that Covid19 has had on depleting trade.

With depleting savings and underperformance of equities in the last two years, retail investors are now running out of patience.

As market volatility continues to persist, Mutual Funds have been constantly increasing their investments in defensive stocks. These market-resistant safe stocks have now hit an all-time high at 35.5% of the overall exposure.

Teji Mandi is a proactive investment manager for everyone. To read more of our research, please visit https://blog.tejimandi.com