Fund Manager Speaks
Market Overview – December 2017 Quarter

Global Economy
The most significant thing at the onset of 2018 is the global economy outlook. For the first time in more than six years, the latest projections of the International Monetary Fund (IMF) have been revised upward. This upward revision applies to North America, Europe, China, Japan and East Asia. Even Brazil, beset with economic and political problems, is expected to do better.

USA: Following historically low levels of volatility in 2017, volatility seems to have returned over the last few days with Dow Jones touching all-time high of 26500 in Jan 2018 and subsequently correcting to 24500 levels currently.

The primary driver of the decline was investors reaction to rising interest rates. However, the underlying reason for higher rates are expectations for strong economic growth which though positive has led to concern of higher inflation and more Fed Rate hikes. Further, unemployment is at the lowest level in 17 years, the banking system has mostly healed and the recent corporate tax cuts in US from 35% to 20% will result in faster growth in earnings. However, the market is enduring a bit of conflict and it may not happen as quickly as desired, but positive fundamentals will help.

Fed Rate: The FOMC met in January following its last meeting in December wherein it had raised rates by 25 basis points to a range of 1.25-1.50%. Noting strong growth rate in economy and continued strength in job market, the fed kept the benchmark rate unchanged. This announcement has brought curtains on Jannet Yellen’s 4-year term as Fed’s chairwoman. She has been succeeded by Jerome H Powell, a Fed governor since 2012. Nevertheless, it is expected that the committee will remain on schedule to raise interest rates more frequently this year.

China: China’s economy grew faster than expected in the fourth quarter of 2017, as an export recovery helped the country post its first annual acceleration in growth in seven years, defying concerns that intensifying curbs on industry and credit would hurt expansion. The headline numbers and signs of property market resilience suggest that fundamentals are expected to remain intact in 2018 although they might see some headwinds from tighter regulations, US trade protectionism and softer consumer sector.

Indian Economy
India’s GDP growth is expected to touch 6.5% for 2017-18 and grow by 7% in H2’18 compared to 6% in H1’18. This indicates that perhaps the effect of two structural reforms – De-monetisation and GST are behind us and we can look forward for an upward trajectory in third and fourth quarter. Further, the teething troubles of GST implementation are being speedily addressed by the GST council. Further, the budget 2018 has paved way for the future, focusing capital expenditure on key sectors like agriculture, infrastructure, housing and healthcare (bringing in social security concept – if the plan goes through).

The index of industrial production (IIP) grew 7.1 per cent in December 2017, led by robust growth in manufacturing. Significantly, the capital goods sector, a barometer for investments, grew a sharp 16.4%. Consumer durables segment grew by 0.9% compared to a decline of 5% a year ago, indicating revival in demand.

The RBI at its meeting in February retained its neutral policy while acknowledging multiple upside risks to inflation. For FY18, RBI expects inflation to come in at 5.1-5.6% in the April to September period before easing to 4.5-4.6% in H2’19 thus overshooting the bank’s target of 4% for the whole year. RBI has highlighted upside risks to its inflation outlook but maintained its data dependent guidance and may only act if inflation displays a trend that is not consistent with its 4.5% forecast by late FY18.

Corporate Performance - Improved performance
Corporate India’s revenue for the quarter increased by 9.3% Y-o-Y alongwith improvement in PAT margins from 7.3% in Q3’17 to 8.3% in Q3’18.  Headline growth for India focused companies was boosted by a favourable base effect and from higher government spending especially in rural areas. Positively, many companies said that the GST related issues are now receding. Automobiles, Consumer Goods, Metal, Finance, Capital Goods companies etc. did well whereas PSU Banks, Tyres, Sugar, IT, Pharma etc. fared poorly.

Stock Market
The corporate performance has improved backed by restocking due to GST, the liquidity from domestic MFs and several measures like re-capitalization of banks etc. continue to push the positive sentiments. However, the announcement in budget w.r.t. introduction of 10% tax on LTCG along with recent turmoil in global markets has taken some shine from the returns with Sensex registering a fall of ~2000 points from a high of 36000 in Feb to current levels of 34000. This fall however was due and justified our strategy of going for ‘safe stocks’ rather than ‘growth stocks’.

“This fall is a reminder that emotions and various other factors can take the wheel for a short-time, but they rarely drive the market over a broader term”

Strategy at Care PMS
Our strategy looking at the current market situation is based on the following principles: -

Remember why you’re investing:The value of your investments won't rise every day, nor did you expect them to.  Your goals are longer term, so your evaluation of your portfolio's performance should be done over a longer period as well.

Don’t Overreact:Market declines can make you feel like you have to make a change to your strategy. If your goals haven't changed and your tolerance for risk over time is still the same, avoid the temptation to change your long-term approach based on short-term volatility. Market corrections can be a blessing in disguise. If appropriate for one’s situation, use it to your advantage.

"I’ve found that when the market’s going down and you buy funds wisely, at some point in the future, you will be happy"
- Peter Lynch

Happy Investing!

Market Overview – September 2017 Quarter

Global Economy
USA: Despite the hurricane that devastated several southern states and the rising tensions with North Korea, USA markets gained in excess of 5% for the 3rd quarter ended September 2017.

US economy maintained a brisk pace of growth as the GDP increased at 3% beating expectations and despite the disruptions caused by hurricanes Harvey and Irma. Investments rose sharply and a smaller trade deficit along with lower imports offset a decline in consumer spending.

Fed Rate: The FOMC met in September following its last meeting in July. Noting moderate economic activity, stagnant inflation and temporary effects of two damaging hurricanes, the FOMC left the target funds rate range unchanged at 1-1.25%. Nevertheless, the committee indicated that it will remain on schedule to raise interest rates at least once more this year.

China: The GDP growth of 6.8% for the 3rd quarter was in line with expectation inspite of drop in investments in manufacturing and mining as real estate sector posted healthy gains. GDP for the fourth quarter is expected to slow down due to production restriction in some areas impacting growth, tightening of liquidity and expected slowdown in the property market.

EU: Eurozone is experiencing its strongest and most sustained growth period since recession as its economy grew by 2.5% in July to September quarter. This was mainly driven by increased exports which grew by 5% and Household consumption growth of 1.9%. Germany (3%), France (2.2%), Italy (1.8%) and Netherlands (3.3%) all contributed to this strong growth.

Japan: The country’s economy expanded at faster than expected rate of 2.5%. This data shows that the economy has expanded for the 7th consecutive quarter. With recovery in global markets, exports growth helped drive corporate profits and business investment whereas wage gains and consumer spending remained lackluster. Despite a relative positive backdrop, improvement in equity market sentiment was constrained due to escalations in tensions with North Korea.

Indian Economy
India’s GDP growth rises to 6.3% in Q2’18 after falling for five consecutive quarters. This indicates that perhaps the effect of two structural reforms – De-monetisation and GST is behind us and hopefully we can look forward for an upward trajectory in third and fourth quarter. Industry sector did well with growth above 6% in mining, manufacturing, electricity, gas, water supply and other utility services. However, agriculture sector growth at 1.7% remains a concern. India GDP growth forecast has been lowered to 6.7% for 2017-18 and major hurdles like low investment, rise in private consumption and government spending would be keenly watched.

The inflation rate has been on a rising trend since the last 3-4 months and stood at 4.88% in November 2017 vs 3.58% in October as crude oil prices touched a 30-month high of $65 a barrel on 12th December. Food inflation slowed whereas prices rose at a faster pace for housing, fuel and clothing.

The RBI at its meeting in December raised its inflation projection to 4.3-4.7% for H2’18 due to firming up of global oil prices and uncertainty on kharif farm output. Further, farm loan waivers and state’s implementation of salary and allowances could push up headline inflation by 100 basis points over the next 18-24 months. Hence, the RBI decided to keep a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4% (+/- 2%), while supporting growth.

Corporate Performance - Lackluster show
Corporate India’s revenue for the quarter increased by 9% Y-o-Y even as net profits declined of 12%. Despite restocking and early festive season, demand remained sluggish. While lower GST rate benefits had to be passed on, it was difficult to do so for higher GST rates. Automobiles, Steel, Domestic Appliances, Airlines, Cement, Retail, Agro-Chemicals etc. did well whereas Telecom, PSU Banks, Tyres, Sugar etc. fared poorly.

Stock Market
Though the corporate performance was poor, the liquidity from domestic MFs and several measures like re-capitalization of banks etc. continued to push the positive sentiments. The Indian markets performance in the July to September 2017 quarter slowed down as there was continuous selling by FIIs who sold over `38500 Cr worth of shares, which was nullified by good flow of funds from Mutual Funds and general public. This has been happening since De-monetisation and is a healthy sign as dependency on FIIs is reducing. Sensex delivered a return of 1.17% during Q2’18. However, the global geopolitical tensions, slowdown in growth momentum of Indian economy and valuations of many companies are points of concern.

Strategy at Care PMS
The soaring markets are leading investors to tread a cautious path with the cash portion of many fund managers increasing significantly. However, we feel that if we follow stock specific approach, there are enough pockets of opportunities. We firmly believe in India’s long-term growth potential and although cautious, we feel that if we are able to find some “safe stories” rather than “growth stories” we should be able to do a decent job.

"Investors have to remember: Corporate profits are going up, but stocks are going up faster. How can that continue indefinitely?
Investors can only earn what companies themselves can earn. How can you get anything more out of a farm than what it grows?"
- Warren Buffett

Happy Investing!

Market Overview – June 2017 Quarter

Global Economy
USA: As in the first quarter, US stock markets shrugged off geo-political concerns and finished up 3.1% in Q2, resulting in a 9.3% year-to-date increase. Improvement in corporate earnings gave much of the support along with signs of slowing inflation. US economic growth rebounded solidly to 2.6% in second quarter after an underwhelming start of the year with both consumer and government spending bolstering the economy. Personal consumption which makes the biggest contribution to GDP growth rose by 2.8% vs 1.1% in first quarter.

Fed Rate: The Federal Reserve has continued with their hawkish monetary policy with consecutive hikes in March and June by 25 basis points each and raised the target range between 1% to 1.25%. Fed officials maintained a projection of one more rate hike in 2017 amid slightly stronger growth projections and downward revisions to its unemployment forecasts after the jobless rate fell to 16-year low in May.

China: China’s economy expanded faster than expected at 6.9% on the back of firmer exports and production, in particular steel. This strong 2nd quarter growth paves way for deeper reforms and keeps the country on track to meet its growth target of 6.5% in 2017. With USA and China set to begin economic talks, simmering trade tensions are expected to provide some uneasiness in the coming months.

EU: Eurozone equities advanced in the second quarter with the MSCI EMU index gaining by 1.8% mainly due to reduced political risk, positive economic data and improved corporate earnings. Markets responded positively to Emmanuel Macron’s victory as this will enable him to push his reforms agenda and the risk of eurozone break-up has greatly diminished.

Japan: After weakening in the early part of April, the Japanese market trended upwards for most of the quarter to end 6.8% higher. The corporate results season for the fiscal year to March 2017 was completed in May, with a majority of companies reporting profit figures above expectations. Despite a relative positive backdrop, improvement in equity market sentiment was constrained due to escalations in tensions with North Korea.

Indian Economy
India’s GDP grows at 6.1% in Q1’18 was the slowest since Q4’14 due to lower domestic demand as well as continued weakness in investments. Weak client demand and concerns related to GST slowed India’s manufacturing activity to a 4-month low in June. Well distributed south west monsoon for the 2nd consecutive year has brightened the prospects of agriculture and allied activities and rural demand. India is expected to grow at 7.3% for 2017-18 riding on strong fundamentals, reforms momentum and improving investments scenario.

There has been an easing in price levels in the domestic economy as seen from the moderation in CPI and WPI. The CPI in June 2017 dropped to 0.90% (multi-year low) aided by fall in food prices. However, the inflation of non-food products has only seen a marginal decline and continues to be sticky at around 5%. There is an upside risk to inflation from continued sticky non-food inflation, GST implementation impact, impact of higher allowances especially HRA on CPI and farm loan waivers. Nevertheless, inflation is unlikely to breach RBI’s medium-term target of 4%.

RBI in its August policy, cut repo rate (first policy rate cut since October 2016) by 25 basis points to 6% which is the lowest in six and half years i.e. since November 2010. Further, RBI and government are working in close co-ordination to resolve the large stressed corporate borrowers.

Corporate Performance
Corporate’s revenue saw strong growth of 10% Y-o-Y even as net profits declined to five quarter low of 11% mainly due to channel de-stocking and dealer incentivization on account of GST. Commodity-linked sectors (energy, materials, utilities) and industrials reported strongest growth whereas IT, telecom, consumer discretionary saw the most decline.

Stock Market
The Indian markets performed well in the April to June 2017 quarter led by positive global cues, prediction of good monsoon by IMD and good flow of funds from FIIs, Mutual Funds and general public. Dalal Street continued to be in euphoria during Q1’18 with Sensex delivering a return of 4.39% which led to markets crossing 31500 levels with current PE of Sensex at ~22.65. However, the global geopolitical tensions and slowdown in growth momentum of Indian economy are points of concern.

Strategy at Care PMS
The soaring markets are leading investors to tread a cautious path. However, there are enough pockets of opportunities. We firmly believe in India’s long-term growth potential and feel this is a right time to re-balance our portfolio from non-performing companies to performing companies.

Sell BAD companies in GOOD time;
No time is BAD to buy GOOD companies !!

Happy Investing!

Market Overview - March 2017 Quarter

Global
Riding the momentum following the presidential election, stocks surged for much of the first quarter of 2017. Buoyed by the anticipation of tax cuts and policies favorable to domestic businesses, the benchmark indexes listed here reached historic highs throughout the quarter. During the quarter, Dow Jones reached the magic 21000 mark for the first time. However, the US economy turned in the weakest performance in 3 years in the January to March quarter growing by just 0.7% vs 2.1% in October to December quarter as consumers sharply slowed their spending. However, economists expect the growth to rebound to 2% or more in the coming quarters.

Fed Rate: Following its meeting in March, the Federal Open Market Committee raised the target range for the federal funds by 25 basis points to 0.75%-1.00%. This is the first interest rate change for 2017, although the FOMC projects that it will increase rates two more times this year. The Committee expects that economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2% over the medium term.

Eurozone economy defied expectations and grew at 1.8% during the quarter i.e. a robust growth of 0.5% over the corresponding quarter of last year on the back of solid consumption and buoyant exports. On top of the positive incoming data, Eurozone is also clearing political hurdles as centrist Emmanuel Macron won the elections in France ensuring the 2nd largest economy remains in pro-European hands.

China regained its position as the fastest growing economy in the world, growing at 6.9% which is slightly faster than expected, supported by government infrastructure spending spree and a frenzied housing market. The government is aiming for a growth of 6.5% in 2017.

Japan's economy grew at 2.2% in the first quarter which is its fastest in over a year thanks to robust exports and a much needed helpful boost from private consumption. This gives policy makers some relief who hope that economy is now gathering momentum which will drive up inflation which remains stubbornly below their 2% target.

Indian Economy
India’s economic growth slowed to 6.1% in the fourth quarter ending March 2017, compared with 7.1% in the previous quarter, clearly showing the scars of demonetisation on the economy which resulted in China becoming the fastest economy in the world in the March quarter. Almost all sectors, with the exception of agriculture, showed deceleration in the aftermath of demonetisation. While manufacturing sector output in the fourth quarter slowed to 5.3% versus 12.7% in the same period last year, construction slipped into negative territory, contracting 3.7%.

Consumer inflation fell to its lowest in 5 years because of softer food prices raising hopes for a rate cut. Further, the MET department expects higher rainfall than its earlier forecast of 96% of normal which has been revised to 98% of normal due to lower probability of El Nino during the monsoon season.

GST
The economy is also expected to benefit from the introduction of a nationwide goods and sales tax (GST), eliminating multiple state sales taxes, making it far easier to do business in India. The GST is expected to come into effect from July 1.

Corporate performance
The quarter gone by has shown that top-line growth has improved for the 3rd quarter in a row and is in fact 2nd highest growth in the past 10 quarters whereas operating performance has been weak. Commodity-linked sectors, Steel and FMCG sectors were the saving grace whereas IT, Telecom, Power, Pharma and Airlines sectors were the laggards.

Stock Market
The Indian markets performed very well in the January to March 2017 quarter led by positive global cues, good flow of funds from Mutual Funds, HNIs and general public. The BJP victory in UP in March improved the perception about the Indian economy amongst foreign investors which resulted in FIIs becoming net buyer as they pumped in more than `25000 Cr during March which also led to rupee appreciating vis-à-vis dollar. Markets are currently trading at all-time highs with Nifty trading at a one-year forward PE of 17.21 times which is higher than 5 years average of 14.77 times.

Strategy at Care PMS
The current market scenario has led us to re-enforce our philosophy of bottoms up approach and re-balancing our portfolio from non-performing companies to performing companies. However, we continue to remain positive on India’s growth story.

Happy Investing!

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