Fund Manager Speaks
Market Overview - March 2017 Quarter

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.

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!

Market Overview - December 2016 Quarter

U.S. economy continues to do well with near full employment and rising inflation with multiyear high consumer confidence. Dow Jones Future recorded historic high after gaining 20% post-Election. President Trump is abided by many of his campaign pledges, which is raising hopes for sizable tax cuts and increase in government infrastructure outlays.  Federal Reserve’s chair, after gauging Trump’s economic policy, may consider interest hike in its forthcoming March or May meet. President’s announcement of restrictions on H1B visas, if implemented, will have far reaching initial impacts and will unsettle foundation of its IT industry.

Recent data suggest that the Eurozone economy ended 2016 on a bright note, despite it being a rollercoaster of a year in terms of political developments. GDP growth picked up to 0.5% in the December quarter, after coming in at 0.3% in the previous two quarters. Overall, economic sentiment is at multiyear high.

Chinese economy fared well in Q4 with GDP at 6.8%. Growth for the 2016 came at 6.7%.The figures signaled that China's economic growth is starting to stabilize amid the country's transition toward domestic consumption and away from manufacturing and investment led growth.  Chinese authorities are gradually shifting their focus from supporting growth to tackling rising systemic risks. On 3 February, the Central Bank decided to use its monetary tool box and hiked a series of short-term interest rates. This move has been widely seen as an attempt to reduce excessive risk taking and support the Yuan growth.

Japan's economy grew at 1%, lower than 1.4% in September quarter. Weaker yen supported exports, but tepid private consumption and the risks of rising U.S. protectionism cast doubts over a sustainable recovery.

Trump's protectionist policies, which have rattled global markets and regional economies reliant on the vast U.S. market, have kept investors guessing about the outlook for world trade, investment and growth.

The bull run in commodities market globally had a few supporting factors at play like reversing of overproduction due to shutting down of high cost plants, pick up in Chinese economy etc. which led the prices to rise significantly from the lows of 2016.

Economic activity is beginning to firm up after demonetization shocked the economy in the December quarter. The manufacturing PMI crossed into expansionary territory in January to 50.4 from 49.6 in December and imports rebounded. The monsoon is the big event for Indian economy and fortunately it was normal this year as against sub-normal in preceding two years. Finance Minister announced a slew of measures in the Union Budget 2017 to boost the agriculture sector with an aim of doubling farmer’s income by 2022. These measures are higher agricultural credit, higher allocation for irrigation projects, a crop insurance scheme and increased allocations for MGNREGA to dig farm ponds etc. The good monsoon has allowed government to present growth supportive policies under the budget with focus on capital and infrastructure spending and also enabled it to restrict fiscal deficit to 3.2% of GDP. This should boost the economy which in turn shall encourage private sector for follow up capital spending which has dried down for some time.

The Interest rates, which have remained unchanged since last two RBI policies, are at reasonable level considering our GDP growth rate of +7%. The consumer inflation for January reduced to 3.2% from 3.4% in December on lower food and beverages prices. Whereas, WPI sharply rose to 5.3% almost up by 1% mainly due to rise in power and fuel cost. The crude prices are on the rise on production cut by OPEC countries but yet, are within the tolerable limit. Due to disruptions in parliament functioning, the Implementation of much awaited GST Act is delayed to July’17. Meanwhile, five states have gone for elections in this month, with results to be announced on 11 March.

Restrictions on H1B Visa by newly elected US president, particularly for Indian IT engineers may write new chapters for India in coming years as it may prove blessing in disguise and otherwise for U.S.

Corporate performance
The 3rd quarter performance of Index companies missed forecast both in terms of sales and EBIDTA. Corporate top line, volume’s growth is mostly subdued; capacity utilization remains where it was in last several quarters, margin pressures re-appeared with trend reversal in input prices. The corporate tax revenues-trend growth fell sharply to 1.5% in April-December 2016 from 8.1% in 2015-16 when deflated with WPI and turned negative when adjusted with CPI. Likewise, real excise duty collections that track manufacturing activity dropped to 2.3% in April-October, 2016 from 7.5% in 2015-16 when deflated with WPI for manufacturing. Real bank credit growth has fallen further to zero; credit to industry saw deep contraction and Non-performing assets continues to rise.

Stock Market
Post demonetization, market is witnessing good flow of funds from Mutual Funds, HNIs and general investors at large. Market also witnessed relief rally post Union budget as no alteration has been made to the capital gains tax structure as widely expected by capital market. This has led the index to near all-time high.  Alternative investment options, like real estate and gold, have almost closed or have not remained attractive or feasible under new laws post demonetization and post union budget. Further, falling interest rates have rendered FDRs un-attractive therefore forcing depositors to think of alternatives on its maturity. During 9 Months of FY 16-17, Mutual funds have witnessed inflow of 56000 Cr in equity and ELSS funds. During 2016, 24 lakhs new demat accounts got opened, higher by 44% as compared with 2015. The most notable thing is that in last four months, FIIs net selling was 30000 Cr against which DIIs have bought worth 38000 Cr, this has provided much needed relief to the investors that markets are no more dependent on the mercy of foreign funds.

As on date, NIFTY 50 companies PE ratio is at 23, which could be considered as the market being overvalued.

Strategy at Care PMS
We try to remain conscious as far as valuation part of our portfolio companies is concerned and are rebalancing portfolio by exiting from non-performing companies to better performing companies. We apply many parameters while valuing company which includes management, growth, financials, market share etc. and review the same on results or other updates.

Happy Investing!

Market Overview - September 2016

After the un-expected referendum for Brexit, Donald Trump’s victory again surprised the Globe. Though U.S. economy picked up momentum in Q3 with solid growth in consumer spending and remained on track, making strong case for interest hike in forthcoming Fed meet in mid-December, yet it remains uncertain about evolution of economic policy under Trump’s presidency. The Eurozone growth remained modest with supportive monetary policy and improving labour market. Growth in the UK decelerated slightly in Q3, but the slowdown was less than markets had expected. The Chinese economy continues to sail smoothly on the back of policy support and slow but steady economic rebalancing. The Japanese economy regained some momentum on improving external demand particularly from Asia and US but the domestic demand remained weak. Overall PMI of most of the economies remained in expansion mode.

Economic growth in India gained momentum in the second quarter as GDP increased to 7.3% which came in above the 7.1% rise recorded in the first quarter against expectation of 7.5%. Still, India continues to grow the fastest of all major economies in the world. Private consumption was the main economic engine, picking up from 6.7% growth in Q1 to 7.6% in Q2. Consumer price Index reduced to 4.2% in October against 4.39% in September mainly due to subdued food item prices. This should provide RBI room to further reduce its policy rates. A near normal monsoon and public pay hikes have been acting as tailwinds for households. Government spending was solid, expanding at a double digit pace. However, fixed investment contracted sharply, recording the worst result since 2012. Meagre lending growth from banks amid stress on both lenders and corporate balance sheets has caused investment to shrink. Exports of goods and services lost steam, growing 0.3% after a 3.2% increase in Q1. Import also contracted as compared with Q1. Overall, GDP data suggest that the economy remained on solid footing, driven largely by booming consumption.

On November 8, a major event took place as PM announced demonetisation of 500 and 1000 currency notes. With this announcement, economic activity is likely to take a hit in the third and fourth quarter as this is expected to disrupt consumption and cash intensive sectors in the short run, particularly the informal sectors which accounts for 40% of GDP. Therefore, demonetisation is expected to shave off around 1% of GDP growth forecast. However, in the long run, this will have positive impact on the economy as it will widen assesse base & improve tax collection, both direct and indirect, will permit higher infra spent, more social measures and may provide room to reduce tax rates.

Industry performance:
Overall, Industry performance remained mixed, could just match the market expectations. The demand side remained weak. The raw material cost benefit saved the day for corporates. The corporate sector needs to be more efficient on staff cost and should save on other expenses for profit improvement as there seems to be saturation on pricing side at least.

Sector Wise Performance

  • Airlines, Auto and Auto Ancillaries, Cement and Chemicals did well both on the top line and bottom-line growth.
  • In Banking; Private Banks performed well. PSBs took NPA provisioning hit.
  • FMCG Sector grew by single digit on account of weak rural demand; profit grew by 10% on cost advantage.
  • Metal and Mining Sector reported better than expected results with anti-dumping duty and buoyant trend in base metal prices.
  • Pharmaceutical companies did a decent double digit growth, though some large and midsized companies performed very well.
  • Large software companies grew in single digit with cautious guidance. The performance was mixed in case of small and mid-sized companies in software segment.
  • Textile segment grew by 10% and profit grew by 25% on value addition and inventory gains

Stock Market
After Sensex touching high of 29000 in September from June low of 26000, it again fell to 26000 on account of stretched valuations as compared with performance, continuous FII selling due to rising U.S. bond yield which is signalling strong case for Fed interest rate hike and negative impact of demonetisation on corporate performance and GDP growth. This resulted in wiping off majority of the FY 2016 gains.

So far in 2016, FIIs net purchases are at 1500 Cr whereas, DIIs have invested 26500 Cr, thanks to positive investment sentiment in various mutual fund schemes due to falling domestic interest rates. The Sensex trades at 15.6 times 12-month projected earnings, compared with the MSCI Emerging Markets Index’s multiple of 12.1.

Market is expected to remain capped on upper side as results of Q3 and Q4 are expected to remain subdued due to impact of demonetisation on consumption, certainty of Fed hike, uncertainty about U.S. President, Donald Trump’s policies etc.

The major positive for the market should be closing of all alternate investment avenues like Property, Gold and FDRs (due to falling interest rates) on account of demonetisation. This should open flood gates of money for stock market. We again believe that this will again lead to expansion of PEs of few good companies in the market.

Care PMS Strategy
We have always said and believe that “The stock specific fundamental approach” is the only way which allows you to ignore and overcome uncertainties.

Happy Investing!

Market Overview - June 2016

The US reported weaker August job data than expected and also the PMI is down to 49.4 for August, down from 52.6 in previous month, denoting contraction in production. The Fed will find it very hard to hike rates in its September meeting. With the help of policy stimulus and weak Yuan, the Chinese economy managed to grow around 6.9%. Its PMI managed to expand to 50.4 in August from 49.9 in July, showing some stability in its economy. With continued easy money policies, European economy managed to grow around 1.6%. The effects of Brexit are expected to be negative on EU in particular and world in general. Japan, with negative interest rates managed to remain afloat with GDP growth of 0.6%. Other emerging economies got sigh of relief with recovery in commodity prices and stability in crude oil prices. Overall, the Global economies managed to thwart recession going deeper with the help of continued easy money policies.

Finally, the government succeeded in passing of most sought GST bill. This national GST when fully implemented, promises to boost the buoyancy and growth including enhancing the efficiency of the internal goods and services market. Further, the advent of GST will force large parts of the economy to migrate from black to white. The unorganised sector accounts for 58% of GDP, with GST, the unorganised sector which used to fly below the radar of tax man, will have to pay tax. This will substantially boost tax revenue, both, direct and indirect. With augmented tax revenues government will be in a better spending position without exceeding fiscal deficit targets.

The CPI touched 6% on account of high food prices but with good monsoon, the CPI is expected to ease to comfortable limit. Further, last month, the RBI has adopted inflation target of 4% for the next 5 years with tolerable level of +-2%. This should permit RBI to adopt favourable and predictable interest rate regime.

The brisk progress of monsoon this year will spell relief for rural population engaged in agri sector. According to latest data released by IMD, 67% of the country received normal rainfall while 20% received excess rains. Good rains coupled with the seventh pay commission pay-outs can result in good festive season for consumer industries. India’s August PMI data too indicates that there could be some pick up in manufacturing activity.

Stronger rupee against dollar as compared to currencies of other countries further shows resilient Indian economy. Sustained lower crude oil prices have helped the economy dent falling exports and limit inflation.

So far, the Indian Economy looks decoupled from the slowdown in the developed economies as evident from the GDP growth and inflows from FDIs and FPIs.

Industry performance:
Overall industry performance remained in line with expectations.

Sector Wise Performance
Passenger vehicle and two wheeler segment reported good volume growth. Continued benefit on raw material cost helped substantial improvement in bottom line.
Banking and NBFC:
Most of the Private Banks did very well. NBFC catering to housing finance, micro finance and consumer finance did exceedingly well. PSBs continued to feel NPA pressure.
Capital goods, infra and engineering:
The performance remained below expectation. Though there is good build up in order book position.
Cost side benefits and stable demand helped considerable improvement in bottom line.
Consumer Durables:
This sector performed well with top line growth and more than proportion rise in operating profit.
This sector continues to feel pressure due to subdued rural demand.
IT/ Software:
Performance of top IT majors witnessed impacts of global slowdown and Brexit.
Oil and Gas:
Upstream oil companies gave subdued performance on low oil prices. Downstream oil companies performed well particularly on account of inventory gains.
Overall performance remained satisfactory both on domestic and export front.
The performance remained mixed among different companies.
Companies in this sector found topline growth very tough and bottom line were severely affected on higher interest and depreciation burden.

Stock Market
Index is ruling near its all-time high, up almost 26% from its February’16 low, almost in line with global indices. Considering historical levels of PE, the present valuations of about 17 PE of projected 12 months earning are termed as costly but there is a big difference in the situation then and now as far as liquidity, leadership and comparative growth potentials are considered. Roughly $12-13 trillion of money is earning negative return worldwide triggering a shift from bond to equities; this is what is keeping equity valuations elevated. In last 12-15 months around Rs. 1 lakh crore have come in mutual fund. FPIs have so far, in this calendar year poured in $6.3bn into the stock market.

Market internals are quite upbeat too. Turnover in both cash and derivative segment of the NSE hit record highs in July and August. The shallow corrections witnessed since the February low indicate inherent demand for Indian stocks.

The outlook for Indian economy remains optimistic and so for the market. Good monsoon, governments determination for timely implementation of GST and ample global liquidity are major positives among other factors like favourable crude oil and commodity prices, permissible range bound inflation, rising tax revenues, government infra focus, control over fiscal deficit etc. In terms of FPI flow so far this year, India is third amongst emerging economies.

Strategy at Care PMS
We believe that there is structural change in calculation for valuation of equity due to ample liquidity coupled with very low interest rates and lack of alternate profitable investment avenues. For the time being, it seems that this situation may continue in near future but in the long run the fundamentals like performance and growth potential will guide the valuations. So we try to remain conscious keeping in mind basic parameters of fundamentals and not get carried away by comparative valuations.

Happy Investing!

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