Fund Manager Speaks- June 2015

Market Overview – June 2015 quarter

Global Scenario:

Devaluation of currency by China, the world’s second largest economy, has created havoc in the global stock markets on the fear that world could be heading for a China led economic slowdown. This also created ripples in the global base metal & other commodity markets, falling to a new low as China is the largest consumer. US economy seems to be on the right track but its appreciating currency against emerging market currencies is hampering its exports and growth. Likely hike in interest by US Fed in September also raised concerned in US market and emerging markets. Europe continues to struggle against recession and growth. Japanese economy’s growth is also slowing down sharply. Australia, Russia, South Africa and Brazil, the major commodity producers, are under severe hit of falling commodity prices. Middle East countries are affected by record fall in oil prices. Thus overall Global scenario is discouraging and not hopeful.

Indian scenario:

With fall in crude and commodity prices globally, the situation is turning in favour of India. The different economic parameters are also turning comfortable.  The fiscal deficit, in spite of higher spending on road and infra projects, is expected to remain below 4%. Since last 9 months the WPI is negative and CPI is below 4%, within comfort zone of RBI, making strong case for cut in interest rate. The increased spending by government on infra projects and clearance of stalled projects should generate new orders for the industries. The IIP data are showing signs of improvement. Exports are expected to improve with depreciation of rupee against major currencies. Further, India itself is an untapped potential market which will provide ample opportunities for domestic industries for continuous growth for years and will continue to attract FDI in various sectors. Sooner or later, the GST bill is going to be passed. Similarly Land bill with some modification should clear.  We believe that the various steps taken by new government to create conducive business environment will soon yield result.

Indian stock market:

The massive fall in Indian stock market following Global fall after Chinese currency devaluation and expected Fed interest hike, have made the stocks more attractive and set the valuation right, adjusting for poor quarterly results and below normal rainfall. Recently FIIs have been net sellers in the Indian market but this selling is being absorbed by rising domestic participation with provident fund making beginning and mutual funds receiving good flows. Higher domestic participation should bring more stability to the market. The considerable fall in prices of oil, base metal and other commodities will help corporates to reduce their input cost resulting in better margins. This will also reduce their working capital requirement resulting in lesser interest burden. The corporate sector also needs to cut on the expenses to make the operations profitable. The effects of these positive factors will soon become visible after one or two quarters.

Industry performance:

Overall industry performance remained subdued. The rising employee cost, Power and fuel cost, other overheads and lack of pricing power affected performance of most of the companies and will need few more quarters before it starts showing improvements.

Sector performance of our Investee Companies:

Chemical & Fertilizer: Performance of most of the chemical companies was satisfactory. Petrochemical companies did very well with fall in crude oil prices. Fertilizer companies performance remained poor.

Oil and Gas:  Exploration companies affected by fall in crude prices which was partly set off by reduced subsidy burden. Oil marketing companies did very well with deregulation of petrol and better refining margins.

FMCG: Overall performance was reasonable but their valuations are higher.

Mining & Steel: Subdued demand and Dumping from China affected performance of steel sector. Due to steep fall in base metal prices globally, the performance of mining industry witnessed severe hit.

Power & Power Equipment: Overall performance remained poor. Steep fall in coal prices should impact positively in coming quarters.

Software: Performance was as per expectations. The rising staff cost eating into rise in revenue. Further current depreciation in the currency will term positive for coming quarters.

Textile: Overall performance was affected by fall in export demand.

Market outlook:

We are cautiously optimistic about the market.  At corporate level, we feel better cost control and efficient management at every level of operations are key to turnaround of businesses rather than crying foul for interest rate cut. Our RBI governor is doing his job in the best of national interest. We reiterate that there is plenty of liquidity in the system but there are not much commensurate investment avenues to park the funds. Therefore this liquidity will chase good companies, which are few, raising their valuation to new peaks.

Investment strategy at Care PMS:

In present time, when the market has fallen to years low, we will realign the portfolio for better opportunities. We will be happy to book loss or cut exposure in the stocks where there is a negative development beyond the control of management which will prolong expected result. We will, as a strategy, continue to be stock specific, irrespective of sector performance.

Happy Investing !!


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