Market Overview – September 2015
Global
US employment data at comfortable level and inflation likely to rise at target levels, now interest hike appears more likely in next Fed meet in December irrespective of weaknesses in other parts of the world. The Fed has kept interest rates near zero for almost last seven years. Everybody wants it to happen to end uncertainty. China’s industrial growth further cooled down to 5.6% in October. Frequent reduction in interest rates by China’s Central Bank has pushed retail sales which registered better than expected growth. China, being global manufacturing hub, its slowing growth has driven metal and crude further down. European economies, in spite of lower crude oil, cut in tax rates and quantitative easing, finding its growth slackening. Japanese economy is also shrinking despite aggressive monetary stimulus. Slowdown in all these major economies has affected growth of emerging countries. According to IMF chief Christine Lagarde, global growth prospects are “fragile and uneven”. Globally, the terrorist attack on Paris will aggravate geopolitical tension.
India
Notwithstanding many hiccups, the Indian economy is expected to grow at its potential of 7% which looks respectable. India’s October month’s wholesale prices Index registered 12th consecutive fall of 3.81% owing to soft commodity prices but the consumer price index is ruling around 5% on account of higher food prices owing to below normal monsoon. Both, the purchasing managers Index and the Manufacturing index are trending lower. RBI governor in its last meet reduced the policy rates by 0.5% against market expectation of 0.25%. Considering falling saving rates and high food inflation, the RBI is unlikely to reduce the interest rate any more in near future. The PSBs NPA problem is getting bigger which is giving sleepless nights to the RBI and the finance ministry. Though the Modi government is committed for reforms, the recent stunning defeat in crucial Bihar election has put them on the back foot. The high hopes built on coming into power of Modi government are gradually receding as it was mistaken because, for any government, it is impossible to get the things done without the support of the state government and the bureaucrats. To attract foreign investment, the government has liberalised FDI rules for some industries. But, of all the reform agenda, GST bill is very crucial, passing of which can rejuvenate the sentiment. To boost the falling exports, the government has raised duty drawback rates and has also provided interest subvention of 3% for five years, commencing from April 1, 2015. The stable commodity and crude oil prices at lower levels have provided big advantage to our economy and have helped in keeping the fiscal and the current account deficit under control.
Industry
An ET sample of 1,822 companies delivered a growth of only 1.5% in revenues and 1.6% rise in net profit, indicating that while the slump in commodity prices has given a boost to sales, the profits have not risen substantially. This suggests weak pricing power with companies, which are being forced to pass on benefits to customers to augment demand. Weaker rupee has also eaten into some of the gains from softer commodity prices. To achieve profitable growth in the domestic and the export market, our industries will have to be innovative, competitive, cost effective and ethical.
Stock market
The Nifty is down 7% since last November. The post boom retracement of index and the stocks is continuing as rise is not followed by performance from corporates and the economic recovery is being put off for natural, political and other reasons. Threat of Fed interest hike is discouraging FIIs and will reduce interest spread which will lead to unwinding of carry trades. This financial year, so far, FPIs have sold equity worth 11200cr.
On the positive side, the equity schemes of mutual fund have witnessed inflow of 62300cr so far in F.Y. 2016 as compared to 71000cr in the past financial year. During April to October, mutual funds added around 24 lacs folios, averaging 10000 folios a day, thanks to rise in Systematic Investment Plans. HNIs and retail investors have become more mature now and are using dips to buy fresh units. Further amongst the Global fund managers, India remains preferred and overweight destination for being biggest consumer market.
Outlook
Over all near term outlook does not seem positive. It should take two to three quarters by then hopefully the various measures taken by government start yielding results. Low commodity and crude prices, contained inflation & fiscal deficit, scope for reduction in interest rates, willingness of government to do policy reforms, clearance of stalled projects and fresh infra spending, ease of doing business, incentives to boost exports, rising public participation through mutual fund etc. remains the major positives.
Care PMS Strategy
As always, our focus will be company specific that too mostly in small and mid-cap segment and the current subdued market condition should provide very good opportunity to accumulate good stocks at reasonable valuations. These segments have given better returns in last four/five years than large caps, which have diverted HNIs and Mutual funds to focus more towards companies in these segments which is very positive for us as this will expand their price earnings.
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