Fund Manager Speaks- June 2016

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.

Q1’17 sector-wise Industry performance: Overall industry performance remained in line with expectations.

Automobile: 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.

Cement: 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.

FMCG: 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.

Pharmaceuticals: Overall performance remained satisfactory both on domestic and export front.

Power: The performance remained mixed among different companies.

Telecom: 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.


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