Fund Manager Speaks- September 2016

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.


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