Fund Manager Speaks- December 2016

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.


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