Fund Manager Speaks- June 2017

Market Overview – June 2017 Quarter

Global Economy:

USA: As in the first quarter, US stock markets shrugged off geo-political concerns and finished up 3.1% in Q2, resulting in a 9.3% year-to-date increase. Improvement in corporate earnings gave much of the support along with signs of slowing inflation. US economic growth rebounded solidly to 2.6% in second quarter after an underwhelming start of the year with both consumer and government spending bolstering the economy. Personal consumption which makes the biggest contribution to GDP growth rose by 2.8% vs 1.1% in first quarter.

Fed Rate: The Federal Reserve has continued with their hawkish monetary policy with consecutive hikes in March and June by 25 basis points each and raised the target range between 1% to 1.25%. Fed officials maintained a projection of one more rate hike in 2017 amid slightly stronger growth projections and downward revisions to its unemployment forecasts after the jobless rate fell to 16-year low in May.

China: China’s economy expanded faster than expected at 6.9% on the back of firmer exports and production, in particular steel. This strong 2nd quarter growth paves way for deeper reforms and keeps the country on track to meet its growth target of 6.5% in 2017. With USA and China set to begin economic talks, simmering trade tensions are expected to provide some uneasiness in the coming months.

EU: Eurozone equities advanced in the second quarter with the MSCI EMU index gaining by 1.8% mainly due to reduced political risk, positive economic data and improved corporate earnings. Markets responded positively to Emmanuel Macron’s victory as this will enable him to push his reforms agenda and the risk of eurozone break-up has greatly diminished.

Japan: After weakening in the early part of April, the Japanese market trended upwards for most of the quarter to end 6.8% higher. The corporate results season for the fiscal year to March 2017 was completed in May, with a majority of companies reporting profit figures above expectations. Despite a relative positive backdrop, improvement in equity market sentiment was constrained due to escalations in tensions with North Korea.

Indian Economy:

India’s GDP grows at 6.1% in Q1’18 was the slowest since Q4’14 due to lower domestic demand as well as continued weakness in investments. Weak client demand and concerns related to GST slowed India’s manufacturing activity to a 4-month low in June. Well distributed south west monsoon for the 2nd consecutive year has brightened the prospects of agriculture and allied activities and rural demand.  India is expected to grow at 7.3% for 2017-18 riding on strong fundamentals, reforms momentum and improving investments scenario.

There has been an easing in price levels in the domestic economy as seen from the moderation in CPI and WPI. The CPI in June 2017 dropped to 0.90% (multi-year low) aided by fall in food prices. However, the inflation of non-food products has only seen a marginal decline and continues to be sticky at around 5%. There is an upside risk to inflation from continued sticky non-food inflation, GST implementation impact, impact of higher allowances especially HRA on CPI and farm loan waivers. Nevertheless, inflation is unlikely to breach RBI’s medium-term target of 4%.

RBI in its August policy, cut repo rate (first policy rate cut since October 2016) by 25 basis points to 6% which is the lowest in six and half years i.e. since November 2010. Further, RBI and government are working in close co-ordination to resolve the large stressed corporate borrowers.

Corporate Performance:

Corporate’s revenue saw strong growth of 10% Y-o-Y even as net profits declined to five quarter low of 11% mainly due to channel de-stocking and dealer incentivization on account of GST. Commodity-linked sectors (energy, materials, utilities) and industrials reported strongest growth whereas IT, telecom, consumer discretionary saw the most decline.

Stock Markets:

The Indian markets performed well in the April to June 2017 quarter led by positive global cues, prediction of good monsoon by IMD and good flow of funds from FIIs, Mutual Funds and general public. Dalal Street continued to be in euphoria during Q1’18 with Sensex delivering a return of 4.39% which led to markets crossing 31500 levels with current PE of Sensex at ~22.65. However, the global geopolitical tensions and slowdown in growth momentum of Indian economy are points of concern.

Strategy at Care PMS:

The soaring markets are leading investors to tread a cautious path. However, there are enough pockets of opportunities. We firmly believe in India’s long-term growth potential and feel this is a right time to re-balance our portfolio from non-performing companies to performing companies.

Sell BAD companies in GOOD time;

No time is BAD to buy GOOD companies!!

Happy Investing!!


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