Fund Manager Speaks- September 2017

Market Overview – September 2017 Quarter

Global Economy:

USA: Despite the hurricane that devastated several southern states and the rising tensions with North Korea, USA markets gained in excess of 5% for the 3rd quarter ended September 2017.

US economy maintained a brisk pace of growth as the GDP increased at 3% beating expectations and despite the disruptions caused by hurricanes Harvey and Irma. Investments rose sharply and a smaller trade deficit along with lower imports offset a decline in consumer spending.

Fed Rate: The FOMC met in September following its last meeting in July. Noting moderate economic activity, stagnant inflation and temporary effects of two damaging hurricanes, the FOMC left the target funds rate range unchanged at 1-1.25%. Nevertheless, the committee indicated that it will remain on schedule to raise interest rates at least once more this year.

China: The GDP growth of 6.8% for the 3rd quarter was in line with expectation inspite of drop in investments in manufacturing and mining as real estate sector posted healthy gains. GDP for the fourth quarter is expected to slow down due to production restriction in some areas impacting growth, tightening of liquidity and expected slowdown in the property market.

EU: Eurozone is experiencing its strongest and most sustained growth period since recession as its economy grew by 2.5% in July to September quarter. This was mainly driven by increased exports which grew by 5% and Household consumption growth of 1.9%. Germany (3%), France (2.2%), Italy (1.8%) and Netherlands (3.3%) all contributed to this strong growth.

Japan: The country’s economy expanded at faster than expected rate of 2.5%. This data shows that the economy has expanded for the 7th consecutive quarter. With recovery in global markets, exports growth helped drive corporate profits and business investment whereas wage gains and consumer spending remained lackluster. 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 growth rises to 6.3% in Q2’18 after falling for five consecutive quarters. This indicates that perhaps the effect of two structural reforms – De-monetisation and GST is behind us and hopefully we can look forward for an upward trajectory in third and fourth quarter. Industry sector did well with growth above 6% in mining, manufacturing, electricity, gas, water supply and other utility services. However, agriculture sector growth at 1.7% remains a concern. India GDP growth forecast has been lowered to 6.7% for 2017-18 and major hurdles like low investment, rise in private consumption and government spending would be keenly watched.

The inflation rate has been on a rising trend since the last 3-4 months and stood at 4.88% in November 2017 vs 3.58% in October as crude oil prices touched a 30-month high of $65 a barrel on 12th December. Food inflation slowed whereas prices rose at a faster pace for housing, fuel and clothing.

The RBI at its meeting in December raised its inflation projection to 4.3-4.7% for H2’18 due to firming up of global oil prices and uncertainty on kharif farm output. Further, farm loan waivers and state’s implementation of salary and allowances could push up headline inflation by 100 basis points over the next 18-24 months. Hence, the RBI decided to keep a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4% (+/- 2%), while supporting growth.

Corporate Performance – Lackluster show

Corporate India’s revenue for the quarter increased by 9% Y-o-Y even as net profits declined of 12%. Despite restocking and early festive season, demand remained sluggish. While lower GST rate benefits had to be passed on, it was difficult to do so for higher GST rates. Automobiles, Steel, Domestic Appliances, Airlines, Cement, Retail, Agro-Chemicals etc. did well whereas Telecom, PSU Banks, Tyres, Sugar etc. fared poorly.

Stock Markets:

Though the corporate performance was poor, the liquidity from domestic MFs and several measures like re-capitalization of banks etc. continued to push the positive sentiments. The Indian markets performance in the July to September 2017 quarter slowed down as there was continuous selling by FIIs who sold over `38500 Cr worth of shares, which was nullified by good flow of funds from Mutual Funds and general public. This has been happening since De-monetisation and is a healthy sign as dependency on FIIs is reducing. Sensex delivered a return of 1.17% during Q2’18. However, the global geopolitical tensions, slowdown in growth momentum of Indian economy and valuations of many companies are points of concern.

Strategy at Care PMS:

The soaring markets are leading investors to tread a cautious path with the cash portion of many fund managers increasing significantly. However, we feel that if we follow stock specific approach, there are enough pockets of opportunities. We firmly believe in India’s long-term growth potential and although cautious, we feel that if we are able to find some “safe stories” rather than “growth stories” we should be able to do a decent job.

“Investors have to remember: Corporate profits are going up, but stocks are going up faster. How can that continue indefinitely?

Investors can only earn what companies themselves can earn. How can you get anything more out of a farm than what it grows?”

– Warren Buffett

Happy Investing!!


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