Fund Manager Speaks- December 2017

Market Overview – December 2017 Quarter

Global Economy:

The most significant thing at the onset of 2018 is the global economy outlook. For the first time in more than six years, the latest projections of the International Monetary Fund (IMF) have been revised upward. This upward revision applies to North America, Europe, China, Japan and East Asia. Even Brazil, beset with economic and political problems, is expected to do better.

USA: Following historically low levels of volatility in 2017, volatility seems to have returned over the last few days with Dow Jones touching all-time high of 26500 in Jan 2018 and subsequently correcting to 24500 levels currently. The primary driver of the decline was investors reaction to rising interest rates. However, the underlying reason for higher rates are expectations for strong economic growth which though positive has led to concern of higher inflation and more Fed Rate hikes. Further, unemployment is at the lowest level in 17 years, the banking system has mostly healed and the recent corporate tax cuts in US from 35% to 20% will result in faster growth in earnings. However, the market is enduring a bit of conflict and it may not happen as quickly as desired, but positive fundamentals will help.

Fed Rate: The FOMC met in January following its last meeting in December wherein it had raised rates by 25 basis points to a range of 1.25-1.50%. Noting strong growth rate in economy and continued strength in job market, the fed kept the benchmark rate unchanged. This announcement has brought curtains on Jannet Yellen’s 4-year term as Fed’s chairwoman. She has been succeeded by Jerome H Powell, a Fed governor since 2012. Nevertheless, it is expected that the committee will remain on schedule to raise interest rates more frequently this year.

China: China’s economy grew faster than expected in the fourth quarter of 2017, as an export recovery helped the country post its first annual acceleration in growth in seven years, defying concerns that intensifying curbs on industry and credit would hurt expansion. The headline numbers and signs of property market resilience suggest that fundamentals are expected to remain intact in 2018 although they might see some headwinds from tighter regulations, US trade protectionism and softer consumer sector.

Indian Economy:

India’s GDP growth is expected to touch 6.5% for 2017-18 and grow by 7% in H2’18 compared to 6% in H1’18. This indicates that perhaps the effect of two structural reforms – De-monetisation and GST are behind us and we can look forward for an upward trajectory in third and fourth quarter. Further, the teething troubles of GST implementation are being speedily addressed by the GST council. Further, the budget 2018 has paved way for the future, focusing capital expenditure on key sectors like agriculture, infrastructure, housing and healthcare (bringing in social security concept – if the plan goes through).

The index of industrial production (IIP) grew 7.1 per cent in December 2017, led by robust growth in manufacturing. Significantly, the capital goods sector, a barometer for investments, grew a sharp 16.4%. Consumer durables segment grew by 0.9% compared to a decline of 5% a year ago, indicating revival in demand.

The RBI at its meeting in February retained its neutral policy while acknowledging multiple upside risks to inflation. For FY18, RBI expects inflation to come in at 5.1-5.6% in the April to September period before easing to 4.5-4.6% in H2’19 thus overshooting the bank’s target of 4% for the whole year. RBI has highlighted upside risks to its inflation outlook but maintained its data dependent guidance and may only act if inflation displays a trend that is not consistent with its 4.5% forecast by late FY18.

Corporate PerformanceImproved performance

Corporate India’s revenue for the quarter increased by 9.3% Y-o-Y alongwith improvement in PAT margins from 7.3% in Q3’17 to 8.3% in Q3’18.  Headline growth for India focused companies was boosted by a favourable base effect and from higher government spending especially in rural areas. Positively, many companies said that the GST related issues are now receding. Automobiles, Consumer Goods, Metal, Finance, Capital Goods companies etc. did well whereas PSU Banks, Tyres, Sugar, IT, Pharma etc. fared poorly.

Stock Markets:

The corporate performance has improved backed by restocking due to GST, the liquidity from domestic MFs and several measures like re-capitalization of banks etc. continue to push the positive sentiments. However, the announcement in budget w.r.t. introduction of 10% tax on LTCG along with recent turmoil in global markets has taken some shine from the returns with Sensex registering a fall of ~2000 points from a high of 36000 in Feb to current levels of 34000. This fall however was due and justified our strategy of going for ‘safe stocks’ rather than ‘growth stocks’.

“This fall is a reminder that emotions and various other factors can take the wheel for a short-time, but they rarely drive the market over a broader term”

Strategy at Care PMS:

Our strategy looking at the current market situation is based on the following principles:-

  • Remember why you’re investing: The value of your investments won’t rise every day, nor did you expect them to.  Your goals are longer term, so your evaluation of your portfolio’s performance should be done over a longer period as well.
  • Don’t Overreact: Market declines can make you feel like you have to make a change to your strategy. If your goals haven’t changed and your tolerance for risk over time is still the same, avoid the temptation to change your long-term approach based on short-term volatility. Market corrections can be a blessing in disguise. If appropriate for one’s situation, use it to your advantage.

“I’ve found that when the market’s going down and you buy funds wisely,

at some point in the future, you will be happy”

– Peter Lynch

Happy Investing!!


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