Fund Manager Speaks- September 2018

Market Overview – September 2018 Quarter

Global Economy: 

Global economic growth appears to have lost steam in the third quarter with 3.3% growth following Q2’s strong showing. The slow growth was mainly due to weakness shown by global powerhouse China with EU growth being stable whereas USA economy continued to roar ahead. Though it is expected that global growth will remain robust, but risks are skewed to the downside.

USA: The US economy continued to march ahead in Q3 and expanded at annualized rate of 3.5% on the back of fiscal stimulus measures, low unemployment numbers and elevated consumer confidence. However, the stock markets were very volatile with Dow Jones falling 9% in 10-15 days since start of October 2018 due to rising treasury yields and trade-related worries weakening risk appetite amongst equity investors. However, expected outcome of US mid-term elections led the recovery in stock markets as the uncertainty surrounding elections was out of the way thereby paving way for more balanced US politics.

Fed Rate: Sticking to its script, the US Fed raised interest rate by 25 bps thereby raising the target range to 2-2.25% and signaled another rate hike in December and three more in 2019. Though the US President was not happy with the move, Fed Chair said that it was simply focusing on its mandate.

China: The Chinese growth fell to 6.5% for the quarter falling short of expectation amid rising trade disputes with the US and subdued industrial production and investment. In order to shore up flagging activity, the Chinese authorities have loosened credit conditions, relaxed anti-pollution measures and unveiled plans to reduce taxes in recent weeks, with impact of these changes likely to be felt from Q4 onwards.

Indian Economy:

Indian economy is in much better shape than many other economies despite headwinds with fiscal deficit of around 3.3%, forex reserves rising by $120 billion in last 4 years to hit a record $426 billion, inflation being largely under control and economy growing at brisk pace post the slowdown due to GST and demonetisation. With GST collections crossing Rs 1 lakh Cr mark in October maybe due to economic activity picking up pace ahead of festive season.

Oil being one of the major components of imports for the country, surge in oil prices increases India’s expenditure as well as widens the trade deficit thus adversely impacting fiscal deficit as well as current account deficit. Additionally, a rise in crude oil clearly has impact on rupee as well as leads to higher inflation. However, exemption from sanctions by USA to 8 countries on imports from Iran has led to steep fall in oil prices from $85/barrel at start of November to below $65/barrel currently. This steep fall also halted the slide in rupee and a bit roll back from Rs 74 levels to Rs 71.60 currently.

RBI: The RBI presented its fourth bi-monthly monetary policy for 2018-19 and surprised one and all by their decision to hold rates. After two successive rate hikes, the monetary policy committee (MPC) kept rates unchanged citing a benign inflation trajectory and downward revision to inflation projection, though changed the stance from neutral to calibrated tightening.

Retail inflation unexpectedly eased to 13-month low in October. CPI based inflation rate slowed to 3.31% from 3.7% a month ago driven by lower food prices. A weaker rupee, higher crude oil prices and increase in minimum support prices for farm produce were expected to put pressure on retail inflation, along with uneven distribution of monsoon rainfall that may limit kharif output in the months ahead.

Corporate Performance:

The performance of 1,627 companies in Q2 FY19 over the last year (Q2 FY18) reveals an improvement, with net sales registering 21.2% growth whereas net profits also witnessed a double-digit improvement of 15.6% in the quarter i.e. NP margins witnessed contraction of 40 bps Y-o-Y during the quarter as rising commodity prices put pressure on margins.

Sectors such as IT, Pharma, Consumer Durables, Chemicals, Paper, Finance, Textiles, Mining and Minerals, Auto Ancillary and Real Estate did pretty well whereas telecom, banking, Auto OEM, Paints, Cement and Power reported stress during Q2 FY19.

Stock Markets:

The domestic equity market witnessed a lot of pain in the months of September and October 2018 with Sensex falling by 11% from close of August 2018 whereas Midcap and Smallcap Index have fallen by 13.5% and 17.5% respectively.

It is the default by ILFS, which triggered this phase of decline which got further aggravated due to the liquidity crisis faced by NBFC and HFCs leading to heightened volatility. Increasing crude oil prices and rupee depreciation put pressure on stock markets. With new board in place to tackle ILFS situation, liquidity crisis easing out post fulfillment of all rollovers, crude oil price falling by around 25% in the last 10-15 days which has controlled the fall in rupee; it appears that macro factors should be in a bit more control. However, the future market direction will be dictated by oil price movements and election outcomes.

Care PMS strategy:

Market continue to drift lower even in second quarter, only difference this quarter was that, this time, it took few frontline stocks also into its fold which so far, on the contrary, were supporting and raising index, in the midst of unabated fall in small/mid cap stocks since last union budget.

Though, the sentiment continues to remain subdued and nervous for the reasons which you all know. But, for us, the biggest consolation was good results in case of most of our portfolio companies. The good part is that we have good exposure in such sectors/companies.

The Paper sector is in best of its time wherein our exposure, all companies put together, is around 25%. Though the market price of these stocks has moved up but still it remains on the lower band of the valuation. The Chemical sector also did quite well wherein we have 15%+ exposure and is likely to do very well in future as well.

The quarterly results season has re-affirmed our confidence on our portfolio companies as well as opened up islands of new opportunities.

We, at Care PMS, believe that the negative factors, both domestic/internal and global/external, though changing, are going to persist in this dynamic world. The market will learn to live under such situations. The advantage in such market is that it facilitates good entry levels which will provide higher safety & better capital protection creating room for higher appreciation. Almost 70% of our portfolio companies which can be considered as underpriced and not recognized, have the highest potential for appreciation.

“Patience sounds boring. But if you realise that patience is nothing

but making time work for you, it gets interesting.

– Unknown

Happy Investing!!


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