Fund Manager Speaks- June 2018

Market Overview – June 2018 Quarter

Global Economy:

It is expected that the global economy will grow at 3.1% for FY18. While the ‘sun is shining’ on the global economy, clouds could be looming over the horizon. Tensions on the trade front and risk of rising global debt are key risks to be monitored. Faster growth in the US, Japan and China, would largely drive global growth during 2018-19.

USA The USA economy surged in the April-June quarter to an annual growth rate of 4.1%, fastest since 2014 driven by consumers (account for 70% of economic activity) who began spending their tax cuts and exporters who rushed to get their products delivered ahead of retaliatory tariffs. However, the current rate of growth is not sustainable as it stems from temporary factors and rest of the year is likely to be see good but slower growth of ~3%.

Fed Rate: The Federal Reserve has hiked the target range in June by 0.25% to 1.75%-2.00%. This is the 2nd rate hike by Fed this year and it has forecasted 2 more rate hikes by the end of 2018.

China: GDP for the 2nd quarter grew by 6.7%, in line with expectations. The escalating trade war with USA, deleveraging drive and fatigue with credit expansion slowing has raised uncertainty about the outlook of Chinese economy. Notwithstanding the same, it is expected that the Government’s target of 6.5% GDP growth for FY18 should be met easily.

Indian Economy:

The latest world bank figures states that India has become world’s 6th biggest economy pushing France to 7th place. The US leads the table as the biggest economy followed by China, Japan, Germany and Britain. The economy seems well positioned for FY18 with business activity increasing in the private sector for 4th consecutive month in June and at the fastest pace since October 2016.

Further, on 04 July, the government approved an increase in MSP (1.5 times the cost of production) paid to farmers growing summer-sown crops. This increase should result in significant increase in the purchasing power capacity of farmers. This along with normal monsoon in most parts of the country should drive the rural demand which is very essential in an economy where ~65% population still lives in rural areas and of which ~70% are dependent on agriculture for their livelihood.

With average revenue from GST increasing from 89885 Cr in FY17-18 to more than 97000 Cr in the first 4 months of FY18-19, we witnessed GST rate rationalization in a slew of goods especially household consumption items (more than 50 items), which should result in cost savings to consumers thereby increase consumer confidence and lead to higher demand.

RBI: The RBI at its latest meeting in August 2018 has raised interest rates by 0.25%. The RBIs decision to hike interest rates for the 2nd time in 3 months was driven by high inflation and weak rupee.

Inflation has accelerated in the recent months, hitting a 5-month high of 5% in June. At its monetary policy meeting in August, RBI maintained its inflation forecast for Q2 FY18 at 4.6% whereas it raised its forecast for H2 FY18 slightly to 4.8% from earlier guidance of 4.7%. Oil price risk (even though it has cooled down from earlier elevated levels) was also a factor in raising the rates. However, inspite of all this, RBI still maintains its ‘neutral’ stance to monetary policy.

Corporate Performance:

FY18-19 has started on an optimistic note for corporate India. The combined net profit of 2271 companies (whose results were declared till now) were up by 7.9% Y-o-Y during Q1 FY19 whereas the top-line growth during the same period was even better at 18.7%, growing at the fastest pace in the last 3 years. This to some extent can be attributed to low base due to impact of demonetisation as well as roll-out of GST in July last year.

Sectors such as IT, Pharma, FMCG, Oil &Gas, Mining and Minerals, Capital Goods and Infra did pretty well whereas telecom, banking and power reported stress during Q1 FY19.

Stock Markets:

July 2018 saw Nifty scaling all-time high and, in the process, increasing by 5.6% buoyed by a) good start to Q1 FY19 corporate earnings season and b) GST rate rationalization. The rally however, was extremely narrow led by a handful of companies in IT (TCS and Infosys), FMCG (HUL) and Banking (HDFC Bank, Kotak Mahindra Bank, IndusInd Bank) and Reliance Industries.

However, a sharp correction has gripped Mid-cap and Small-cap segment since May with more than half of the listed stocks having lost more than 20% of their value. However, we see early signs of reversal of this situation (in August 2018) where in quality stocks should rebound at a faster pace.

“A market downturn does not bother us. For us and our long-term investors, it is an opportunity to increase our ownership of great companies with great management at good prices.

Only for short-term investors and market timers, it is a correction and not an opportunity”

– Warren Buffett

Happy Investing!!


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