August, 2016

Canara Rebeco. Mutual funds.

In the month of July'16, global events drove domestic markets. While the world was still recovering from Brexit, US jobs data positively surprised the market participants. During the month, the Indian equity markets were lifted by positive global cues from the European markets, and were also supported by a strong rupee and falling crude oil prices. Domestically, WPI continued its inflationary trend while there was a marginal uptick in CPI while IIP showed sharp rebound. The markets sentiments were further boosted by abundant rainfall over the Indian Subcontinent, and the decision of the Union Cabinet to make key changes to the GST Constitutional Amendment Bill so as to enable the passage through the Parliament.

Market Performance*

The benchmark indices, Nifty 50 and S&P BSE Sensex rose by 4.23% & 3.90% respectively despite interim volatility seen post United Kingdom's exit from EU. Better than expected Q1FY17 Corporate Earnings reported by Indian companies were instrumental in improving the sentiments of the market participants. The Q1FY17 corporate earnings result season has begun and so far the results are in line with and in some companies exceeded our expectations. We believe that the earnings are likely to remain static for Corporate India in the near term & pick –up is expected in the FY18.

IIP^

Industrial production grew by 1.2% in May'16 as against a dismal growth of -1.3% seen in Apr'16 after seeing a contraction in the previous month, mainly due to uptick in consumer durables output. On the sectoral side, Mining rose by 1.3%, Manufacturing by 0.7% and Electricity by 4.7%. On the use-based front, Basic goods registered annual growth of 3.9%, Intermediate goods of 3.6% and Consumer goods of 1.1%. Only Capital goods disappointed coming in at - 12.4%.

Inflation^^

India's consumer price inflation (CPI) surged to 22 month high of 5.77% in Jun'16 after surging to 22-month while industrial output grew at a measly 1.2%, dashing hopes of RBI cutting rates in the August'16 policy review. India Wholesale inflation, as measured by the wholesale price index (WPI), rose to 1.62% in Jun'16 from 0.79% in May'16.

Current Account Deficit narrowed; Exports grow:#

India's current account deficit (CAD) narrowed sharply to $0.3 Billion, or 0.1% of GDP, in the fourth quarter of 2015-16 from $7.1 Billion, or 1.3%, in third quarter, on account of lower trade gap. Exports grew 1.27% in June to $22.6 billion while imports continued to contract for the 19th month in a row, down 7.3% to $30.7 billion. In the Q1FY17 (April-June) of the fiscal year, India's exports contracted 2.1% to $65.3 billion while its imports dropped 14.5% to $84.5 billion, leaving a trade deficit of $19.2 billion.

Triggers:

  • On domestic front, market participants are expected to keenly track the announcements of corporate earnings.
  • Another key event to watch out will be the stance of the US Fed in the coming months, which might govern the direction of FII flows to India.
  • The decision of the Union Cabinet to make key changes to the GST Constitutional Amendment Bill has brought about fresh hopes of the clearance of the Bill in the monsoon session of the parliament. The event of this happening might have a cascading effect on the Indian Economy.
  • The turmoil in Europe is likely to have impact on commodities and currency. The movement in both these parameters is likely to be followed by market participants
  • Progress of monsoon and its impact on inflation would be key element tracked by RBI to decide on the interest rate trajectory.
  • The selection of the new RBI governor will be keenly watched by the market participants. Looking at the way how effectively the current governor has handled the issues of inflation and liquidity in his tenure, the decision of selecting the next governor may be observed from the financial and sentimental perspective. The early formation of the Monetary Policy Committee (MPC) is likely positive for investor confidence

Source:
# Department of Commerce
^ mospi.nic.in
^^ ICRA
* Bloomberg

Disclaimer:
The information used towards formulating the outlook has been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. CRMF, its sponsors, its trustees, CRAMC, its employees, officer, directors, etc. assume no financial liability whatsoever to the user of this document. Mutual Fund Investments are subject to market risk. Investors are requested to read the Scheme related documents carefully before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

The month of July'16 saw positive sentiments favouring Indian equity markets. On global footing, strong US job data and improved economic performance suggested a possibility of rate hike in 2016. The increased expectations of further stimulus in Japan and ~15% drop in crude oil prices also served as positive cues for the equity market. Domestically, the good progress in monsoon, better-than-expected corporate earnings, robust FPI inflows and Union Cabinet's approval to key changes to the GST Constitutional Amendment Bill resulted in positive momentum in the market.

Market Performance*

The benchmark indices s viz. S&P BSE Sensex & Nifty 50 gained 3.9% and 4.23% respectively in last day of June'16. The month even saw S&P BSE Mid-cap index & S&P BSE Small-cap index rising by 8.06%% & 4.31% respectively.

The rally was seen across major sectors; except IT and Media. The top gainers were S&P BSE India Metal, S&P BSE India Oil & Gas and S&P BSE India Auto.

IIP^

India's industrial production showed a sharp rebound in the month of May'16, registering a growth of 1.2% against negative 0.84% growth in April'16. On sectoral side, growth was driven by electricity which clocked in a growth of 4.7%, while manufacturing and mining grew by 0.7% and 1.3% respectively. On used based classification Basic goods and Intermediate goods registered a growth of 3.9% and 3.6% respectively while capital goods registered a growth of -12.4% during May'16. The Consumer durable and Consumer non-durables recorded growth of 6% and -2.2% respectively, with overall growth in consumer goods being 1.1%.

Growth$

India's manufacturing sector represented by Nikkei India Manufacturing PMI recorded a print of 51.7 in June'16 against 50.7 in May'16, signifying an overall improvement in the sector. The growth in order book and improvement in output were the factors that led to the upward movement in the PMI.

Nikkei India Services Business Activity Index which tracks changes in activity at service companies on a monthly basis fell marginally to 50.3 in Jun'16 from previous month's 51.0. The dip in service PMI indicates a slower pace of expansion. However a fractional increase in employment was seen in month of June'16. The decline in Services sector for third consecutive month raises concern about sustainability of the economic upturn.

FPI Inflows*

The month saw FPIs (Foreign Portfolio Investors) increasing exposure to the tune of ~Rs. 9130* crs. On the other hand, mutual funds reduced their equity exposure to the tune of ~Rs.293 crs.

Outlook

Equity markets continue to track the developments of global markets. The data flow from US economy might give some indication regarding Fed's decision on rate hike and intermittent impact on FPI flows. Brexit could be another factor that might have a deferred impact on the direction of global equity markets. Further, the risk of an economic slowdown in China & the possibility of it devaluing its currency can add to the volatility. The fall in crude oil prices is a positive for India; however any further fall might have an adverse effect.

On domestic front, the progress of monsoon is positive which might help in improving the rural demand. This coupled with implementation of 7th Pay Commission would likely benefit the consumer discretionary demand. The ongoing discussions on GST have buoyed expectations of the bill getting cleared in the current session of the parliament.

The Q1FY17 earnings season so far has been positive and we expect acceleration in earnings from FY18. We believe that when the earnings cycle starts to revive, P/E multiples should expand and hence there is significant upside left in the markets.

Long term investors should take advantage of any volatility and use it as an opportunity to add to the equity exposure as India remains one of the very few economies which have a stable currency and healthy economic growth potential. Any positive trigger in the global economy would lead to a sharp run up in Indian equities.

Source:
^MOSPI
$ Markit Economics
* ICRA MFI Explorer

Disclaimer: The information used towards formulating the outlook has been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. CRMF, its sponsors, its trustees, CRAMC, its employees, officer, directors, etc assume no financial liability whatsoever to the user of this document. Mutual Fund Investments are subject to market risk. Investors are requested to read the Scheme related documents carefully before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

On the back of global risk-on and falling yields, the month of July'16 witnessed India's 10-year bond yield nearing 2013 lows. The key factors that attributed to the rally in bond market were the domestic liquidity turning to positive from neutral and sharp decline in global yields including US treasury yields after the UK's decision to leave the European Union did not negatively impact the market sentiment as was expected. Since the Brexit vote, Indian 10 year g-sec yields have fallen 31 basis points. While the investors chose safer havens as an immediate reaction of the event, they returned to emerging market realising that the impact would take some time, especially India. This can be seen by positive FII flows in the Indian debt markets. Also, the aggressive open market operations (OMO) by RBI and restrained primary supply of G-Secs contributed to the moderation in yields. Towards the end of the month, the 10 year benchmark yield softened a meaningful 28 bps to 7.17% as against the last month's close of 7.45%. The fiscal deficit for the 1st three months constituted 61.1% of the budget estimates for FY2017 and stood at Rs 3.26 lakh cr, compared to 51.6% in the corresponding period of FY2016.The rupee strengthened against the USD, settling at 66.9950 in July'16 as against 67.5250 in June'16.

Food prices, the key driver for Inflation:~

CPI inflation for the month of June'16 increased marginally at 5.77% as against 5.76% in the month of May'16. The increase in prices of food articles and increase in prices of manufactured products has been the primary contributor to the elevated CPI inflation. WPI based inflation for June'16 continued to increase at 1.62% y-o-y compared with 0.79% for the previous month. Rise in prices of manufactured products including the food item also added significantly to the overall rise in WPI inflation. However, more than abundant monsoon covering majority of the country augurs well towards tempering of inflation going into 3QFY17.

Event impacting the economies around the globe::

Slump in oil prices, uncertainty over Japan's stimulus package and status quo maintained by US Fed kept market on the edge. In lieu of current economic condition prevalent in Japan, the government is expected to focus more on fiscal policy and structural overhauls in trying to defeat deflation. The overall increase in global crude output has dragged the global oil prices down by ~15% to $42.46/barrel by the end of July'16 from 49.68/barrel at the end of June'16. The US Fed kept its benchmark rate unchanged in its latest FOMC meeting maintaining it in the range of 0.25% - 0.50%. US Fed however acknowledged the improved macros and job data, indicating a rate hike possibility in near future. However, a large section of market participants expect US FED to remain on hold for rest of 2016, though there is a probability of rate hike in Dec'16

Outlook:

Due to the uncertainties witnessed across the economies and domestic volatility, RBI kept the interest rate unchanged during its last bi-monthly policy and it's the stance on monetary policy still remains accommodative. The recent rise in CPI inflation may prevent RBI for any cut in August policy as well, though expected drop in inflation by end of 2016 is likely to open room for further rate cuts.

The macroeconomic and financial developments and the progress of monsoon and its impact on inflation would be the key element which RBI would monitor to decide on reducing the interest rate and there could be a possibility of rate cut in 2nd half of FY2017. Also, the appointment of the new governor would be crucial event in the trajectory of interest rate.

With the liquidity targeting framework of RBI, to bring systemic liquidity to “neutral” seems to pan out well; it could translate into the transmission of rates by banks and would impact positively to the bond markets.

In the dynamic global environment with dovish commentary from US Fed and other central banks and EU event, India remains relatively resilient. The macroeconomic stability and gradual pick-up in growth may help FPI Inflow in the Indian debt market.

While further policy rate cuts are likely limited, better transmission and liquidity stance, might lead to lowering of rates in medium term period. In short term, markets are expected to remain volatile due to global headwinds. We expect 10Y G-Sec to remain in the range of 7.10-7.30% range in the near term.

Source:
~MOSPI

Disclaimer: The information used towards formulating the outlook has been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. CRMF, its sponsors, its trustees, CRAMC, its employees, officer, directors, etc. assume no financial liability whatsoever to the user of this document. Mutual Fund Investments are subject to market risk. Investors are requested to read the Scheme related documents carefully before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.