December, 2016

Canara Rebeco. Mutual funds.

The month gone by witnessed two unprecedented events; Indian government banning the circulation of 500 & 1000 denomination notes and victory of Donald Trump in US's Presidential election. The decision of demonetization was made to unearth black money, curb the financing of terrorism and curtail counterfeit currency. We might see a shift from cash economy to a cashless economy. In short term, we might see surge of liquidity in banks and it is nticipated that rates may come down. To absorb sudden influx of liquidity, RBI's announced increase in CRR to 100% on incremental deposits.. RBI noted that applying an incremental CRR is a temporary measure and is in discussion with government to increase limits on Market stabilisation Scheme (MSS), which could be used to absorb excess liquidity through issue of short term instruments. From a long term perspective rates are likely to soften on back of this move. The GST council decided on a 4 tier tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and demerit goods. Luxury & de-merit goods would also attract an additional cess. On global front, with Donald Trump coming to power it is expected that US economy will see tax cuts and increased infrastructure spending which could be re-inflationary. OPEC reached a deal to cut oil production by 1.2 million barrels per day in order to raise global prices. However, uncertainties of the said deal still prevail as it depends on production cuts by non-OPEC countries and developments in US shale oil market.

Market Performance*

The demonetization announcement dented equity market sentiments resulting in broader market indices closing in red. Bellwether indices viz. Nifty 50 and S&P BSE Sensex fell by 4.65% and 4.57%. In short term, equity markets are likely to be volatile. Sectors like Cement, NBFCs & Micro-Finance and Materials are expected to be negatively affected by the move. While banking sector is expected to be the biggest beneficiary of the collective move by RBI & government.

IIP^

The Index of Industrial Production (IIP) rose by a muted 0.7% (Y-o-Y) in September'16, as compared to -0.7% (Y-o-Y) growth in August'16. The decline in output is attributed to yet another contraction in capital goods. The output of capital goods declined by a steep 21.6%, marking it the 11th consecutive month of decline. On use-based sector front; basic goods, intermediate goods and consumer goods grew by 4.0%, 2.2% and 6.0% respectively. In terms of sectoral classification, manufacturing and electricity output grew by 0.9% and 2.4% respectively while mining output contracted by 3.1%.

Inflation^^

CPI inflation eased to 4.20% in October'16 from 4.39% (revised) in September'16. The softening in food & beverages and fuel inflation led to moderation of inflation. Wholesale inflation moderated to 3.39% in October'16 from 3.57% in September'16. With good monsoons we expect further easing on inflation in coming months.

Trade Deficit ##

Trade deficit for the month of October'16 widened to USD 10.16 billion from USD 8.34 billion September'16. The month saw exports registering a sharp rise of 9.59% (Y-o-Y) to USD 23.51 billion. Imports expanded by 8.11% (Y-o-Y) to USD 33.67 billion due to increase in oil and non-oil imports. The month witnessed oil imports widening by 3.98% (Y-o-Y) to USD 7.14 billion and non-oil imports increased by 9.28% to USD 26.53 billion.

GDP #

India's Q2FY17 Gross domestic product (GDP) came in at 7.3% as against previous quarter's 7.1% but below the 7.6% jump recorded in the year-ago. GDP growth in Q2FY17 was supported by an uptick in agricultural growth and strong government spending even as industrial growth moderated. Agriculture recorded growth of 3.3% YoY in Q2FY17, up from 1.8% in Q1FY17 and 2% in Q2FY16 on the back of a good monsoon. Industrial growth however slowed to 2.2% in Q2FY17 from 6.7% in Q2FY16. Going ahead, activity is expected to slow down due to cash crunch seen post demonetisation move. We might see its impact for a quarter or two but from a long term perspective demonetization would be positive for economic growth.

Triggers

  • Post demonetization all eyes shift to RBI's upcoming Monetary Policy announcement, with expectations growing on rate cuts.
  • Markets participants would keenly track the announcements by government post demonetization to demonstrate the government's commitment against “black economy”
  • While US FED rate hike in December is a near certainty, markets might keenly watch the FED's commentary on future trajectory of rate hikes.
  • The trajectory of crude oil prices after the production cut would be interesting to follow

Source:
* Bloomberg
^ mospi.nic.in
^^ ICRA & RBI
## Ministry of commerce
# Economics times

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.

Equity markets were impacted negatively by global and domestic events in the month gone by. On November 8, 2016, the Indian government announced that the banknote of INR 500 and INR 1,000 would cease to be legal tender. The immediate effect of the move, on a country driven by cash economy, was seen as inconvenience caused to the masses, but this move would clean the complete economic system, increase the size of economy and revenue base amongst other benefits as cited by the government. In shorter term, this may negatively impact the sectors which depend on cash transactions and have a rural presence. In the longer run, it might help the unorganised sectors becoming more organised which was also the intention of the government while it proposed the Four Tier GST structure ranging from 5% to 28%. Apart from concerns about demonetisation, Donald Trump's victory and concerns about his restrictive trade philosophy led to foreign investors pulling out of Indian equities. Heavy selling by foreign investors also led to the Indian currency depreciating against the US Dollar. Increase in inflation and other positive data and sentiments hint towards a fed rate hike in the upcoming FOMC meeting in Dec'16.

Market Performance**

As a combined effect of demonetisation and US presidential election, the stock market indices dropped to an around six-month low in the week following the announcement. The day after the demonetisation announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points. By the end of the intraday trading section on 15 November 2016, the BSE SENSEX index was lower by 565 points and the NIFTY 50 index was below 8100 intraday. By the end of the month, the two benchmark equity indices—the Nifty 50 and the S&P BSE Sensex—declined 4.65% & 4.57%.

Almost all the other indices also were seen trading in the red territory while only S&P BSE Power Index grew by 1.13% compared to the previous month. Worst affected were S&P BSE Realty and S&P BSE CD which fell by 17.63% and 12.75% respectively

Growth'

Indian manufacturers enjoyed yet another month of improving operating conditions. With demand from the external markets picking up, Nikkei India Manufacturing PMI rose from 52.1 in Sept'16 to 54.4 in Oct'16. Similar surge was seen in Nikkei India Services PMI which was seen at 54.5 in Oct'16 from 52.4 in Sept'16.

IIP^

Industrial production in India went up 0.7% Y-o-Y in the month of Sept'16 after falling for two straight months. Manufacturing rose 0.9% while electricity was increased 2.4% and mining shrank 3.1%. Consumer durables output grew 14% capital goods output fell 21.6%. With demonetisation effect to be seen in the next month IIP, Consumer durables output and sales could slowdown in the coming few months following the scrapping of high denomination currency notes and the limit on withdrawals.

FPI flows **

Nov'16 was the second month in a row that saw funds outflow from the equity markets. While FPIs withdrew ~ Rs. 17290 Crs from the Indian markets, the total influx in the current calendar year has been reduced to ~ Rs. 25596 Crs.

Outlook:

After the step of demonetisation, there is a belief that the economy could suffer due to lack of consumption demand. While this might be true for a very short term, it could be positive for the economic growth in the medium to long term.

Consumption-driven sectors and stocks will continue to be hit in the short term. Other sectors like Cement, NBFCs & MicroFinance and Building materials are expected to be negatively affected by the move in the short term. Sectors like Health Care and Pharma are expected to have least impact.

However, once the short-term impact of demonetisation is over, Indian equities are likely bounce back. A rate cut from the Reserve Bank of India would be helpful and easy monetary conditions are generally beneficial for equities.

The fixing of rates by the GST Council marks a crucial milestone towards the rollout of the single tax that will replace various state and central levies and create a seamless national market for goods and services. This is in line with the vision of the current government to make the Indian economy more organised.

The outcome of US Presidential elections can bring uncertainty in the market as there is lot of ambiguity surrounding the new economic policies. This may cause a negative reaction in the Indian equity markets in the near term.

Despite the near-term challenges, the long term potential of Indian economy remains intact. We continue to be constructive on equities and hence, in our opinion, we see merit in increasing allocation to equities in a staggered manner to even out the market volatility.

Source:
^ MOSPI, ICRA
' Markit
** 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.

During the month of Nov'16, investors around the globe were surprised by the twin events of demonetisation of high value notes by the government of India and Donald Trump's victory at the US presidential election. Market participants in India seemed to be more concerned about the uncertainty around India's growth prospects as the GDP as well as the external trade environment are expected to get impacted negatively on the back of changes in US bilateral trade agreement post Trump's victory. Domestically on the back of unexpectedly excess liquidity, easing inflation and the dovish policy stance by the RBI, the 10 yr G-Sec Yield moderated by 55bps from 6.79% on 28th Oct'16 to 6.25% on 30th Nov'16. INR weakened on overall USD strength on an expectation of a rate hike by the US Federal Reserve in December. Further expectations that new administration under Trump is likely to use fiscal stimulus to boost US economy, thereby increasing inflation and growth also supported the dollar. For the month of Nov'16, FPI net outflow was around Rs 19,500 crs whereas, Mutual Fund invested around Rs 9150 crs*. On the global front, post the election results, the US 10 year hardened 55bps to 2.38% at the month end from 1.83% on 31st Oct'16. European council awaits sustainable inflation numbers before taking any key decision on QE before the crucial ECB meeting in the upcoming month.

Indian currency demonetisation –a paradigm shift^

The Government of India on 8th November 2016 announced the demonetisation of high value banknotes (INR500 and INR1000) ostensibly in an effort to crackdown on black money in circulation and as well as to stop counterfeiting of the high value demonetisation and terrorist financing. With this move, the banking system saw an influx of over Rs 8.00 lakh crs via deposits, which resulted in huge surplus of liquidity in the system. In an attempt to suck out excess liquidity from the system, RBI announced an incremental CRR of 100% on deposits with banks from 16th September'16 to 11th November'16. The decision to control liquidity may have dented any hopes of lending rate cut in the near term. In an anticipation that the increase in CRR may result in liquidity deficit, the RBI conducted three overnight variable rate repo auctions for a notified amount of Rs 3 trillion to fulfil the deposit requirement of banks. With this measure of demonetisation of the currency and steps by the government post that, the core business of banks is expected to be majorly impacted and the incremental CRR on incremental increase in NDTL will further put downward pressure on the bank's yearend balance sheet (CRR hike would not yield any interest on the amount kept with RBI while interest payments on the deposits by the masses can't be avoided). In the short term, effects of demonetization of the Indian currency were seen to result in inconvenience to many but the bigger picture may be in the favour of the Indian economy.

Inflation continues to ease amid softening food inflation#

India's CPI based inflation came in at 4.20% in the month of October'16, lower than the figure of 4.39% in September'16. The WPI based Inflation fell to a four-month low of 3.39% as compared to 3.57% in the previous month. The fall in inflation was driven by lower food prices on back of a good monsoon.

Fiscal situation showing sign of improvement~

Fiscal situation during the month of October'16 showed a sharp improvement, driven mainly by growth in non-tax revenues. India's fiscal deficit came in at Rs 4.24 lakh cr, accounting for 79.3% of the Rs 5.34 lakh crs budgeted for the entire year. Non-tax revenues increased to Rs 1.68 lakh crs in October from Rs 1.19 lakh crs in the previous month. Apart from increase in non-tax revenues due to inflow from spectrum auctions, capital inflows from disinvestments also helped improve the fiscal situation.

Outlook:

On the global front, with an expectation of Donald Trump bringing in tax-cuts to help boost spending in the economy which may result in rise in inflation in US thereby strengthening the expectation of a rate hike by the US Federal Reserve in the upcoming month FOMC and hikes continuing into 2017.

Domestically, there could be a negative impact on the Indian GDP growth going forward, given the shock of demonetisation that has largely affected demand in the economy due to sectors dealing in secondary market which has higher cash component. Gradual implementation of the structural reform agenda is expected to contribute to higher growth in the long term.

With the steps taken by the central government in recent past, the momentum of Inflation has remained comfortable and its trajectory in the recent past hints at RBI's undershooting its target of 5% by Q4 of 2016-17 by a good margin. With inflation likely to reduce and a sharp drop in demand, market expects RBI to cut the interest rate by 25-50 bps in the next couple of policies. A25 bps rate cut is already factored in the rates of the fixed income instruments and hence the event of a rate cut might not impact the Indian bond markets significantly.

While the sentiment of the market participants immediately after demonetisation was largely positive, RBI's move on CRR dampened their moods. This however would not stop the yields in the Indian Fixed income markets to continue their downward trajectory as the surplus liquidity in the system will result in the flattening of the yield curve in the medium to long term. Further there is likely to be positive spill-overs of demonetisation on tax collections and overall government finances. Based on the current market sentiments, we expect the new 10 year to trade between 6.10 - 6.50% in the near term, in absence of any external factor or event.

Source:
~CGA
#Ministry of Fin
^RBI
*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.