July, 2016

Canara Rebeco. Mutual funds.

The month of June'16 could be termed as the month of uncertainties. The month started with monetary policy announcement by RBI. As expected, RBI adopted a wait-and watch approach stating that progress of monsoon and its impact on inflation would be tracked before taking any decision on interest rates. US Fed also left the interest rates unchanged owing to slower job creation and global uncertainties. Market participants were in for two surprises this month: Rexit and Brexit. Dr. Rajan's decision to not seek a second term as the RBI governor did shock the market, however the impact of same was subdued as the announcement was tactfully made on a Saturday, which gave time to participants to digest the news. While the exit of Britain from the European Union had wide impact and the ripples of the same might be felt by economies around the globe for quite some time. On policy front, the cabinet approved the recommendations of the 7th Pay Commission and renewed hopes of passage of the GST in monsoon session of parliament.

Market Performance*

Despite the interim volatility due to Brexit, Indian equity markets closed on a positive note in the month of June'16. Benchmarks Nifty 50 and S&P BSE Sensex gained ~1.56% and ~1.24% respectively. Markets tumbled post the aftermath of Britain's referendum, but rose to pre-Brexit levels towards the end of the month. We believe Brittan's exit is not a one off event and it might have far reaching implications which would lead to some volatility in markets.

IIP^

The index of industrial production (IIP) for April'16 contracted by 0.8% (Y-o-Y) compared to previous month's expansion of 0.3%. The deceleration in Manufacturing being the main reason for dragging IIP downwards. On sectoral basis, Mining and Electricity grew by 1.4% and 14.6% respectively. As per Use-based classification, Basic goods and Intermediate goods registered a growth of 4.8% and 3.7% respectively. While, Capital goods contracted by 24.9%.

Inflation^^

The retail inflation for the month of May'16 edged marginally up to 5.76% against 5.47% registered in the month of April'16. On one hand there was surge in food & beverages inflation due to Minimum Support price (MSP) in Pulses (to 7.2% from 6.3%); on the other hand there was easing in core-CPI (to 4.7% from 4.9%) and fuel & light (to 2.9% from 3.0%). We believe so far the progress of monsoon has been decent and we are likely to see easing of food inflation in coming months.

Balance of Payments#

The Current account deficit (CAD) for 4QFY16 narrowed sharply to $0.3 Billion (0.1% of GDP), much lower than $7.1 Billion (1.3% of GDP) in 3QFY16 and $0.7 billion (0.1% of GDP) in 4QFY15. For the full year, CAD improved significantly to $22.1 billion (1.1% of GDP) in FY2016 from $26.8 billion (1.3% of GDP) in FY2015. The improvement in current account was mainly led by improved trade deficit. Trade deficit narrowed to $24.8 billion ($34.0 billion in 3QFY16; $31.6 billion in 4QFY15), owing to considerably lower imports (down 12.4% y-o-y). Non-oil, non-gold imports remained weak, reflecting sluggish domestic demand. Exports contracted 8.3% after declining 18.9% in 3QFY16. For the full year, trade deficit/GDP improved to 6.3% in FY2016 ($130.1 billion). However, invisibles growth slowed contracting by 19% Y-o-Y mainly led by slowing NRI remittances and software exports.

Net capital flows for 4QFY16 were $3.5 billion compared to $10.9 billion inflows in 3QFY16. Weakness in capital flows was due to subdued External Commercial Borrowing (ECB), mainly owing to repayments of overseas borrowings. For FY2016, capital account surplus slowed sharply to $41.1 billion as against $89.3 billion in the previous year, largely due to contracting FII flows.

Trade Deficit for May'16#

India's trade deficit expanded in May'16 for the first time in five months. The deficit expanded to $6.27 Billion for the month of May'16 from previous month's deficit of $4.8 Billion. Exports continued to contract however the pace of contraction softened. Exports fell by 0.79% (Y-o-Y) to $22.17 Billion. The month even saw 1.01% (Y-o-Y) rise in non-petroleum exports. Imports for the month of May'16 plunged by 13.16% (Y-o-Y) to $28.44 Billion. The decrease was mainly driven by 30.45% reduction in oil imports and 7.06% reduction in non-oil imports.

Triggers:

  • Though the markets have recovered post Brexit, its impact might be felt for a while and global economies are likely to remain cautious regarding newsflows relating to European Union and the UK
  • 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 may 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:
# Edelweiss & 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.

In the month gone by, Indian equity markets experienced high volatility. The first half of the month saw the markets moving up on the back of fairly encouraging Q4 corporate earnings results and the progress of monsoon in the sub-continent. As the month progressed, markets started witnessing large volatility ahead of the US Federal Reserve Meet and Brexit referendum.

Financial and currency markets across globe went into a tailspin at the latter half of the month (24th June 2016) after Britain voted to exit the European Union. Global markets stabilized due to the realization that the eventual exit of Britain will take place in a few years from now. Hence, by the end of the month, Indian markets recovered and the benchmark indices Nifty 50 & S&P BSE Sensex were seen trading close to the levels prior to the historic referendum. Another reason for such a sharp bounce back can be attributed to expectation of good monsoon & the clearance of the Goods & Services Tax Bill in the session of the Rajya Sabha. The markets also cheered the cabinet's decision of accepting the recommendations of the 7th Pay Commission.

Market Performance*

The month of June'16 saw bellwether indices viz. S&P BSE Sensex & Nifty 50 rising by ~1.24% and ~1.56% respectively while S&P BSE Mid-cap index & S&P BSE Small-cap index also rose by ~3.09% & ~5.91% respectively. S&P BSE IT however fell by ~3.25% compared to its levels a month ago.

IIP^

India's industrial production fell by 0.8 % year-on-year in April'16, following an upwardly revised 0.3% rise in March'16. Out of the twenty-two industry groups in the manufacturing sector, thirteen industry groups registered a positive growth in April, 2016. The growth of index of Manufacturing, Mining and Electricity was -3.1%, 1.4% and 14.6% respectively during the month. Cumulatively, the IIP registered a growth of 2.4% during April to March, 2015-16 over corresponding period of previous year. The index of Basic goods, Intermediate goods and Consumer Durables registered a growth of 4.8%, 3.7% and 11.8% respectively during April, 2016 while the index of Capital goods and Consumer Non-durables declined by 24.9% and 9.7% respectively

Britain chooses to exit the European Union$

The most iconic event of the month was England's decision to leave the European Union by voting 52% to 48%. The pound was seen dropping to its lowest level against the US dollar since 1985 on the news on fears over future trade. Rupee depreciated sharply and Companies which seem to be most impacted were those that have a direct exposure to Europe in the significant manner, particularly select companies in sectors such as IT, Pharma and Auto.

FPI Inflows*

The month saw FPIs (Foreign Portfolio Investors) increasing exposure to the tune of Rs. 3821 crs. This shows the confidence of the Foreign Portfolio Investors (FPIs) in the Indian Equity Markets on back of strong macroeconomic fundamentals and the expected of strong monsoon. Domestic Investors were neutral with respect to investing in the Indian Equities. With almost similar amount of purchases and sales made in the month of June'16, on net basis, they invested Rs. 37 crs in the Indian equity markets.

Outlook

Indian equities are expected to continue to remain volatile in near-term. Global headwinds might continue to impact Indian Markets in short to medium term. Further, the risk of an economic slowdown in China & the possibility of it devaluing its currency can add to the volatility.

With the expectations of a Fed rate hike diminishing in the near future, the focus will now shift to monsoon and its reach in the Indian subcontinent and the upcoming result season.

We believe that in the near term markets are likely to remain volatile. However, with India slowly heading towards a period of sustainable growth; the pick –up in corporate earnings growth is likely to follow resulting in PE expansion. We expect the market to improve in medium to long term and could be seen as an opportunity by investors to enter the market and take exposure to Indian equities.

Source:
*NSDL
^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.

The month of June'16 began with the Inflation number inching up, on back of food inflation as per the market expectations. This was followed by a muted Bi-Monthly Policy by RBI where the central bank took a cautious approach on intermediate rise in inflation, whilst maintaining an “accommodative” stance on policy. Global unrest like Fed Policy and the outcome of a long time hanging sword of Britain's exit from the EU were also amongst the reasons for RBI maintaining a 'Status Quo'. While US Fed's Policy outcome may have been seen as a non-event, the expectation of the market participants of Britain remaining with the EU was belied, when the country voted for Brexit. Britain's exit announcement brought volatility in global treasury yields including the US, but towards the end of the month US markets saw a sharp drop in yields on safe haven flows. The Indian 10yr benchmark also recovered, closing almost flat at 7.45% as against the last month's close of 7.46%, though it saw an interim range bound movement and heightened volatility during the Brexit announcement. The rupee weakened, settling at its lowest closing level since the end of February'16, on the wake of the unexpected event. To add to the already volatile markets, the RBI governor's decision to not seek extension also had some kneejerk reaction on the currency resulting in the rupee closing at 67.53 as compared to the previous month's close of 67.45.

RBI's Second Bi-monthly Monetary Policy Statement, 2016-17^

As anticipated by the market participants, RBI maintained 'status quo' on policy rates in its Second Bi- Monthly Policy Review of FY17. Consequently, key policy rates remain unchanged – Repo rate at 6.50%, Reverse Repo at 6% and Marginal Standing Facility (MSF) at 7%. The forward stance remained accommodative with incoming macroeconomic and financial developments defining the finer contours of future policy decisions. Until then, focus remains on improving transmission of previous rate cuts to aid growth.

Inflation increased due to upwards pressure on food items~:

More or less in line with market expectations, May'16 CPI jumped to 5.76% vis-à-vis the revised estimate of 5.47% in the previous month. Food Inflation rose to a six-month high of 7.57% after clocking in 3.85% increase in April’16. Going forward, a good monsoon is likely to dampen food inflation in next few months. Wholesale inflation posted its second consecutive positive reading coming in at 0.79% from -2.2% in the year ago period. As with its retail counterpart, rise in headline index was primarily driven by food items. Correspondingly, Core WPI inched higher at -0.47% as against -0.56% in May-15.

Outlook:

With events like Brexit, impacting the fundamentals of economies around the globe, growth across the world economies remains uneven and is yet to show any concrete signs of sustainability. In the current volatile environment globally, FPI flows will likely remain volatile. Amidst such weak external environment, domestic growth would be solely dependent on improving domestic demand and public investment.

Central bank's monetary policy for the month of June'16 came as no surprise – neither on the rates front nor on the forward guidance aspect. We expect the policy makers to observe the initial progress on monsoon and be watchful of how it pans across the subcontinent before taking any decision on interest rates. As a new RBI Governor takes over in September, there may not be any action in the next policy meeting. Formation of Monetary policy committee (MPC) during this period may put policy makers on wait-n-watch mode. Under these domestic circumstances and surprises settling from around the globe, we may expect further rate cuts in the second half of the current financial year. The FED is more likely to remain on hold for the rest of the year, as the long term impact of Brexit is assessed on global economy. Fed's pause on the rate hike cycle may help restarting flow to EMs and in particular India, which is placed in a sweet spot due to relatively better macro conditions.

Demand conditions are likely to improve going forward majorly due to rural demand aided by an expectation of above average monsoon as well as steady expansion in supply capacity, especially in services which could help offset the inflationary pressures. The Government may push key reforms as well in the monsoon session to give confidence to global investors on India story.

In short term, markets are expected to remain volatile due to global headwinds. However, on the domestic front, with strong GDP growth and better macroeconomic condition Indian economy is expected to improve going forward. We expect the domestic liquidity conditions continue to improve considerably due to increased government expenditure, and the OMO activity by the central bank may likely to bring the money market liquidity back in balance. We expect 10Y G-Sec to remain in the range of 7.25-7.50% range.

Source:
~MOSPI, STCI PD,
^RBI

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.