May, 2016

Canara Rebeco. Mutual funds.

May'16 saw the release of FY16 GDP data which recorded India's growth as the fastest growing economy in the world. The Indian economy expanded by 7.6% in the recently concluded financial year wherein the 4QFY16 growth stood at 7.9%. The month saw the contraction of Index of Industrial Production (IIP) and trade deficit while Retail Inflation was seen rising unexpectedly before the monsoon. The forthcoming monsoon season and the higher than expected retail inflation are expected to make RBI pause before they take any further action on reduction of interest rates.

Market Performance*

Indian equity markets closed on a positive note in the month of May'16. Benchmarks Nifty 50 and S&P BSE Sensex gained ~4.14% and ~3.95% respectively. The earnings of the companies were in lines with the expectations. However, we believe that earnings may pick-up from the 2HFY17.

GDP^

India again was seen as the world's fastest-growing economy, registering a GDP growth of 7.9% for the 4QFY16, up from 7.3% the previous quarter. The strong 7.9 per cent growth in the fourth quarter comes at a time when China reported a growth of 6.7% during the same time which was the slowest pace it grew in the last seven years. Sector wise, the farm sector grew by 2.3% from a year while Mining grew 8.6% in the March'16 quarter, up from 7.1% in the previous quarter. Electricity, water and gas production growth surged to 9.3% from 5.6% in the December'16 quarter. However, the consumption continues to drive growth while investment growth continues to disappoint

IIP^

Dragged by poor manufacturing and mining output, the index of industrial production (IIP) decelerated in the month of March'16 recording a print of 0.1% compared to 2.0% in February'16. For the entire 2015-16 fiscal, the factory output grew at 2.4%, down from 2.8% in the previous fiscal. On sectoral basis, Mining (-0.1% Y-o-Y) and Manufacturing (- 1.2% Y-O-Y) sectors led to this dismal performance. As per Use-based classification, moderate growth was registered in Basic Goods (4.0% Y-O-Y), Intermediate Goods (3.7% Y-O-Y) and Consumer Goods (0.4% Y-O-Y).

Inflation^^

The retail inflation for the month of April'16 edged marginally up to 5.39% against 4.83% registered in the month of March'16. All components other than fuel & power resulted in the unusually high surge of the inflation print. Consequently, Core CPI also rose higher to 4.94% in April' 16 from 4.75% in March' 16. Despite statistical base support remaining unchanged as compared to the previous month, sharp increase in month-on-month inflation more than offset its impact.

Trade Deficit#

India's trade deficit narrowed to a five-year low of $4.8 Billion in the first month of the current financial year, because of a steep reduction in gold imports due to a nationwide strike by jewellers in the month of March' 16 protesting against the proposed 1% excise duty and a reduction in inbound oil shipments. Exports declined with shipments dropping 6.74% to $20.56 Billion in April' 16, while imports fell 23.1% to $25.4 Billion; marking the shrinking trade deficit for fourth straight month.

Triggers:

  • On the global front, Brexit seems to be a cause of concern as with the in/out referendum on Britain's membership in EU, bouts of heightened volatility could be witnessed in the Indian Markets.
  • In addition to this, the expectation of a FED rate hike in June '16, though low, could dampen the moods of the market participants as it may see flow of funds away from the emerging markets.
  • With IMD's forecast, expectations of normal monsoon have increased. The progress of monsoon is likely to help in determining the inflation trajectory
    going forward.
  • The RBI Governor's term is ending in August'16 and the selection of the new governor may be watched out for 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 financial and sentimental perspective would be the few of many prespecting into account while selecting the next governor.

Source:
# http://commerce.nic.in/tradestats/filedisplay.aspx?id=1;
^ 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 growth numbers as both the bellwether indices showed strong gain at the end of May'16. Factors that drove the rally in the market were Good corporate results, forecast of above normal monsoon and strong US home sales data. However, the weak Chinese factory data, changes in the India-Mauritius tax treaty, disappointing CPI and IIP data weighed on the market at the start of the month. The issue of UK's exit out of the EU commonly known as 'Brexit' continued to impact markets around the world. The domestic policy environment was positive with the state election results indicated the widening base of the ruling party. The 2nd half of the budget session concluded with government's approval on the National Capital Goods Policy and the passage of bankruptcy bill in Rajya Sabha.

Market Performance*

The month of May'16 saw benchmark indices viz. S&P BSE Sensex & Nifty 50 rising by ~4.14% and ~3.95% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index also rose by ~2.92% & 1.10% respectively. The broad based expansion in market was seen in almost all sectors except some sectors like S&P BSE Telecom fell by ~2.97% and S&P BSE Health Care fell by ~2.16%. Amongst the others, S&P BSE Energy & S&P BSE Oil & Gas were seen falling by ~1.22% & ~0.36% respectively

IIP^

The Index of Industrial Production (IIP) rose at a subdued pace in March'16, as manufacturing growth, contracted by 1.2% as against 0.7% a month ago. It cumulatively grew by 2% in the FY16, down from 2.3% in the previous year. In March'16, the IIP was boosted primarily by electricity generation, which rose by 11% from the 9.6% rise seen in the previous month. On the other hand, mining output contracted by 0.1% in March'16, a sharp fall considering the 5% witnessed in February'16. On the use based classification, capital goods, continued to contract sharply, going down by 15.4% after a 9.8% slide in the preceding month. On the demand side, decline in consumer non-durables accelerated to 4.4% from the 4.2% fall in the previous month; though consumer durables grew by 8.7%.

FPI Inflows*

The stable external environment, strengthening domestic economic indicators and the quarterly earnings indicating early signs of a recovery, rendered positivity in the market sentiments leading to net positive flows of ~ Rs. 1,823Crs. from FPIs (Foreign Portfolio Investors) in the Indian Equities. The macroeconomic factors and the expectation of above normal monsoon has resulted in Indian equities being one of the preferred destinations for the FPIs. Domestic investors were seen to be more confident about the Indian markets as they infused money to the tune of ~ Rs. 5,954.20Crs. in the month of May'16.

Outlook

On growth front, India appears to be on the right track; indicated by improving industrial production and improved performance of bellwether indices. Expectation of normal monsoons and implementation of 7th pay commission are likely to enhance the consumption demand in the economy.

The earnings season so far has been better than market expectations with few negative surprises. We expect the corporate earnings growth which remained muted is expected to gradually improve as macro-economic growth picks up led by rural demand and show its maximum impact in 2017-18. With improving global sentiment and with India slowly heading towards a period of sustainable growth; the pick –up in corporate earnings growth is likely to follow PE expansion. Indian economy is showing signs of improvement and we are likely to see momentum building up from the H2 of FY2017.

We expect the market to improve in medium to long term and could be seen as an opportunity by the investor to enter the market and take exposure to Indian equities. One should invest in equity funds that allow participation in Indian growth story by adopting a staggered approach to equity investments in order to even out the market volatility.

Source:
^MOSPI
*ICRA MFI Explorer
' Data as on 31st May, 2016

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.

Month of May'16 begun with mixed US jobs data coupled with RBI open market operations Purchase announcement rendering a positive start to the domestic bond market. However, the market appetite remained subdued in the absence of strong trigger (key events including US non-farm payrolls and expectation of a rate hike by the US Federal Reserve during the policy meet due in June 16). Government bond prices moved in a narrow range during the month of May'16 closing at 7.47% from 7.43% by the end of April'16. The interbank call money rate ended below the repo rate at 6.30% due to the periodic fund infusion from the central bank through repo auctions. RBI conducted term repo auctions, infusing a total of ~ Rs. 80,000 - 90,000crs* into the banking system. Towards the end of the month, the yields hardened on account of profit booking ahead of FOMC meeting in June'16 and ended up at the similar level at the start of the month, negating the little downward push seen during the month.

India's economic growth accelerated stronger than expected!~

India's GDP numbers for quarter ended March'16 stood at 7.9% as against 7.3% in December'16, thereby making it the fastest growing economy in the world. On the global front, the world's number two economy China, saw growth slowing to 6.7% for the quarter ended March'16, the slowest in seven years. The growth in the economy was powered by an improvement in electricity generation, mining production and a rebound in farm output in the last quarter of the FY2016. India's core sector growth jumped to 8.5% in April'16 due to sharp pick-up in refinery products and a commensurate rise in electricity generation. Mining grew 8.6% in the March’16 quarter, up from 7.10% in the previous quarter. Electricity, water and gas production growth jumped to 9.3% from 5.6% in the December quarter. On the fiscal deficit front, India's fiscal deficit in April'16 was Rs 1.37 lakh crore (25.70% of its budgeted target of Rs 5.34 lakh crore for FY2016-17); the government's fiscal deficit for FY2015-16 was marginally higher at 3.92% of the GDP as against the targeted 3.90%.

Inflation rose sharply on account of price pressure in commodities~

For the month of April'16, consumer price index (“CPI”)came in at 5.39% marginally higher as compared to 4.83% in March'16. Increased pace of acceleration in the headline number impacted the Core CPI also, which rose to 4.94% in April''16 as compared to 4.75% in March'16. The increase in retail inflation could be attributed to a modest price pressures in commodities along with spike in food articles. Wholesale inflation (WPI) for the last month turned positive after a long gap coming in at 0.34% in April'16 vis-à-vis -0.85% in Mar-16. Correspondingly, Core WPI inched higher to -0.8% from -1.1% in the previous month.

Expectation of above normal monsoon augments well for the fixed income market

Monsoon rains are vital for farm output and economic growth in India. An expectation of above normal rain may result in higher farm output which would rein in food prices and help the government to take steps to cut the fiscal deficit and farm subsidies further. The MET prediction of above average monsoon season in 2016 may work in favour of Indian economy and help curb the inflation in near term. With the rural economy growth expected to strengthen, the consumption led demand may provide impetus to the economy growing further. The expectation of above normal monsoon predicts well for the bond market and may provide some comfort to the central bank to reduce the interest rate.

Outlook:

On the domestic front, with strong GDP growth and better macroeconomic condition Indian economy is expected to improve going forward. On one hand, domestically, India is gearing up for growth; while the global markets are facing uncertainty on the interest rate hike by the Federal Reserve in coming month. For almost 6 months now, there has been deflationary environment in the globe and the growth has been subdued.

The strong macros expected to bring down inflationary pressure in near future on the back of normal to above average rainfall and oil price. RBI's will continue to keep a close watch on the macroeconomic and financial developments in the coming months as the increase in inflation has put aside chances of a rate cut in the near term and this year's monsoon has become critical for the overall prospects of the economy.

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. Under these domestic circumstances and absence of any surprise from around the globe, we may expect further rate cuts in the second half of the current financial year.

While the recent uptick in the inflation has stressed the market a little, the expectation of good monsoon and easy monetary regime adopted by the RBI has added a favorable impact on the bond market dynamics, keeping the yields range bound at around 7.40% levels. The RBI's stance of monetary policy is expected to remain “accommodative” for some time before further assessing inflation and other key economic indicators. We expect 10Y G-Sec to remain in the range of 7.30-7.60% 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.