November, 2016

Canara Rebeco. Mutual funds.

October’16 started on a positive note with the newly constituted monetary policy committee (MPC) announcing 25 bps rate cut on back of lowering CPI, weak global environment and to provide impetus to the still recovering local economy. The month also marked the beginning of 2QFY16 corporate results announcements; so far the results have been in line with expectations. On global market development, US Fed is contemplating the raising rates but their next move is anybody’s guess. Markets seem to have already discounted the possibility of a rate hike whether in December’16 or in coming months. ECB kept its policy rates unchanged however they indicated that they are open for new stimulus to boost inflation in the economy. The month even saw crude oil prices rallying a bit with it surging to one year high of USD 53. This upswing was post Russia’s announcement of joining the OPEC’s effort to reduce oil supply. However towards the end of the month, the price fell back to USD 48.3 as the market perceived any action from OPEC to be limited in nature.

Market Performance*

In the month gone by, the broader market remained largely subdued with the mid-cap and small cap indices closing in green. Bellwether indices viz. Nifty 50 and S&P BSE Sensex closed at 8625.7 and 27930.21 gained 0.17% and 0.23% respectively after the customary Muhrat trading on 30th October’16. Though the main indices clocked marginal gains, S&P BSE Midcap indices gained 2.33% and S&P BSE Smallcap rose by 6.28%.

IIP^

The Index of Industrial Production (IIP) came at -0.7% (Y-o-Y) in August’16, as compared to -2.5% (Y-o-Y) growth in July’16. The decline in output is attributed to yet another contraction in capital goods. The output of capital goods declined by a steep 22.2%, marking it the 10th consecutive month of decline. Overall the use-based sector registered a muted growth; basic goods, intermediate goods and consumer goods grew by mere 3.2%, 3.6% and 1.1% respectively. On the Sector front, manufacturing and mining output shrank by 5.6% and 0.3% respectively while electricity output grew by 1.6%.

Inflation^^

CPI inflation eased to a 13 month low of 4.31% in September’16 against 5.05% in August’16. The new print of CPI is within RBI’s near-term target of 4%, with a band of 2% on either side. The considerable softening in food & beverages inflation to 4.1% in September’16 from 5.83% led in moderating inflation. Wholesale inflation came in 3.57% in September’16 which was lower than 3.74% in August’16. The newly formed monetary policy committee of RBI cut rates as inflation was lower than expectations, and this may nudge banks to lower base rates and ease corporate lending rates. With inflation easing it opens room for RBI to maintain its accommodative stance going ahead as well.

RBI’s Monetary Policy^^

The newly constituted Monetary Policy Committee (MPC) met for the first time on 4th October, 2016. All six member of MPC voted in favour of a 25bps rate cut. With comfortable liquidity scenario, we might see revival in bank credit and transmission of rates by banks. The easing of food prices provides leeway to RBI to act on rates. However, the MPC is likely to take into consideration the impact of 7th Pay commission and GST on inflation before further action on rates. We believe RBI may be in position to cut rates by 25 bps in current fiscal.

Trade Deficit ##

Trade deficit for the month of October’16 widened to USD 8.34 billion from USD 7.67 billion in Septemnber’16. The month saw revival in exports registering a growth of 4.62% (Y-o-Y) to USD 22.88 billion. Imports contracted by 2.54% (Y-o-Y) to USD 31.22 billion due to decline in non-oil imports. The month witnessed oil imports widening by 3.13% (Y-o-Y) to USD 6.89 billion. Though the deficit has inched up, the revival in exports is positive. if the trends continues we might see narrowing of trade deficit in coming months.

Triggers

  • The announcement of 2QFY16 corporate results is likely to be tracked by market participants.
  • GST council is yet to decide upon the final tax structure. The progress of council in deciding the rates would be keenly followed.
  • Inability of OPEC to decide production quotas and the discord between the OPEC producers is likely to have negative impact on crude oil prices. If the production freeze deal fails, we might see crude prices retracing to USD 40 levels.
  • The US Presidential election seems to be close one, and is likely to have a meaningful impact on market sentiments going ahead.
  • Though the possibility of Fed rate hike impact has been discounted for, there might be some knee jerk reaction by the market after the actual announcement.

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

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.

Indian equity markets were guided by 2QFY16 corporate results which have been in line with the market expectation and the unexpected rate cut by the RBI. Key domestic economic indicators provided a cautiously optimistic picture. Inflation was seen within the comfort zone of RBI while the pace of India’s growth slowed slightly. The month of October’16 witnessed profit booking by FPIs which resulted in the outflow of funds from the Indian equities markets. The markets which had ended the last month in red rose marginally during the month.

Market Performance**

Equity markets were seen in a narrow range during the previous month. On net basis India’s bellwether indices viz. S&P BSE Sensex & Nifty 50 witnessed slight positive momentum rising by 0.23% & 0.17% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index rose by 2.33% & 6.28% respectively.

S&P BSE Oil & Gas, S&P BSE Metal and S&P BSE Consumer Durables were the top performing sectors during the month rising by 8.26%, 5.67% and 3.02% respectively. S&P BSE IT, S&P BSE Auto & S&P BSE FMCG were the sectors seen under pressure.

Growth'

Indian manufacturers enjoyed yet another month of solid operating conditions during Sept’16. With demand from the external markets picking up, companies saw higher export orders; strongest since Jul’15. Slowing from 52.6 in Aug’16 to 52.1 in Sept’16, the index saw intensification of inflationary pressures, leading to the input costs and output charges increasing at a quicker rate.

Meanwhile, at 52.4 in Sept’16, down from 54.6 in Aug’16, the seasonally adjusted Nikkei India Services Business Activity Index mirrored trends for new business. The slow pace of growth in the activity of the service providers could be attributed to the increasing cost of production; albeit highlighting the on-going growth in the county is on the right path.

IIP^

Remaining in the negative territory for the second month in a row, industrial production contracted by 0.7% in August’16; following an upwardly revised 2.5% fall in July’16; due to slump in manufacturing, mining and capital goods segments. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of August’16 were seen growing at (-) 5.6%, (-) 0.3% and 0.1%. In terms of industries, seven out of the twenty two industry groups in the manufacturing sector have shown negative growth.

FPI flows **

The month saw reversal in FPI (Foreign Portfolio Investor) flows. From investing close to Rs. 10,443 Crs in Indian equities in September’16; FPIs withdrew around Rs. 4,306 Crs. in Indian equities in the month gone by. The outflow of funds could be attributed to profit booking. This was also the first time that the FIIs have turned net sellers in Indian Equities in the current Financial Year.

Outlook*

On global front, all eyes are now on the FOMC meeting and the possibility of rate hike in December’16. We believe that, this hike will be dependent on domestic US data and the global environment. While there may be some knee-jerk reaction post the announcement, India is unlikely to see huge foreign outflows as the macro-economic variables in the country continue to remain strong compared to other emerging economies.

The earnings season so far has been in line with our expectations with no major negative surprises. We expect the earnings in the coming few quarters to be subdued and corporate profits and margins are likely to start responding to the improving economy by the next financial year. We expect support for domestic cyclicals and capex industries from declining interest rates while exporters and defensive sectors are likely to face some pressure due to slowdown in global growth.

Despite the near-term challenges, the long term potential of Indian economy remains intact. We expect markets to remain volatile in the near term owing to US Fed stance. With expectations of improving growth and the economy likely to benefit from being a favourable investment destination globally, India should continue to attract steady inflow of foreign investments. 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 start of October’16, Indian bond market saw yields moderating on account of positive domestic macroeconomic variable and continued global uncertainty. The newly formed Monetary Policy Committee (MPC), announced a surprise rate cut of 25 bps in RBI’s 4th bi-monthly policy. In its commitment towards increasing the participation of foreign investors in bond market and enlist them in market development, RBI in the first week of October’16 announced the increase in quantum of FPI limits. This move along with the positive Inflation print helped boost the market sentiments and resulted in the 10 year benchmark yield to drop from 6.82% at the start of the month to 6.67% in a couple of trading sessions. However, yields went up on back of global bond market weakness and profit booking, ending the month at 6.79%. FPIs also sold, resulting in the outflows* to the tune of `6000 Cr as against an inflow of over `9800 Cr in the previous month. During the second half of the month, RBI announced OMO Purchase auction of `10,000 Cr which didn’t have any positive impact on yields. Also, the global volatility concerns such as UK’s exit from EU, narrowing ECB’s bond buying program and US Fed’s caution on rate move has kept domestic market in a narrow range. Market activity was limited on account of festival season.

RBI prioritises growth over inflation, cuts rate by 25 bps~

The newly formed MPC voted unanimously to cut the key interest rate by a 25bps in its first policy review, citing moderating momentum of food inflation opening up space for a rate cut. Higher sowing of crops and supply management measures have helped curb rising food prices. MPC highlighted the potential cost push pressures from the 7th Pay Commission award on HRA and increase in minimum wages with possible spill overs through minimum support prices (MSP) for farm produce. Overall, RBI’s stance on inflation and growth expectations appears to be more dovish than initially envisaged.

Inflation continues to ease amid softening food inflation#

September’16 CPI inflation eased to 13-month low of 4.31% as against 5.05% in August’16. Food remained a key contributor to this sharp easing of price pressures. However, Core CPI inched up to 4.88% from 4.72% in the previous month. The receding pressure from the food segment has kept the wholesale level down. The wholesale inflation declined to 3.57% in September’16 after it touched a two-year high in August’16 at 3.74%.

Fiscal situation deteriorated as compared to last year~

The fiscal deficit in first half of the current financial year widened to 83.9% as compared to the budget target of 68.1% of the last year. In absolute terms, fiscal deficit for 1HFY17 was `4.48 lakh crore, the highest level recorded for April-September’16 in last two decades. The rise in capital expenditure as well as revenue expenditure primarily on account of increase in salaries due to the implementation of 7th CPC. The gap between the expenditure and revenue for the entire fiscal, has been pegged at `5.33 lakh crore, or 3.5 % of GDP, in 2016-17. The government is expected to improve the fiscal condition and achieve the targeted level by taking actions such as spectrum auctions, strategic sale in public sector companies and disinvestment.

Outlook:

Unforeseen global volatility especially low global growth & the impact of the Great Britain exiting the EU would remain key factors along with domestic data before the US Fed decides it future developments. However, the market anticipates US Fed increasing the interest rate in one of the next two meetings depending on the economic data and the upcoming election. Markets may remain volatile due to the US Presidential election and post that the expected increase in FED funds rate in December’16 FOMC.

India is heading towards structurally lower inflation. With relatively better monsoon which has helped to stabilize food prices and the formation of MPC which is committed towards targeting inflation, volatility in inflation is expected to reduce, moving India from a volatile high inflation environment to one with a low and stable inflation. Maintaining policy continuity, the MPC reiterated ‘accommodative’ stance on liquidity and displayed comfort on improving inflation fundamentals. With the expected continued downtrend in CPI, we expect another 25 - 50 bps rate cut by RBI by April’17.

During H1FY17, the bond market has experienced sharp rally owing to global sentiments and the favorable domestic macro-economic conditions & positive liquidity management by RBI. Future course of the Indian bond market would be guided by the market economic variables and major policy implementation such as GST and the 7th CPC. With the 10 year yields coming down considerably, we continue to believe that the appetite in the market is still present. Based on the current market sentiments, we expect the new 10 year to trade between 6.60 - 6.80% in the near term, in absence of any external factor or event.

Source:
~CGA, Ministry of Fin
#STCI PD
^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.