October, 2016

Canara Rebeco. Mutual funds.

September'16 marked a number of positive developments on economic front such as lowering of CAD and moderating of inflation. However, geopolitical tensions surrounding Indian sub-continent temporarily dented market sentiments. On global market development, US Fed kept the rates unchanged. Bank of Japan (BoJ) modified its monetary policy framework by targeting interest rates and the shape of the government bond yield curve from its previous policy of targeting base money. Through this change BoJ aims to achieve its inflation target and boost growth. This development had a positive impact on domestic as well as global markets. The month even witnessed OPEC announcing cut in oil production to lift oil prices.

Market Performance*

Geopolitical situation faced by Indian sub-continent impacted the performance of Indian equity markets. Bellwether indices viz Nifty 50 and S&P BSE Sensex closed at 8611.15 and 27865.96 respectively on the last day of September, 2016. The Nifty 50 fell by 1.99% while the BSE Sensex plunged by 2.06% in the month of September'16.

IIP^

The Index of Industrial Production (IIP) came at -2.4% (Y-o-Y) in July'16, as compared to 2.1% (Y-o-Y) growth in June'16. The sharp 29.6% contraction in capital goods weighted upon the performance of IIP in July'16. Overall the use-based sector registered a weak growth; basic goods, intermediate goods and consumer goods grew by mere 2%, 3.4% and 1.3% respectively. On the Sector front, manufacturing growth contracted by 3.4% while pace of growth of mining and electricity slowed to 0.8% and 1.6% respectively.

Inflation^^

CPI inflation eased to a five month low of 5.05% in August'16 as against 6.07% in July'16. The new print of CPI is within RBI's near-term target of 4%, with a band of 2% on either side. The softening of inflation was mainly due to sizeable moderation in food & beverages inflation to 5.83% in August'16 against 7.96% in July'16. Core inflation marginally inched up to 4.72% in August'16 from 4.64% in July'16. Wholesale inflation climbed to a 24-month high of 3.74% in August'16 compared to 3.55% in July'16. An adverse base effect was the reason for this uptick negating the effect of lower food prices.

Balance of Payments$

The current account deficit fell to USD 0.3 billion (0.1% of GDP) in the first quarter of fiscal year 2017, significantly lower than the USD 6.1 billion (1.2 % of GDP) clocked in the same quarter last year. The sharp narrowing of trade deficit from 6.8% in Q1FY16 to 4.5% of GDP in Q1FY17 mainly led the lowering of CAD. The contraction in imports was more pronounced than the decline in exports; imports declined primarily due to decline in gold imports and lower oil import bill. The net foreign direct investment (FDI) moderated to USD 4.1 billion in Q1FY17 from USD 10 billion in Q1FY16.The reduction in FDI is a cause of concern. Balance of Payments (BoP) remained in the positive territory with addition to foreign exchange reserves in Q1FY17. Foreign exchange reserves rose by USD 7 billion in Q1 FY17 against USD 11.4 billion in Q1FY16.

Fiscal Deficit$

India's fiscal deficit for April-August'16 stood at Rs 4.08 lakh cr, which was 76.4% of Budget estimates for 2016-17, compared to 66.5% of Budget estimates over the corresponding period of the previous year. The deficit tends to be higher in previous months as tax revenues and dividends from state companies is received towards end of financial year.

Triggers

  • Though India's macro–economic situation remains stronger than other emerging markets, the ongoing geo-political issue has made investors cautious. Markets may remain circumspect over uncertainty about geopolitical situation and adopt a wait & watch approach in the short term.
  • The progress in implementation of GST (Goods & Service Tax) bill and second quarter corporate results are likely to be tracked by market participants.
  • OPEC members have agreed upon the broad ceiling regarding oil production cut. There is uncertainty regarding which member will reduce the output, when it will be done and for how long it will last. Market participants might track the developments in this regard to gain clarity on these aspects and to gauge its impact on crude oil prices.
  • The US Presidential election also is likely to have a meaningful impact on market sentiments going ahead.

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

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 September 2016 started with some positive developments in areas of manufacturing growth & retail inflation. While Nikkei India Manufacturing PMI was seen at a 13 month high, the retail inflation also eased and was seen closer to RBI's target zone. These events led the domestic equity markets rise sharply to an 18-month high. As the month progressed, the attention turned towards the upcoming Federal Reserve and Bank of Japan policy meeting but surged back post US Fed Reserve keeping interest rates low. Towards the end of the month, markets remained under pressure over uncertainty about geopolitical situation in the India terrain and investors were seen taking a cautious approach; resulting in the markets plunging. Overall, the domestic market indices displayed range bound movement and ended below the levels seen at the start of the month.

Market Performance*

The month of September'16 saw S&P BSE Sensex & Nifty 50 underperforming the Midcap & Small Cap indices. The S&P BSE Sensex fell by 2.06% in September'16 to close at 27865.96. Nifty 50 also fell by 1.99% to close at 8611.15. Meanwhile, S&P BSE Mid-Cap fell by 0.38% while S&P BSE Small-Cap gained 1.04%.

On the sectoral front, S&P BSE Oil & Gas was the top gainer, rising by 2.75% followed by S&P BSE Auto and S&P Consumer Durables, which rose by 1.01% and 0.51%, respectively during the month. The market was dragged down by negative sentiments in S&P BSE Power, S&P BSE Capital Goods & S&P BSE FMCG which were seen falling by 5.18%, 4.14% & 4.10% respectively.

Growth'

India's manufacturing sector represented by Nikkei India Manufacturing PMI was at a 13-month high in August'16 accelerating from 51.8 in July'16 to 52.6 in August'16. With demand from the domestic and external markets picking up, companies raised output accordingly. Firms recorded an easing in cost inflation during the month, which in turn resulted in a softer overall increase in the factory output. Consumer goods producers led the increase, although solid growth was also seen in the intermediate and capital goods categories.

At 54.7 in August'16, up from 51.9 in July'16, the seasonally adjusted Nikkei India Services Business Activity Index posted its highest level for over three-and-a-half years. The month saw solid rebound in the rate of expansion of the Indian Services industry and witnessed increased levels of business confidence. The trend in employment, however, remained comparatively subdued.

IIP^

India's industrial production contracted by 2.4% in July'16 (Y-o-Y), following a downwardly revised 2% growth in June'16. It was the biggest decline since November'15, as manufacturing production fell 3.4% while output rose for electricity production (+1.6%) and mining (+0.8%). Based on Use-based classification, Basic goods and Intermediate goods showed growth of 2.0% and 3.4% respectively while Capital Goods fell by 29.6% over the previous month. The Consumer durables and Consumer non-durables recorded growth of 5.9 percent and (-) 1.7% respectively, with the overall growth in Consumer goods being 1.3%.

Positive FPI flows **

Continuing the trend witnessed in the last month, FPIs (Foreign Portfolio Investor) increased exposure to Indian equities in the month of September'16. On net basis foreign investors invested to the tune of Rs. 10,443 Crs. in Indian equity markets; strengthening the belief they have in the Indian growth displayed by strong macro-economic fundamentals.

Outlook*

With easing inflation and the US Fed not increasing the interest rates, RBI is expected to continue its accommodative stance. Going ahead, we might see transmission of rates by banks which in turn might lead to financial deleveraging thus improving corporate balance sheets.

Globally most commodity prices are still in a correction phase with crude oil at multi year lows. The reduction in the price of crude is mainly attributed to a fall in demand & supply glut. The reduced crude prices acts as a tailwind to the Indian economy and the prices are expected to stay at such lower levels, the benefits of which might be felt at a greater degree to India.

Once the ongoing geo-political issue de-escalates, the markets is likely revert to its fundamentals which remain strong for India.

With improved fundamentals, good monsoons, inflation under check & good reforms, India offers itself as a bright spot for global investors to park their money & a 'Buy on Declines' strategy could be beneficial for a long term investor.

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 Sept’16 the bond market rallied on back of sharp slowdown in consumer price inflation, normal monsoon and the US FED continuing in the “pause” mode. The 10Y sovereign yields which were seen at 7.12% (old 10Y benchmark) towards the start of the month, softened to 6.96% by the end of the month. The month began with the government announcing the new 10 year bond. Domestic bond markets opened on a bullish note on expectation of aggressive cut off in new 10 yr benchmark paper. Moreover, a sharp decline in global crude oil prices supported bullish market sentiment. While the new 10 yr GOI auction cut offs were broadly as anticipated (coming at 6.97%), it failed to have a lasting impact on market dynamics. The sentiments in the mid month changed when the central bank announced an OMO purchase of Rs.10000crores. This along with weak US jobs and other macros releases sharply scaling down fears of near term Fed rate hike. RBI's gilt purchase further created space for participants to enter into the liquid segment, rendering favorable demand supply dynamics and reducing the yields to lower than 7% mark. The positive sentiment in the market continued and was witnessed by robust demand of the (4th) weekly G-Sec auctions as well.

On the global front, the monetary stimulus measure adopted by major central banks such as BoJ's decision to stick to its bond buying programme as well as the US FOMC outcome to refrain from monetary tightening in its Sep'16 policy, boosted the market sentiments. The reduction in yield were supported by continued investment by Foreign investors proving their faith in Indian debt market and future potential thereby resulting in the inflow in the Indian bond markets to the tune of approximately Rs.9790*.

Aug’16 retail inflation eased towards RBI’s target~

CPI inflation for the month of Aug'16 reduced sharply, as anticipated, to hover close to RBI's inflation target zone to 5.05% as against 6.07% in Jul-16. The sharp decline food prices remained a key contributor to this substantial easing. However, Core CPI marginally edged up to 4.72% from 4.64% in the previous month. Wholesale inflation accelerated to a 2-year high of 3.74% in Aug- 16 as compared to 3.55% in previous month on backdrop of unfavorable base effect. Pulses and manufactured items showed uptick in prices even as vegetable prices witnessed some moderation during the month. Consequently, Core WPI stood at 0.54% for Aug-16, a rise from 0.05% in the previous month.

Current account deficit expected to remain in comfort zone

India's Current Account Deficit (CAD) narrowed to USD 0.3 Bn (0.1% of GDP) in Q1 FY17 as against USD 6.1bn (1.2% of GDP) in the corresponding period last year. Sharp decline in trade deficit helped restrict CAD within sustainable levels for the period under review. The contraction in the CAD was primarily on account of a lower trade deficit as compared to the Q1FY16. On a BoP basis, merchandise imports declined sharply by 11.5% vis-à-vis merchandise exports which declined by 2.1%, leading to a lower trade deficit in Q1 of 2016-17.

Liquidity#

Under the LAF window, the central bank infused liquidity to the tune of Rs 7,429 Cr as on 30th Sept 2016. Also, the borrowing by RBI through MSF stood at Rs 175 Cr on 30th Sept 2016 as compared to Rs 450 Cr on 20th Sept 2016. The system-wide liquidity on a net basis, turned into surplus mode to the tune of Rs 81,000 Cr at the end of the month.

Outlook:

The market anticipated US Fed increasing the interest rate, which remained unchanged in the September 2016 meeting. However, the possibility of a rate-hike in 2016 remains still alive during the next two meetings, with higher probability for the December 2016 meet, depending on the macroeconomic data flow in the US. Going forward, the US Fed Policy decision would be instrumental in defining the path of the markets globally as well as domestically. Since the markets have already factored this increase in rates later this year, market expects less volatility in the coming months.

An inflation-focused framework has been created and the government as well as the central bank is targeted to accomplish the common goal of macro stability. Relatively better monsoon has helped stabilize food prices that were a cause of concern over the last couple of years. We expect the inflation to ease down further to the RBI's target and may infuse confidence in the system thereby providing a boost to the overall economy ahead.

RBI's newly appointed monetary policy committee (MPC), headed by new governor Urjit Patel is likely to continue on the path of structural reform of the monetary system and is expected to see that the CPI inflation within the mandated target band (4%+/- 2%)^, ensure continued down-trend in inflation expectations, and develop mechanisms to see that the earlier rate cuts are transmitted to borrowers by the banks. Going ahead, the monetary policy stance would largely depend on major policy implementation such as GST, increase in capacity utilization, movement in commodity price and monetary policy adjustments by major central banks, especially the US Fed. With the 10 year yields coming down drastically, we continue to believe that the appetite in the market is still present. Based on the current market sentiments, we expect the 10 year to trade between 6.65 - 6.85% in the near term, in absence of any external factor or event.

Source:
~MOSPI, 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.