July 31, 2015

Canara Rebeco. Mutual funds.

In the month of July'15, domestic markets were mainly driven by global events. The positive outcome of Greece crisis, slowdown in China, and falling crude oil prices were main triggers driving the markets. On domestic front, WPI continued its disinflationary trend while there was an uptick in CPI. Further IIP dampened & trade deficit widened due to fall in exports.

Market Performance*

Starting of the month, market sentiments were dampened due to the melt down in commodity prices and slowing China's economy. In later part of the month, sentiments revived slightly as Greece & ECB arrived at a resolution. The Q1FY16 result season has started and so far the results are in line with our expectations. We believe that the earnings are likely to remain subdued for Corporate India in the near term & pick –up in the 2HFY16. The benchmark indices, CNX Nifty and S&P BSE Sensex rose by 1.2% & 1.96% respectively.

IIP^

The Index of Industrial Production (IIP) grew at a modest pace of 2.7% growth (y-o-y) in May'15 compared to 3.4% in April'15 (revised). Muted pickup in manufacturing segment and consumer goods segment dragged down the IIP. On Sector front electricity registered a healthy growth of 6%, while mining and manufacturing segments grew 2.8% and 2.2% respectively. On Use-based classification Basic Goods recorded a robust growth rate of 6.4%, while Consumer goods registered a growth rate of -1.6%. This de-growth in consumer goods was due to contraction in both consumer durables & consumer non durables.

Inflation^^

The wholesale price inflation (WPI) continued to tread in negative territory and declined to -2.4% in June'15 compared to previous month's -2.36%. Consumer Price Index (CPI) inflation inched higher to 5.40% in June'15 compared to 5.01% in the previous month. The uptick was predominantly due to hike in food inflation after a three month respite. Core inflation (excluding food & beverages and fuel &light) increased to 4.8% in June'15 from 4.6% in May'15.

Trade Deficit##:

Trade deficit expanded to $10.83 billion in June'15 from $10.41 billion in May'15. Imports contracted by 13.40% (y-o-y) helped by sharp decline in crude oil prices. Marginal contraction was also recorded in non-oil imports (1.85%). Continuing the recent trend, exports declined by 15.82% y-o-y in May'15 to US$22.29 billion. The contraction in exports for seventh consecutive month triggers concern.

Triggers

  • On domestic front, market participants may keenly watch progress in monsoon and announcement of corporate earnings.

  • With positive outcome of Greece ECB negotiations focus has shifted from Greece for the time being. Global participants are likely to observe how China's macro-economic fundamentals pans out.

  • Another key event to watch out will be US rate hike, which is likely in 4QCY15, for global markets and liquidity flow.

  • Though there has been no official news regarding FPI limit, global players are keenly awaiting Government's stance on increasing FPI limit. RBI has indicated that the limits may be revised twice a year, going forward, and is in consultation with the government on the same.

  • Acceptance of Iran accord may continue to put pressure on oil prices, keeping them lower for longer. This will continue to be huge positive for India.

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

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

In the month gone by, outcome of Greek crisis, weak Chinese macroeconomic numbers & Corporate results were the main market drivers. Another factor tracked by market participants was July'15 monsoon data which was below expectations. Low rainfall in July'15 is a big worry as second consecutive year of below average rainfall could adversely impact the economy. On a positive note, the International Monetary Fund (IMF) has reaffirmed its growth forecast for India at 7.5%^^ each for 2015 and 2016 in its latest World Economic Outlook (WEO).

Market Performance**

The month of July'15 saw bellwether indices viz. S&P BSE Sensex & CNX Nifty rising by 1.2% & 1.96% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index rose by 5.55% & 6.82% respectively.

The market rally was broad based & all sectoral indices except S&P BSE Metals, S&P BSE Realty, S&P BSE India Infrastructure & S&P BSE Utilities ended the month in green.

Growth`

India's manufacturing sector represented by Nikkei India Manufacturing PMI recorded above the 50.. no-change mark for the twentieth successive month to come at 51.3 for June'15. The dip in the PMI from 52.6 in May'15 indicated a slower pace of improvement in manufacturing sector. Though there was an improvement in operating conditions, slower increase in both output and new orders weighed on the PMI.

Nikkei India Services Business Activity Index which tracks changes in activity at service companies on a monthly basis, fell to 47.7 in June'15. This was down from previous month's 49.6 as new orders declined for the first time in 14 months. The decline in Services sector for two consecutive months raised concerns about India's economic growth momentum.

IIP^

The Index of Industrial Production (IIP) rose at a slower pace to register 2.7% growth (y-o-y) in May'15. The April'15 IIP number was also revised downwards to 3.4% as compared to the initial 4.1%. Robust expansion in Basic Goods led the growth in IIP while Capital Goods displayed a muted growth compared to last month. Sector-wise mining, manufacturing & electricity rose by 2.8%, 2.2% & 6.0% respectively. Based on Use-based classification, basic goods, capital goods & intermediate goods recorded a growth of 6.4%, 1.8% & 1.2% respectively. The consumption basket which expanded last month recorded a de-growth of 1.6% owing to 3.9% contraction in Consumer Durables & 0.1% contraction in Consumer non – durables.

FPI Outflows*

The month of July'15 saw FPIs (Foreign Portfolio Investor) re-entering the Indian equity markets. The net FPI investments for the month were to the tune of Rs. 5,319 Crs. The expected reduction in crude oil prices, weak macroeconomic data of China & market intervention by Chinese authorities to support stock market fall helped strengthen sentiment towards India.

Outlook

On global front the positive resolution of Greek debt woes has shifted focus from Greece for the time being. Markets are likely to track the next move of Chinese regulators& policy announcements by US Fed for further cues. Iran is expected to boost oil production after international sanctions are lifted, this may further reduce crude oil prices which is positive for India's current account deficit & balance of payment.

On domestic front with the July'15 monsoon being below expectations the progress of monsoon will be a key determinant in RBI policy action. Market participants are also likely to watch further Government steps with respect to implementation of Goods & Services Tax.

The result season so far has been in line with our expectations. We believe that the earnings are likely to remain subdued for Corporate India in the near term & pick –up in the 2HFY16. In near term markets are likely to track the first quarter results of Corporate India for investment triggers.

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. Any interim correction can be used as an opportunity to enter the market by investors having medium to long term investment horizon.

Source:
*NSDL
^MOSPI
$The Economic Times, Business Standard
**ICRA MFI Explorer
^^IMF

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Retail Inflation soars ahead while Wholesale Inflation continues to decelerate in June'15~

Consumer Price Index (CPI) inflation for the month of June'15 rose to 5.40% compared to 5.01% in May'15 owing to uptick in both food & core inflation. Inflation in food & beverage (accounting for ~46% of the retail basket) hardened to 5.7% due to twin impact of seasonal spike in prices of key vegetables and rise in service tax. Core-CPI, indicative of demand side price pressure firmed up to 4.8% in June'15 from 4.6% in the previous month.

Continuing its slide in the negative territory, the wholesale inflation represented by WPI clocked -2.4% for June'15 compared to - 2.36% in the previous month. Slowdown in fuel & manufacturing inflation negated the impact of uptick in food inflation. Core inflation dropped to lowest level (-0.9%) since Nov-09.

Trade deficit widened marginally in June'15^

Trade deficit expanded to $10.83 billion in June'15 from $10.41 billion in May'15. Imports during June'15 compressed to US $33.12 billion 13.40% lower than previous year owing to sharp fall in international commodity prices - especially crude oil. Exports for the month of June'15 were valued at US $22.29 billion. The contraction in exports (15.82% y-o-y) for seventh consecutive month triggered concerns. Exports also contracted for the June'15 quarter in both volume and value making it the steepest fall in exports since Q2 of 2009-10.

Current Account Deficit expected to widen in June'15 quarter*

India's Current Account Deficit (CAD) fell steeply to USD 1.3Bn (0.2% of GDP) for Q4 FY15. However the increase in crude oil prices during the last quarter may cause the current account deficit to widen. Further the trade deficit for April-June, 2015-16 rose to ~US $32 billion from ~ US $26 billion in the previous quarter.

Ample Liquidity in the System

Continued liquidity surplus, increased the possibility of OMO sale operations which slightly daunted markets sentiments. However, RBI decision to infuse less than notified amount of assured liquidity via 14-day term repos subdued fears over likely OMO sales.

Outlook

  • With the positive outcome of Greece ECB negotiations, oil prices sliding downwards, and expectation of a slow and gradual rate hike by US Fed, RBI's main concerns on global front have been largely addressed with likely positive outcome for India macro. However, with July's monsoon being below expectations & spike in June'15 retail inflation, concerns regarding stickiness in inflation remain. We believe that the sharp decline in crude oil prices coupled with proactive measures by the government to manage food inflation, and low increase in MSP is likely to pull down inflation below RBI's target of 6% by Jan'16.

  • Despite the gradual recovery in global economy, the continued slowdown in China may help keep a lid on commodity prices, which are at multi-year lows. This is expected to be positive for India's twin deficit & inflation.

  • Though there has been no official news regarding FPI limit, RBI in consultation with the Government is looking at a framework for revision of Foreign Portfolio Investors' investments in Government securities. This is likely to be positive as many international investors have been interacting with the government on increase of limits.

  • While the 10Y G-Sec bond yield is trading close to 7.8%, the rest of the yield curve is near 8%. The spread over repo at around 75bps becomes attractive for banks / long term investors. Further we believe this rate cut cycle to be a gradual providing investment opportunities at different market levels. We expect the 10Y G-sec is likely to trade between 7.70% - 7.90% in next few months, awaiting more clarity on monsoons, and FED rate action.

Source:
~MOSPI, STCI PD & ICRA
^RBI, Ministry of Commerce
*RBI

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.