January, 2017

Canara Rebeco. Mutual funds.

2016 was a year of the unthinkable and the unexpected; both globally and locally. Globally events like Brexit, and Trump election were totally unexpected while Fed rate hike and OPEC's decision to cut oil production kept markets guessing. Domestically, the passing of GST bill, the formation of Monetary Policy Commission (MPC), recommendations of 7th Pay commission and demonetization were the key events which kept markets on the edge.

Though Indian markets were volatile throughout the year, there were several positive macro-economic cues. On fiscal front, the government has stuck to its budgeted target. India's CAD has lowered to 0.6% of GDP for the 3QFY16. The monsoons this year has helped to bring down the inflation (now below 4%). Falling inflation & RBI's policy directed towards liquidity prompted RBI to cut rates by 50bps during the year. Government's move of banning high denomination notes led to a sudden spurt in the liquidity which likely would further help in reducing inflation further. We might see a slowdown in growth in the coming quarters due to demonetization, but we expect growth to pick up by 2HFY17.

The month gone by:

December'16 started on an unpleasant note with RBI maintaining status quo in its bi-monthly monetary policy stating that they watch out for global and domestic data points before altering interest rates. However, market sentiments boosted when CPI for the month of Movember'16 came in at 3.63%, clearly depicting the impact of demonetization and a favourable monsoon. On the last day of the year, PM delivered the much awaited speech. In his speech, the PM announced for rebates for housing loan, series of reforms for farmers, financial aid for pregnant woman and lock-in on interest rates for senior citizens. On global front, Eurozone saw another referendum from its member state Italy. The referendum dealt with altering the country's legislative process. However it was not agreed upon resulting in resignation of its PM Matteo Renzi. Euro region is likely to battle political instability as more countries see increased acceptance of Euro-skeptic political movements. The month also saw US Fed announcing 25 bps on back of strengthening labour market data and the Committee's expectation of achieving the 2% inflation target. Fed also signalled at a faster pace of increase in rates in 2017. We expect Fed to likely be data dependent before taking a call on interest rate.

Market Performance*

Weak domestic industrial production data, higher oil prices and possible delay in implementation of GST took a toll on market sentiments. The shock of demonetization further added to market woes as there is likely to be short term impact on sectors like real estate, building materials and consumer discretionary. Bellwether indices viz. Nifty 50 and S&P BSE Sensex fell by 0.47% (M-o-M) and 0.10% (M-o-M) respectively. The mid and small cap space also declined by 3.74% and 2.30% respectively. The calendar year 2016 ended on a positive note with Nifty 50 gaining 3.01% and S&P BSE Sensex gaining 1.95%.

IIP^

The Index of Industrial Production (IIP) came at -1.9% (Y-o-Y) in November'16, as compared to 0.7% (Y-o-Y) growth in October'16. The abysmal decline of 25.9% in capital goods continued to drag IIP. On use-based sector front; basic goods and intermediate goods grew by 4.1% and 2.9% respectively while consumer goods output declined by 1.6%. In terms of sectoral classification, manufacturing and mining output contracted by 2.4% and 1.1% respectively while electricity output grew by 1.1%.

Inflation^^

The effect of the government's move to de-legalise the high denomination notes was seen impacting the inflation positively in the month of November 2016. Accordingly, CPI fell to 3.63% in Nov'16 compared to 4.20% in October'16. Normal monsoons helped bring down food inflation; prices of food and beverages slipped to 2.56% in November'16compared to 3.71% in October'16. Inflation at the wholesale level also slowed in Nov'16 due to subdued demand, coming at 3.15% in November'16 compared to 3.39% in October'16. We expect the inflation print to undershoot RBI's target by a comfortable margin as the demonetization impact is yet to be completely seen. If CPI continues to drop further, we might see RBI lowering rates in near term.

Balance of Payments #

The current account deficit (CAD) stood at USD 3.4 billion (0.6% of GDP) in the 2QFY17 compare to USD 8.5 billion (1.7 % of GDP) clocked in the same quarter last year. Decline in CAD was mainly driven by lowering trade deficit (USD 25.6 billion). The trade deficit was low YoY predominantly due to improving exports, while imports remained weak. The net foreign direct investment (FDI) inflows during 6 months rose by more than 28.8% over the level during the corresponding period of the previous year. Net Balance of Payments (BoP) surplus was USD 8.5 billion for 2QFY17.

Trade Deficit ##

Trade deficit for the month of November'16 widened to USD 13.01 billion from USD 10.16 billion October'16. The revival of exports continued in November'16 as well. Exports grew by 2.29% (Y-o-Y) to USD 20.01 billion. Imports expanded by 10.44% (Y-o-Y) to USD 33.02 billion due to increase in oil and non-oil imports. The month witnessed oil imports widening by 5.89% (Y-o-Y) to USD 6.5 billion and non-oil imports increased by 11.07% to USD 26.18 billion.

Triggers

  • Budget 2018 would be the key event for markets to decide on future direction
  • Post the Budget announcement, RBI's monetary policy would be next key trigger. With inflation moderating and the demonetization impact yet to be completely seen, there is room for RBI to cut rates
  • Markets participants would keenly track the announcements by government post demonetization to demonstrate the government's commitment against “black economy”
  • Equity participants would likely closely watch Q3FY17 earnings to gauge impact of demonetization and judge the pace of recovery going forward
  • The trajectory of crude oil prices post the production cut would be interesting to follow as adherence to quota by OPEC/Non-OPEC members has been “more honored in breach rather in observance” in the past
  • Global developments would continue to drive the market movement. Investors would look at policies to be formulated by US President elect and unfolding geo-political events in Europe

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

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 equities began on a cautious note and traded in a narrow range throughout the month of December'16. However, Indian domestic macroeconomic factors remained favourable while global factors like a hike in US Fed rate and Italy's referendum stalled the growth of the domestic equity markets. Continuous selling pressure and a resultant outflow of foreign funds dragged the key domestic indices lower. Domestically, consumption had taken a hit and the informal sector was seen struggling too with repercussions to be seen on the GDP growth in the December'16 and March'17 quarter.

Market Performance**

The Indian Equity markets remained range bound throughout the month of December'16. On net basis India's barometer indices viz. S&P BSE Sensex & Nifty 50 remained nearly flat with -0.10% & -0.47% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index fell by 3.74% & 2.30% respectively.

S&P BSE IT, S&P BSE Oil & Gas and S&P BSE FMCG were the top performing sectors during the month rising by 3.29%, 1.57% and 0.75% respectively. Health care, Metal and Capital Goods were the major sectors under pressure falling by 6.39%, 5.22% and 3.73% respectively.

Growth'

Manufacturing production indicated by Nikkei India Manufacturing PMI was recorded below the crucial threshold of 50 for the first time in 2016 during December'16. PMI data for December'16, down from 52.3 in Nov'16 to 49.6, indicated that the demonetisation of the rupee took a toll on manufacturing performance. Four of the five sub-components of the PMI edged below 50.0, while average delivery times lengthened further. At the sector level, operating conditions deteriorated in both the consumer and intermediate goods categories due to cash shortages.

IIP^

The Index of Industrial Production (IIP) went down 1.9% Y-o-Y in October 2016, following 0.7% growth in the previous month. While mining shrank 1.1%, manufacturing contracted by 2.4%. Electricity generation grew 1.1%. But worryingly, capital goods production—a key indicator of the investment demand in the economy—contracted for the twelfth consecutive month, by 26%. Consumer goods production also contracted in Oct'16 after registering positive growth for five consecutive months. Consumer goods declined by 1.2%, with non-durable goods falling by 3.0% and growth in consumer durable goods moderating to 0.2%.

FPI flows **

The month of December'16 saw an outflow by FPIs (Foreign Portfolio Investor) on account of expected rate hike by US Fed. The net FPI outflow for the month was Rs. 8176 Crs. The corrections in markets during the last month were viewed as an attractive investment opportunity by Mutual funds who increased their exposure to equities with the net purchase being Rs. 6422 Crs.

Outlook*

Most domestic economic indicators are already positive or are showing signs of recovery. The government seems to be on the right track to find out solutions for some of the structural issues prevailing in the country. All this combined, India is expected to be one of the fastest growing Emerging Market economies the coming year, in absence of any external shocks.

While the global economic scenario is expected to improve gradually, the economic slowdown due to demonetisation should reverse by 2H2017. Expectations of low crude oil prices and commodity prices is likely to help in bringing down the deficit further and reduce the cost for corporate India. Further, the introduction of GST in a time-bound manner should help in improving GDP growth over the next 3 to 5 years.

Going ahead, the consumption and investment demand are likely to slowly steer growth in the Indian Equity markets, due to range bound commodity prices and low interest rates (once transmission of rate cuts happens). In the medium term markets will keenly monitor the implementation of the Goods & Services Tax and the upcoming budget on Feb 1, 2017.

December'16 quarter corporate earnings, which will start trickling in during the second week of January'17, will highlight the impact of demonetisation. Market participants have extended the forecast of an earnings recovery by a couple of quarters. The optimism in the corporate earnings has now shifted from FY17 to FY18, largely on the hope of lower interest rates and pickup in economic activity in some sectors. If higher commodity prices persist, certain sectors could take longer than normal to recover their lost grounds.

We believe that the long term growth story is still intact & as earning growth picks up there is a strong likelihood of PE expansion. With Indian economy seems to be showing sign of improvement, the year 2017 is likely to be a year of subdued growth and we may see momentum building up from the 2nd half of FY 2018. The interim corrections can be used as an opportunity to enter the market by investors having medium to long term investment horizon and should adopt a staggered approach to equity investments in order 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.

The month started with the markets eying RBI's bi-monthly policy with the expectation of a rate cut. Market participants, however, were caught off-guard when RBI decided to maintain 'status quo' and not cut interest rates; citing reasons that it would want to assess the impact of demonentization on growth and inflation. On back of unexpected stance of the RBI, the interest rates started hardening after reaching a low of 6.20% (on the new 10 year G-Sec), just before the policy. The 10 yr G-Sec Yield hardened by ~ 27 bps to 6.51% towards the end of the month from 6.25% on 30th Nov'16. For the Calendar year 2016, the 10 yr gradually softened by ~122 bps from 7.73% at the start of the year; owing to benign global environment, falling CPI inflation and tepid growth.

During the second half of the month, the focus shifted to the much awaited outcome of the US FOMC Policy. As expected, the US Fed raised the federal funds rate by 25 bps. Additionally, Eurozone saw a referendum by Italy regarding altering the country's legislative process. The referendum was opposed leading to the resignation of the PM Matteo Renzi, which might further add to the rising political instability in the Euro region. Dec'16 saw sharp rise in US bond yields post the federal fund rate hike and Donald Trump's election, which sent global investors rushing back to dollar assets and Indian Debt markets saw FPIs withdrawing funds to the tune of ~ Rs. 18,935 crs making the total net outflow of ~ Rs. 42,373 crs during the calendar year. Domestic participants showed conviction in the Indian Fixed income markets as Mutual Funds invested ~ Rs. 25,884 crs in the month of Dec'16 adding to the total net inflow of ~ Rs. 3 lac crs for the year 2016.

RBI pauses; Fed didn't^

The Monetary Policy Committee (MPC), for the time being, chose to overlook the effect of demonetisation & left the key policy rates unchanged in its fifth bi-monthly monetary policy in Dec'16. RBI clarified that it required more data to evaluate the longterm impact of currency replacement and also cited inflation risks. Accordingly, the Repo was kept unchanged at 6.25% & CRR unaltered at 4%. Market participants were hoping that due to demonetization there is likely to be demand contraction, which may lead RBI to cut rates

Action was seen in the FOMC's Dec'16 meet where the US Fed raised interest rates by 25 bps to between 0.50% and 0.75% & signalled a faster pace of increase in rates in 2017. Market participants closely monitored the Committee's update on the outlook on economic growth, inflation and future path of interest rates. The decision was based on positive data on back of strengthening labour market and the Committee's expectation of achieving the near term 2% inflation target. The move reflected Fed's growing confidence that the economy is on a sustainable growth path and its confidence in the unemployment rate was strengthening. The FOMC, is likely to remain data driven, more so as the election of Donald Trump is likely to create fresh uncertainty in US policy.

Retail Inflation shrinks due to contraction in demand#

India's retail inflation for Nov'16 came in at 3.63% compared to 4.20% in Oct'16 owing mainly to decline in food inflation. The wholesale inflation figure fell to 3.15% for Nov'16 from 3.39% in Oct'16. The fall in rates was caused due to the drop in prices of food and beverages which slipped to 2.56% in Nov'16 compared to 3.71% in Oct'16 aided by normal monsoons this year after two consecutive years of drought. The major impact was due to reduction in prices of vegetables, which decelerated to 10.3% YoY. Core inflation, however, was more or less stable during the month at 5.2% in Nov'16 from 5.3% in the previous month.

CAD contracted on YoY basis^

India posted a current account deficit of $3.4 bn or 0.6% of GDP in the July-September'16 quarter compared to a deficit of $8.5 bn, or 1.7% of GDP, in the same quarter a year ago. On a cumulative basis, the CAD narrowed to 0.3% of GDP in H1FY17 from 1.5% in H1FY16. The CAD contracted primarily on account of a lower trade deficit brought about by a larger decline in merchandise imports relative to exports. However, going ahead, rising crude oil prices may put some pressure on trade deficit. Crude prices reached an 18-month high at $56.82 per barrel on 30th Dec'16 after members of the OPEC (Organization of the Petroleum Exporting Countries) agreed to reduce the global oil supply.

Outlook:

Major domestic and global events towards the end of the year such as Demonetisation and Donald Trump winning the US Presidential elections may have a ripple effect which would keep the global and domestic markets volatile in the near term. The effect might get subdued if the government is successful in implementing the GST by the start of next financial year which would formalise the informal, rural, and cash-based segments of the economy.

Recent inflation print, though lower on a Y-o-Y basis, had an underlying momentum as prices rose M-o-M basis. The RBI fears the base effect waning as food prices other than vegetables exhibited sustained firmness and a pick-up in momentum. However, the demonetization should exert downward pressure on core inflation as well, as demand contracts in the short term. The longer term impact of demonetization, especially on sectors like real estate, should keep overall inflation subdued. Domestic macros will continue to impact the way interest rate trajectory will move in the coming future. However, there are expectations of 25-50 bps rate cut in the next couple of policies in absence of any exterior shocks.

Markets will keenly watch the Union Budget in Feb'17, looking at ways in which the government manages the fiscal consolidation goal. India's performance relative to other emerging markets in the near to medium term will be decided by local triggers such as the upcoming Union budget and RBI's bi-monthly policy in Feb'17.

With the expectations of continued government reforms and robust monetary and fiscal policy framework, the Indian economy has built a strong macro foundation to manage interim volatility at the current juncture. The current volatility gives another opportunity to long term investors to make fresh allocations with a 1 – 3 years' timeframe.

Source:
~CGA
#MOSPI
^RBI
*MFI Explorer
@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.