April, 2016

Canara Rebeco. Mutual funds.

FY 17 started with RBI announcing 25 bps rate cut in repo rate and SLR, and also liquidity easing measures. Post the policy announcement, 10 year g-sec yields softened while equity markets witnessed some profit booking. Sentiments turned positive on back of positive domestic macro-economic data and forecast of above-normal monsoon. April’16 witnessed easing of CPI and expansion in IIP numbers. Crude oil price showed some signs of recovery and was hovering around ~$45 throughout the month. The bounce back in crude oil prices and encouraging trade data from China boosted global market sentiments. Towards the end of the month, sentiments deterred with Bank of Japan’s decision of keeping the rates unchanged whilst holding further monetary stimulus. The US Federal Reserve maintained its status quo on key rates for the third time this year with no hint of future course of rate hikes in the next couple of months.

Market Performance*

Equity markets were range bound in the month gone by. Markets did witnessed profit booking in rate sensitive sectors post the RBI’s rate cut announcement. Market sentiments picked up in the second half of the month on back of IMD’s (India Meteorological Department) forecast of an above-normal monsoon, decent earning season and crude oil prices stabilizing. The benchmark indices, S&P BSE Sensex and Nifty 50 gained by 1.04% and 1.44% respectively.

Inflation^^

Retail inflation represented by CPI (Consumer Price Index) positively surprised markets by easing to a 6-month low of 4.83% in March’16 compared to 5.18% in February’16. The moderation in inflation was led by easing in core inflation and decline in food and fuel & light inflation. Wholesale inflation denoted by WPI (Wholesale price index) came in at -0.85% in March’16 lower than previous month’s -0.91%. The better than expected inflation print bode well for markets as well as the economy.

IIP^

After spending 3 months in negative territory , factory output finally rose to 2% in February’16 compared to -1.5% in January ’16. The expansion in IIP was driven by robust Y-o-Y growth in electricity (9.6%) and mining (5%). On use-based classification, capital goods contracted by 9.8% (Y-o-Y) while basic & intermediate goods grew by 5.4% (Y-o-Y) &5.7% (Y-o-Y) respectively. The Consumer durables and Consumer non-durables have recorded Y-o-Y growth of 9.7% and – 4.2% respectively, with overall consumer growth being 0.8%.

Trade deficit$:

Trade deficit for the month of March’16 contracted to USD 5.07 billion from USD 6.54 billion in February’16. The fall in crude oil prices has been favorable for India’s import bill. Imports contracted by 21.56% y-o-y to USD 27.79 billion due to decline in oil & non-oil imports. The month witnessed oil imports shrinking by 35.3% (Y-o-Y) and non-oil imports declined by 17.92%. The global slowdown in major economies continues to impact India’s export, leading to a decline of 5.47% (Y-o-Y) valuing USD 22.72 billion. The constant decline in trade deficit might augur well for FY 16 current account deficit (CAD).

RBI’s Monetary Policy**:

As market expectations, RBI cut the repo rate by 25 bps to 6.5% in its first bi-monthly policy FY 16-17. It also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95% of the requirement to 90% and reduced the SLR by 25bps from 21.50% to 21.25% of NDTL. Further, RBI narrowed the policy rate corridor from +/-100bps to +/-50bps with a view to ensuring finer alignment of the weighted average call rate (WACR) with the repo rate. Consequently, MSF (marginal standing facility) rate stands at 7% and reverse repo rate is 6%. The introduction of the marginal cost of funds based lending rate (MCLR) previously coupled with refinement in the liquidity management framework in the current monetary policy by RBI might help in improving transmission of rate cuts. . RBI further said that it will gradually move from a “deficit” to “neutral” liquidity conditions and to that effect it is likely to do more OMO purchases. It was further indicated that stance of monetary policy will remain accommodative for some time and they will monitor the macro-economic & financial developments before taking a call on interest rates

Triggers

  • Though global markets are showing signs of recovery, volatility may continue to prevail on China concerns, deflationary pressures in Europe and pace of US rate hikes. Market participants may continue to be driven by global sentiments. USD/INR is likely to be continue to be driven by global news
  • 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.
  • Market participants will likely track the 4th quarter corporate earnings season
  • Though crude oil prices seem to be stabilizing, whether it is able to sustain at current levels or not might be keenly tracked by market participants as it is a crucial factor determining stability of global markets

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

The first month of the Financial Year 2016-17 started with the Indian equity markets continuing to retain their positive momentum driven by increased government spending, partial recovery in commodity price, modest corporate earnings and strengthening rupee. The market sentiments were also driven by global cues, especially from the US and China. Both developed markets and emerging markets ended higher with some degree of stability and improved market sentiments on back of the policy decisions from major central banks and improved crude prices.

Indian equity market which had staged a rebound in March’16 and continued it’s upwards trajectory in the month of April’16, triggered by better-than-expected industrial production and the forecast of an above-normal monsoon. Fed’s decision to scale down the number of rate hikes for 2016 to two (from the earlier announced four), gave confidence to foreign investors making them net buyers in the equity market. However, towards the end of the month, markets were negatively impacted due to Bank of Japan’s decision of not expanding monetary stimulus. From a long term perspective, Indian market is shaping up well due to the improved economic outlook and strengthening macros.

Market Performance**

The Indian Equity markets rose in the month of April’16. On net basis India’s bellwether indices viz. S&P BSE Sensex & Nifty 50 gained by 1.0% & 1.4% respectively, while S&P BSE Mid- cap index & S&P BSE Small-cap index saw an increase of 4.0% & 4.5% respectively. On the sector front, majority of the sectors were in green. S&P BSE Realty was the top gainer, rising by 10.4% followed by S&P BSE Metal and S&P BSE Power, which rose by 5.50% and 4.0% respectively. However, S&P BSE IT and S&P BSE Energy fell marginally by 0.5% and 1.4% respectively.

Growth`

India’s manufacturing upturn gathered momentum in the last month and the seasonally adjusted Nikkei India Manufacturing Purchasing Managers’ Index (PMI) registered eight month high of 52.40 in the month of March’16 as compared to 51.10 in February’16. Also, the Nikkei services PMI increased to 54.30 in March’16 (Feb’16: 51.40) which had marked a joint-highest level, since June 2014 and pointed to a solid expansion of output. Indian services companies remained optimistic that activity will increase further over the coming 12 months. The level of confidence was at a nine-month high, with positivity linked to favourable government policies and forecasts of a pick-up in demand.

IIP^

India's industrial output rose 2% in February’16 from -1.5% in Janaury’16, In terms of industries, sixteen out of the twenty two industry groups in the manufacturing sector showed positive growth during the month of February’16 as compared to the corresponding month of the previous year. For the month of February’16, the overall consumer goods remained flat with Consumer durables growing at 9.7% (Y-o-Y) while Consumer non–durables slackening to -4.2% (Y-o-Y). Sector-wise, electricity, mining and manufacturing growth stood at 9.6%, 5.0% and 0.7% respectively. As per the use-based classification, capital goods recorded negative growth of 9.8% whereas; intermediate goods and basic goods grew at 5.7% and 5.4% respectively.

FPI Inflows**

FPIs (Foreign Portfolio Investor) were net buyers in the last month, showing confidence in the market supported by recovery in crude price and strengthening currency. Indian equities have been one of the preferred destinations for the FPIs with net inflow continuing for the second consecutive month; wherein the net investment has been Rs.7405 Crs. Whereas, the month of April’16 saw a marginal net outflow of Rs.127Crs* from the Mutual Fund as compared to the last month which had a net outflow of Rs.10,198 Crs.

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. Going forward, economic recovery is likely to be driven by the infrastructure segment especially sectors viz. road construction, defense, power transmission and railways. Also, with the renewed focus on agriculture in the Budget and improved prospects of monsoon, we expect rural consumption to pick up. The near term market movements driven by 4Q corporate results as well the global trend suggest a gradual recovery, reinstating the expectations of better performance in the current financial year.

The earnings season so far has been in line with our expectations with no negative surprises. We expect the earnings in the coming quarter to be subdued and corporate earnings which remained muted is expected to improve as macro economic growth picks up and show its maximum impact in 2017-18. Indian economy is showing signs of improvement and we are likely to see momentum building up from the H2 of FY2017.

RBI and government have worked in tandem to get the interest rates down. Lowering interest rates will be less taxing on the corporates as their balance sheet shows lower interest costs. We expect support for domestic cyclicals and CAPEX industries to be the major beneficiaries of the declining interest rates. While India has a strong foot hold on the domestic front, short term volatilities could cause jitters in the markets on account of global cues. Such interim periods of heightened volatility should be viewed as opportunities and can be utilized to increase allocation toward equity assets. Seeing an opportunity, investors may adopt a SIP route to invest in equities in order to even out market volatility.

Source:
' Data as on 29th April, 2016
^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.

April’16 begun with the first monetary policy review for the fiscal year where RBI cut the policy rate to its lowest in the last 5 years and announcement of measures in its liquidity management stance. In addition to the affirmative step towards overhauling the liquidity framework, RBI emphasized on the need to infuse durable liquidity via asset purchases in the currency and bond markets. The market participants were expecting this long time pending rate cut and the initial reactions were the considerable easing of the bond yields. This was reflected in the 10 yr benchmark touching new highs. In addition, the expectation of good monsoon and easing inflationary pressures added a favourable impact on the bond market dynamics, impacting the softening of the yield noticeably. Retail and wholesale inflationary pressures still continue to augur well for the Indian fixed income markets being comfortably under RBI’s radar. Towards the end of the month, the yields hardened on account of profit booking ahead of FOMC meeting and were at levels similar to the ones at the start of the month.

RBI’s First Bi-monthly Monetary Policy Statement, 2016-17^

The RBI reduced the repo rate by 25bps and surprised the markets by announcing a new liquidity framework. Ever since RBI began easing monetary policy, it has cut the benchmark repo rate by a cumulative 150bps, which wasn’t getting transmitted. Some of the reasons were high small savings rate, tight liquidity and expectation of high fiscal. Further, the RBI has shifted its focus from deficit systemic liquidity to neutral liquidity stance to alleviate the perennial shortage of liquidity in the past few months. To this effect RBI conducted OMO of 30,000 cr in April 2016

CPI eased to a four-month low while WPI stayed in red~

For the month of March’16, CPI came in at 4.83% much lower than revised estimate of 5.26% in Feb-16. More importantly, Core CPI edged lower to 4.75% in March’16 as compared to 4.99% in Febraury’16. The fall in retail inflation could be attributed to a significant decline in prices of vegetables and pulses. Wholesale inflation (WPI) for the last month came in at -0.85% y-o-y and remained little flattish as compared to -0.91% seen in February’16 and remained in the negative territory for the 17th consecutive month. Lower than the expected retail inflation was augured well for the bond yields as they were seen softening from the previous level.

Outlook:

With global markets still struggling with low growth and disinflationary pressure, India's strong macros are likely to bring down CPI over longer periods of time. The news of the US Fed announcing reduction in the number of rate hikes from 4 to 2 in the current financial year, FIIs regained confidence in the emerging markets, including India. The positive FII print in the month of April’16 and the expected flows in the months to come may foster well for keeping inflation within the RBI’s target range.

Post acknowledging the government’s move of reduction in interest rates of traditional savings instruments, the RBI’s rate cut has indicated that it will continue to manage the key rates to ensure reduction in bank lending rates. It will continue to keep a close watch on the macroeconomic and financial developments in the coming months. The stance of monetary policy is expected to remain “accommodative” for some time.

RBI’s measures to keep the liquidity under check are seen to be long term measures which would gradually get the deficit towards neutral liquidity. RBI may further carry out regular OMO purchases to offset the tight market liquidity conditions as and when required. This is likely to put further downward pressures on yields and provide a “safety net” in an event of unfavourable global events.

In short term, markets are expected to remain volatile owing to uncertainties around the globe. However, the primary factor which could pan out in favour of Indian Economy is likely softening of inflation in the forthcoming months on back of expectations of ‘normal’ monsoons, staggered implementation of 7th CPC and benign commodity prices. In medium-to-long term we expect the global headwinds to settle down and inflation to follow the chalked RBI’s target plan, albeit with a downward bias. Giving these conditions, and in the absence of any fresh new shocks from around the globe, there remains a good chance of a further rate cuts in the second half of the financial year. The new 10 year benchmark is expected to remain in range of 7.30-7.60% going ahead.

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.