Fund Manager Speaks
Market Overview – June 2018 Quarter

Global Economy:
It is expected that the global economy will grow at 3.1% for FY18. While the ‘sun is shining’ on the global economy, clouds could be looming over the horizon. Tensions on the trade front and risk of rising global debt are key risks to be monitored. Faster growth in the US, Japan and China, would largely drive global growth during 2018-19. .

USA: The USA economy surged in the April-June quarter to an annual growth rate of 4.1%, fastest since 2014 driven by consumers (account for 70% of economic activity) who began spending their tax cuts and exporters who rushed to get their products delivered ahead of retaliatory tariffs. However, the current rate of growth is not sustainable as it stems from temporary factors and rest of the year is likely to be see good but slower growth of ~3%.

Fed Rate: The Federal Reserve has hiked the target range in June by 0.25% to 1.75%-2.00%. This is the 2nd rate hike by Fed this year and it has forecasted 2 more rate hikes by the end of 2018.

China: GDP for the 2nd quarter grew by 6.7%, in line with expectations. The escalating trade war with USA, deleveraging drive and fatigue with credit expansion slowing has raised uncertainty about the outlook of Chinese economy. Notwithstanding the same, it is expected that the Government’s target of 6.5% GDP growth for FY18 should be met easily.

Indian Economy:
The latest world bank figures states that India has become world’s 6th biggest economy pushing France to 7th place. The US leads the table as the biggest economy followed by China, Japan, Germany and Britain. The economy seems well positioned for FY18 with business activity increasing in the private sector for 4th consecutive month in June and at the fastest pace since October 2016.

Further, on 04 July, the government approved an increase in MSP (1.5 times the cost of production) paid to farmers growing summer-sown crops. This increase should result in significant increase in the purchasing power capacity of farmers. This along with normal monsoon in most parts of the country should drive the rural demand which is very essential in an economy where ~65% population still lives in rural areas and of which ~70% are dependent on agriculture for their livelihood.

With average revenue from GST increasing from 89885 Cr in FY17-18 to more than 97000 Cr in the first 4 months of FY18-19, we witnessed GST rate rationalization in a slew of goods especially household consumption items (more than 50 items), which should result in cost savings to consumers thereby increase consumer confidence and lead to higher demand.

RBI:
The RBI at its latest meeting in August 2018 has raised interest rates by 0.25%. The RBIs decision to hike interest rates for the 2nd time in 3 months was driven by high inflation and weak rupee.

Inflation has accelerated in the recent months, hitting a 5-month high of 5% in June. At its monetary policy meeting in August, RBI maintained its inflation forecast for Q2 FY18 at 4.6% whereas it raised its forecast for H2 FY18 slightly to 4.8% from earlier guidance of 4.7%. Oil price risk (even though it has cooled down from earlier elevated levels) was also a factor in raising the rates. However, inspite of all this, RBI still maintains its ‘neutral’ stance to monetary policy.

Corporate Performance:
FY18-19 has started on an optimistic note for corporate India. The combined net profit of 2271 companies (whose results were declared till now) were up by 7.9% Y-o-Y during Q1 FY19 whereas the top-line growth during the same period was even better at 18.7%, growing at the fastest pace in the last 3 years. This to some extent can be attributed to low base due to impact of demonetisation as well as roll-out of GST in July last year.

Sectors such as IT, Pharma, FMCG, Oil &Gas, Mining and Minerals, Capital Goods and Infra did pretty well whereas telecom, banking and power reported stress during Q1 FY19.

Stock Market
July 2018 saw Nifty scaling all-time high and, in the process, increasing by 5.6% buoyed by a) good start to Q1 FY19 corporate earnings season and b) GST rate rationalization. The rally however, was extremely narrow led by a handful of companies in IT (TCS and Infosys), FMCG (HUL) and Banking (HDFC Bank, Kotak Mahindra Bank, IndusInd Bank) and Reliance Industries.

However, a sharp correction has gripped Mid-cap and Small-cap segment since May with more than half of the listed stocks having lost more than 20% of their value. However, we see early signs of reversal of this situation (in August 2018) where in quality stocks should rebound at a faster pace.

Q1 – FY 19 Performance of our Portfolio Companies
Broadly results of our portfolio companies has been in line with our expectation except couple of them which has delivered a subdued performance. One highlighting point here would be that the paper industry where we have sufficient weight allocation has given good numbers and have now seen traction in terms of valuation as well. We foresee that the paper sector should continue to do well and should give desired results improving portfolio performance.

Result Review of our portfolio companies is attached

"A market downturn does not bother us. For us and our long-term investors, it is an opportunity to increase our ownership of great companies with great management at good prices.

Only for short-term investors and market timers, it is a correction and not an opportunity "
- Warren Buffett

Happy Investing!

Market Overview – March 2018 Quarter

Global Economy:
The global economic upswing continues to strengthen but US policy uncertainty and a potential trade war could quickly darken the bright skies. Global GDP growth is forecast to accelerate to 3.9% in 2018, the strongest annual expansion since 2011. Faster growth in the US, Japan and China, would largely drive global growth during 2018-19.

USA: The US economy is outpacing other advanced markets, with growth set to expand 2.9% this year before easing to 2.7% in 2019. The growth is driven by various factors such as stronger than expected economic activity, robust external demand, fiscal policy changes and the slashing of corporate income tax from 2018. Summit between North Korea and USA to be held next month will help in easing tensions but inflationary pressures due to tax stimulus and global trade war are the major concerns.

Fed Rate: The Federal Reserve held interest rates steady at its meeting in May 2018 inspite of inflation rising to 2% (which is its medium-term target). The Fed was optimistic about the strength of the economy but have noted some risks on horizons for growth – most notably a potential drag from a trade dispute with other nations like China.

China: GDP growth in China, which was the fastest growing economy last year, is expected to slow down to 6.6% during 2018 from 6.9% in 2017. However, China’s economy grew by 6.8% in the first quarter of 2018, faster than expected, buoyed by strong consumer demand due to strong wage growth in urban areas and surprisingly robust property investment despite continued measures to tame rising home prices.

Indian Economy:
The “hand of government” was the main driver for GDP growth for the 4th quarter of 2017-18 as the growth improved to 7.7% (fastest in 7 quarters) as exports and private consumption disappointed. India retained the tag of the fastest growing major economy in the March quarter on robust performance by manufacturing and service sectors as well as good farm output. Prediction of normal monsoon for 2018 is positive but rising oil prices and the health of banking sector are the major concerns.

RBI:
The RBI at its last meeting had flagged several concerns which could lead to increase in inflation like increase in MSP for farmers, farm loan waivers and high & volatile crude oil prices. However, prediction of normal monsoon and 7-quarter high growth rate in Q4’18 are positives.

Corporate Performance:
As the earnings season for cooperate India nears its end, the results reveal subdued performance during the fourth quarter of FY18. According to a recent report released by CARE Ratings, net sales growth slowed down to 9.1% during Q4’18 from 11.4% growth during same quarter last year whereas net profits declined by 53.4% during the quarter as compared to 30.7% growth last year. If we exclude the banking and financial services sector, net sales grew by 10% during Q4’18 whereas profitability witnessed a sharp improvement and increased by 29.3%.
Sectors such as automobiles, capital goods, mining and minerals & cement did pretty well whereas telecom, banking and pharmaceuticals reported stress during FY18.

Stock Market
Indian equity markets nudged lower as crude oil prices soared and rupee depreciated against the dollar along with the unsatisfactory outcome of Karnataka elections. Further the CPI as well as WPI inflations figures surged to a 4-month high in April 2018, which has given rise to concerns of rate hike by RBI in its upcoming meeting.
Market corrections can be a blessing in disguise. If appropriate to one’s situation, use it to your advantage.

"I’ve found that when the market’s going down and you buy funds wisely,
at some point in the future, you will be happy"
- Peter Lynch

Happy Investing!

Market Overview – December 2017 Quarter

Global Economy
The most significant thing at the onset of 2018 is the global economy outlook. For the first time in more than six years, the latest projections of the International Monetary Fund (IMF) have been revised upward. This upward revision applies to North America, Europe, China, Japan and East Asia. Even Brazil, beset with economic and political problems, is expected to do better.

USA: Following historically low levels of volatility in 2017, volatility seems to have returned over the last few days with Dow Jones touching all-time high of 26500 in Jan 2018 and subsequently correcting to 24500 levels currently.

The primary driver of the decline was investors reaction to rising interest rates. However, the underlying reason for higher rates are expectations for strong economic growth which though positive has led to concern of higher inflation and more Fed Rate hikes. Further, unemployment is at the lowest level in 17 years, the banking system has mostly healed and the recent corporate tax cuts in US from 35% to 20% will result in faster growth in earnings. However, the market is enduring a bit of conflict and it may not happen as quickly as desired, but positive fundamentals will help.

Fed Rate: The FOMC met in January following its last meeting in December wherein it had raised rates by 25 basis points to a range of 1.25-1.50%. Noting strong growth rate in economy and continued strength in job market, the fed kept the benchmark rate unchanged. This announcement has brought curtains on Jannet Yellen’s 4-year term as Fed’s chairwoman. She has been succeeded by Jerome H Powell, a Fed governor since 2012. Nevertheless, it is expected that the committee will remain on schedule to raise interest rates more frequently this year.

China: China’s economy grew faster than expected in the fourth quarter of 2017, as an export recovery helped the country post its first annual acceleration in growth in seven years, defying concerns that intensifying curbs on industry and credit would hurt expansion. The headline numbers and signs of property market resilience suggest that fundamentals are expected to remain intact in 2018 although they might see some headwinds from tighter regulations, US trade protectionism and softer consumer sector.

Indian Economy
India’s GDP growth is expected to touch 6.5% for 2017-18 and grow by 7% in H2’18 compared to 6% in H1’18. This indicates that perhaps the effect of two structural reforms – De-monetisation and GST are behind us and we can look forward for an upward trajectory in third and fourth quarter. Further, the teething troubles of GST implementation are being speedily addressed by the GST council. Further, the budget 2018 has paved way for the future, focusing capital expenditure on key sectors like agriculture, infrastructure, housing and healthcare (bringing in social security concept – if the plan goes through).

The index of industrial production (IIP) grew 7.1 per cent in December 2017, led by robust growth in manufacturing. Significantly, the capital goods sector, a barometer for investments, grew a sharp 16.4%. Consumer durables segment grew by 0.9% compared to a decline of 5% a year ago, indicating revival in demand.

The RBI at its meeting in February retained its neutral policy while acknowledging multiple upside risks to inflation. For FY18, RBI expects inflation to come in at 5.1-5.6% in the April to September period before easing to 4.5-4.6% in H2’19 thus overshooting the bank’s target of 4% for the whole year. RBI has highlighted upside risks to its inflation outlook but maintained its data dependent guidance and may only act if inflation displays a trend that is not consistent with its 4.5% forecast by late FY18.

Corporate Performance - Improved performance
Corporate India’s revenue for the quarter increased by 9.3% Y-o-Y alongwith improvement in PAT margins from 7.3% in Q3’17 to 8.3% in Q3’18.  Headline growth for India focused companies was boosted by a favourable base effect and from higher government spending especially in rural areas. Positively, many companies said that the GST related issues are now receding. Automobiles, Consumer Goods, Metal, Finance, Capital Goods companies etc. did well whereas PSU Banks, Tyres, Sugar, IT, Pharma etc. fared poorly.

Stock Market
The corporate performance has improved backed by restocking due to GST, the liquidity from domestic MFs and several measures like re-capitalization of banks etc. continue to push the positive sentiments. However, the announcement in budget w.r.t. introduction of 10% tax on LTCG along with recent turmoil in global markets has taken some shine from the returns with Sensex registering a fall of ~2000 points from a high of 36000 in Feb to current levels of 34000. This fall however was due and justified our strategy of going for ‘safe stocks’ rather than ‘growth stocks’.

“This fall is a reminder that emotions and various other factors can take the wheel for a short-time, but they rarely drive the market over a broader term”

Strategy at Care PMS
Our strategy looking at the current market situation is based on the following principles: -

Remember why you’re investing:The value of your investments won't rise every day, nor did you expect them to.  Your goals are longer term, so your evaluation of your portfolio's performance should be done over a longer period as well.

Don’t Overreact:Market declines can make you feel like you have to make a change to your strategy. If your goals haven't changed and your tolerance for risk over time is still the same, avoid the temptation to change your long-term approach based on short-term volatility. Market corrections can be a blessing in disguise. If appropriate for one’s situation, use it to your advantage.

"I’ve found that when the market’s going down and you buy funds wisely, at some point in the future, you will be happy"
- Peter Lynch

Happy Investing!

Market Overview – September 2017 Quarter

Global Economy
USA: Despite the hurricane that devastated several southern states and the rising tensions with North Korea, USA markets gained in excess of 5% for the 3rd quarter ended September 2017.

US economy maintained a brisk pace of growth as the GDP increased at 3% beating expectations and despite the disruptions caused by hurricanes Harvey and Irma. Investments rose sharply and a smaller trade deficit along with lower imports offset a decline in consumer spending.

Fed Rate: The FOMC met in September following its last meeting in July. Noting moderate economic activity, stagnant inflation and temporary effects of two damaging hurricanes, the FOMC left the target funds rate range unchanged at 1-1.25%. Nevertheless, the committee indicated that it will remain on schedule to raise interest rates at least once more this year.

China: The GDP growth of 6.8% for the 3rd quarter was in line with expectation inspite of drop in investments in manufacturing and mining as real estate sector posted healthy gains. GDP for the fourth quarter is expected to slow down due to production restriction in some areas impacting growth, tightening of liquidity and expected slowdown in the property market.

EU: Eurozone is experiencing its strongest and most sustained growth period since recession as its economy grew by 2.5% in July to September quarter. This was mainly driven by increased exports which grew by 5% and Household consumption growth of 1.9%. Germany (3%), France (2.2%), Italy (1.8%) and Netherlands (3.3%) all contributed to this strong growth.

Japan: The country’s economy expanded at faster than expected rate of 2.5%. This data shows that the economy has expanded for the 7th consecutive quarter. With recovery in global markets, exports growth helped drive corporate profits and business investment whereas wage gains and consumer spending remained lackluster. Despite a relative positive backdrop, improvement in equity market sentiment was constrained due to escalations in tensions with North Korea.

Indian Economy
India’s GDP growth rises to 6.3% in Q2’18 after falling for five consecutive quarters. This indicates that perhaps the effect of two structural reforms – De-monetisation and GST is behind us and hopefully we can look forward for an upward trajectory in third and fourth quarter. Industry sector did well with growth above 6% in mining, manufacturing, electricity, gas, water supply and other utility services. However, agriculture sector growth at 1.7% remains a concern. India GDP growth forecast has been lowered to 6.7% for 2017-18 and major hurdles like low investment, rise in private consumption and government spending would be keenly watched.

The inflation rate has been on a rising trend since the last 3-4 months and stood at 4.88% in November 2017 vs 3.58% in October as crude oil prices touched a 30-month high of $65 a barrel on 12th December. Food inflation slowed whereas prices rose at a faster pace for housing, fuel and clothing.

The RBI at its meeting in December raised its inflation projection to 4.3-4.7% for H2’18 due to firming up of global oil prices and uncertainty on kharif farm output. Further, farm loan waivers and state’s implementation of salary and allowances could push up headline inflation by 100 basis points over the next 18-24 months. Hence, the RBI decided to keep a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4% (+/- 2%), while supporting growth.

Corporate Performance - Lackluster show
Corporate India’s revenue for the quarter increased by 9% Y-o-Y even as net profits declined of 12%. Despite restocking and early festive season, demand remained sluggish. While lower GST rate benefits had to be passed on, it was difficult to do so for higher GST rates. Automobiles, Steel, Domestic Appliances, Airlines, Cement, Retail, Agro-Chemicals etc. did well whereas Telecom, PSU Banks, Tyres, Sugar etc. fared poorly.

Stock Market
Though the corporate performance was poor, the liquidity from domestic MFs and several measures like re-capitalization of banks etc. continued to push the positive sentiments. The Indian markets performance in the July to September 2017 quarter slowed down as there was continuous selling by FIIs who sold over `38500 Cr worth of shares, which was nullified by good flow of funds from Mutual Funds and general public. This has been happening since De-monetisation and is a healthy sign as dependency on FIIs is reducing. Sensex delivered a return of 1.17% during Q2’18. However, the global geopolitical tensions, slowdown in growth momentum of Indian economy and valuations of many companies are points of concern.

Strategy at Care PMS
The soaring markets are leading investors to tread a cautious path with the cash portion of many fund managers increasing significantly. However, we feel that if we follow stock specific approach, there are enough pockets of opportunities. We firmly believe in India’s long-term growth potential and although cautious, we feel that if we are able to find some “safe stories” rather than “growth stories” we should be able to do a decent job.

"Investors have to remember: Corporate profits are going up, but stocks are going up faster. How can that continue indefinitely?
Investors can only earn what companies themselves can earn. How can you get anything more out of a farm than what it grows?"
- Warren Buffett

Happy Investing!

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