Fund Manager Speaks
Market Overview – September 2018 Quarter

Global Economy:
Global economic growth appears to have lost steam in the third quarter with 3.3% growth following Q2’s strong showing. The slow growth was mainly due to weakness shown by global powerhouse China with EU growth being stable whereas USA economy continued to roar ahead. Though it is expected that global growth will remain robust, but risks are skewed to the downside.

USA: The US economy continued to march ahead in Q3 and expanded at annualized rate of 3.5% on the back of fiscal stimulus measures, low unemployment numbers and elevated consumer confidence. However, the stock markets were very volatile with Dow Jones falling 9% in 10-15 days since start of October 2018 due to rising treasury yields and trade-related worries weakening risk appetite amongst equity investors. However, expected outcome of US mid-term elections led the recovery in stock markets as the uncertainty surrounding elections was out of the way thereby paving way for more balanced US politics.

Policy Rate: Sticking to its script, the US Fed raised interest rate by 25 bps thereby raising the target range to 2-2.25% and signaled another rate hike in December and three more in 2019. Though the US President was not happy with the move, Fed Chair said that it was simply focusing on its mandate.

China: The Chinese growth fell to 6.5% for the quarter falling short of expectation amid rising trade disputes with the US and subdued industrial production and investment. In order to shore up flagging activity, the Chinese authorities have loosened credit conditions, relaxed anti-pollution measures and unveiled plans to reduce taxes in recent weeks, with impact of these changes likely to be felt from Q4 onwards.

Indian Economy:
Indian economy is in much better shape than many other economies despite headwinds with fiscal deficit of around 3.3%, forex reserves rising by $120 billion in last 4 years to hit a record $426 billion, inflation being largely under control and economy growing at brisk pace post the slowdown due to GST and demonetisation. With GST collections crossing Rs 1 lakh Cr mark in October maybe due to economic activity picking up pace ahead of festive season.

Oil being one of the major components of imports for the country, surge in oil prices increases India’s expenditure as well as widens the trade deficit thus adversely impacting fiscal deficit as well as current account deficit. Additionally, a rise in crude oil clearly has impact on rupee as well as leads to higher inflation. However, exemption from sanctions by USA to 8 countries on imports from Iran has led to steep fall in oil prices from $85/barrel at start of November to below $65/barrel currently. This steep fall also halted the slide in rupee and a bit roll back from Rs 74 levels to Rs 71.60 currently.

The RBI presented its fourth bi-monthly monetary policy for 2018-19 and surprised one and all by their decision to hold rates. After two successive rate hikes, the monetary policy committee (MPC) kept rates unchanged citing a benign inflation trajectory and downward revision to inflation projection, though changed the stance from neutral to calibrated tightening.

Retail inflation unexpectedly eased to 13-month low in October. CPI based inflation rate slowed to 3.31% from 3.7% a month ago driven by lower food prices. A weaker rupee, higher crude oil prices and increase in minimum support prices for farm produce were expected to put pressure on retail inflation, along with uneven distribution of monsoon rainfall that may limit kharif output in the months ahead.

Corporate Performance:
The performance of 1,627 companies in Q2 FY19 over the last year (Q2 FY18) reveals an improvement, with net sales registering 21.2% growth whereas net profits also witnessed a double-digit improvement of 15.6% in the quarter i.e. NP margins witnessed contraction of 40 bps Y-o-Y during the quarter as rising commodity prices put pressure on margins.

Sectors such as IT, Pharma, Consumer Durables, Chemicals, Paper, Finance, Textiles, Mining and Minerals, Auto Ancillary and Real Estate did pretty well whereas telecom, banking, Auto OEM, Paints, Cement and Power reported stress during Q2 FY19.

Stock Market
The domestic equity market witnessed a lot of pain in the months of September and October 2018 with Sensex falling by 11% from close of August 2018 whereas Midcap and Smallcap Index have fallen by 13.5% and 17.5% respectively.

It is the default by ILFS, which triggered this phase of decline which got further aggravated due to the liquidity crisis faced by NBFC and HFCs leading to heightened volatility. Increasing crude oil prices and rupee depreciation put pressure on stock markets. With new board in place to tackle ILFS situation, liquidity crisis easing out post fulfillment of all rollovers, crude oil price falling by around 25% in the last 10-15 days which has controlled the fall in rupee; it appears that macro factors should be in a bit more control. However, the future market direction will be dictated by oil price movements and election outcomes.

Care PMS strategy:
Market continue to drift lower even in second quarter, only difference this quarter was that, this time, it took few frontline stocks also into its fold which so far, on the contrary, were supporting and raising index, in the midst of unabated fall in small/mid cap stocks since last union budget.

Though, the sentiment continues to remain subdued and nervous for the reasons which you all know. But, for us, the biggest consolation was good results in case of most of our portfolio companies. The good part is that we have good exposure in such sectors/companies.

The Paper sector is in best of its time wherein our exposure, all companies put together, is around 25%. Though the market price of these stocks has moved up but still it remains on the lower band of the valuation. The Chemical sector also did quite well wherein we have 15%+ exposure and is likely to do very well in future as well. The quarterly results season has re-affirmed our confidence on our portfolio companies as well as opened up islands of new opportunities.

We, at Care PMS, believe that the negative factors, both domestic/internal and global/external, though changing, are going to persist in this dynamic world. The market will learn to live under such situations. The advantage in such market is that it facilitates good entry levels which will provide higher safety & better capital protection creating room for higher appreciation. Almost 70% of our portfolio companies which can be considered as underpriced and not recognized, have the highest potential for appreciation.

"Patience sounds boring. But if you realise that patience is nothing but making time work for you, it gets interesting” - Unknown

Happy Investing!

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.

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.

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!

Other Links
What Is PMS
Useful Links
Home Know Care PMS Investor's Corner Testimonials Useful Links Contact Us Disclaimer