Table 2 gives the average returns of all funds. Large Cap, Mid Cap and Small Cap funds have underperformed BSE S&P Sensex index by wide margins. Funds with long term portfolios built on conviction will survive this market, investors should have a clear focus on fund objectives, growth or value and study portfolios before taking any investment decisions. Index ETFs are best option for investors who do not understand equity fund portfolios.
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Sensex & Nifty witnessed spurt in volatility with benchmark indices correcting sharply in the month of September 2018. The higher probability of more defaults on debt repayments in the NBFC sector has triggered panic sell off in the markets, Infrastructure Leasing & Financial Services (IL&FS) panicked the credit markets by missing several debt repayments in recent months. The primary reason for this was series of defaults and weakening of the company’s liquidity profile along with the diminishing expectation of funding support. Sensex, Nifty, CNX Midcap & CNX Smallcap declined by 6.3%, 6.4%, 14% & 19% respectively in the last one month. Nifty VIX (volatility index) surged by 36% in the month of September 2018.
On the global front, Wall Street indices touched record highs in the month of September 2018 despite a U.S – China trade war. Benchmark indices have been boosted by strong corporate earnings and solid economic growth during 2017 & YTD (2018). Quarterly earnings of U.S listed companies witnessed 10% growth in the last 5-6 quarters (Source: FactSet). Meanwhile, U.S economy has expanded at a rate of 4.2% during Q2Fy18, its best pace since 2014. Strengthening economy and booming corporate profits have partially offset worries over global trade wars.
FIIs/FPIs have sold Indian equity shares worth Rs. 108 billion in the month of September 2018 and bought shares worth Rs. 17 billion in August 2018 while YTD, FIIs/FPIs have sold shares worth Rs. 132 billion.
Key risks going ahead for broader market indices are:
- Global inflation rising faster than expected leading to central banks tightening policy. The Global central banks have already raised interest rates to some extent and continue to maintain a view that would increase rates further depending on the growth and inflationary trends.
- India’s Monetary Policy Committee has raised the benchmark interest rate by 50bps so far in the year 2018 and is expected to raise rates in its policy meet in October, that will cause more uncertainty for markets.
- Crude Oil prices have risen further due to Iran sanctions that will start from November 2018. The demand-supply gap of crude will further worsen and there will be pressure on the India’s CAD.
- Trade wars are making equity markets volatile as export dependent economies would face the effect of slowdown in the corporate earnings growth due to imposed constraints.
- The State Assembly election results would set the trend for the Sensex and the Nifty till the Lok Sabha elections in the month of May 2019. Any clear majority by the ruling party would keep the upward trend intact for Sensex and Nifty but any fractured mandate would pave the way for a steeper correction.
Global Central Banks Monetary Policy Decisions
The Federal Open Market Committee raised the federal funds rate by 25bps to 2% to 2.25% during its September 2018 policy-meeting, in line with market expectations. US GDP growth forecasts for 2018 were raised to 3.1% from 2.8% in the June 2018 projection and for 2019 to 2.5% from 2.4%. 2020 forecast was left steady at 2%. The unemployment rate is seen higher at 3.7% in 2018 (3.6% in the June 2018 projection) and at 3.5% in both 2019 and 2020. Inflation forecasts were left steady at 2.1% for 2018, easing to 2% from 2.1% in 2019 and unchanged at 2.1% in 2020. Policymakers expect one more rate hike this year, 3 rate hikes in 2019 and 1 in 2020.
The Bank of Japan left shorter-term interest rates unchanged at -0.1% on 19th September 2018 and kept the target for the 10-year Japanese government bond yield at around zero, saying the economy will continue to expand modestly despite intensifying trade tensions.
The ECB left its benchmark refinancing rate at 0% on 13th September 2018, in line with market expectations. Policymakers reiterated that the monthly pace of the net asset purchases will be reduced to Euro 15 billion from September to December 2018 and will then end. The central bank also said it expects key interest rates to remain at record low levels at least through the summer of 2019.
The Bank of England voted unanimously to leave the Bank Rate unchanged at 0.75% on 13th September 2018, following a 25bps hike in the previous meeting.
The US unemployment rate was unchanged at 3.9% in August 2018, above market expectations of 3.8%. Non-farm payrolls in the US increased by 201,000 in August of 2018, following an increase of 147,000 in July 2018 and above market expectations of 191,000.
The US trade deficit widened by 9.5% to USD 50 billion in July 2018 from a downwardly revised USD 45.7 billion in the previous month and slightly below market expectations of USD 50.3 billion. It is the highest trade gap in five months as imports hit a new record high and exports of soybeans and civilian aircraft fell sharply.
The US government budget deficit nearly doubled to USD 214 billion in August 2018 from USD 108 billion in the same month of the previous year, above market expectations of USD 156.5 billion.
The trade surplus in the Euro Area declined to EUR 17.6 billion in July 2018 from EUR 21.6 billion a year earlier and compared with market expectations of EUR 18 billion. Imports jumped 13.4% (Y-o-Y) to EUR 177.1 billion, the second-highest value on record. Exports rose at a softer 9.4% (Y-o-Y) to EUR 194.6 billion.
Industrial production in the Euro Area edged down 0.1% from a year earlier in July 2018, following a downwardly revised 2.3% growth in the previous month and missing market consensus of a 1% increase.
Consumer price inflation in the UK rose to an annual rate of 2.7% in August 2018 from 2.5% in the previous month and comfortably above market expectations of 2.4%. It was the highest inflation rate since February 2018.
Japan’s consumer price inflation rose to 1.3% (Y-o-Y) in August 2018 from 0.9% in the previous month and above market consensus of 1.1%. It was the highest rate since February 2018, due to a jump in prices of food and a faster rise in cost of transport.
Japan posted a trade deficit of JPY 444.6 billion in August 2018, compared to a JPY 96.8 billion surplus in the same month a year ago and slightly below market expectations of a JPY 468.7 billion gap. Imports jumped 15.4% and exports increased at a softer 6.6%.
China’s trade surplus narrowed sharply to USD 27.91 billion in August of 2018 from USD 40.05 billion in the same month a year earlier and missing market consensus of USD 39.3 billion. Imports jumped 20% to USD 185.56 billion while exports rose at a softer rate of 9.8% to USD 210.08 billion.
Russia’s gross domestic product grew by 1% (Y-o-Y) in August 2018, easing from a 1.8% expansion in the previous month and missing market expectations of 1.6%.
The South Korean economy advanced 0.6% in the three months to June 2018 after a 1% expansion in the previous period and below market expectations of 0.7% expansion. Annual inflation eased to 1.4% in August 2018 from 1.5% in the previous three months but slightly above market expectations of 1.3%.
The annual inflation rate in Mexico increased to 4.9% in August 2018 from 4.8% in July and above market expectations of 4.8%. It was the highest inflation rate since March 2018, due to an overall rise in prices namely for energy and food.
Wall Street closed mostly flat on 28th September 2018, as the Kavanaugh confirmation drama continued.
European stocks closed in red on 28th September 2018 amid political concerns after the Italian populist government set a higher budget deficit of 2.4% of the GDP for 2019 and agreed on a rise in public spending.
India’s current account deficit widened slightly to USD 15.8 billion or 2.4% of the GDP in the Q1Fy19 from USD 14.9 billion a year earlier (2.5% of the GDP). The goods deficit went up to USD 45.7 billion from USD 42 billion.
The Nikkei India Services PMI declined to 3-month low of 51.5 levels in August 2018 from 54.2 levels in the previous month. New orders increased the least since May 2018 and employment grew at the softest rate since November 2017.
India’s trade deficit widened sharply to USD 17.39 billion in August of 2018 from USD 12.72 billion in the same month a year earlier. Imports surged 25.4% to USD 45.24 billion and exports jumped 19.2% to USD 27.84 billion.
India’s industrial production rose by 6.6% from a year earlier in July 2018, following a downwardly revised 6.9% increase in the previous month and matching market expectations.
Annual consumer inflation in India declined to 3.69% in August 2018 from 4.17% in July 2018 and below market expectations of 3.86%. It is the lowest inflation rate since October 2017, mainly due to a sharp slowdown in food cost.
Government has announced the merger of Dena Bank, Bank of Baroda and Vijaya Bank. The decision comes as a relief for Dena Bank, which is one of the 11 stressed public-sectors banks on the central bank’s watch list and which also faces restrictions on lending. Share price of Bank of Baroda fell by 20% in last week.
The turmoil in non-banking finance companies is deepening, with Infrastructure Leasing & Financial Services (IL&FS) disclosing further missed debt payments which led to panic selling across the markets. The benchmark equity indices had its wildest intraday move in more than four years before closing with a 0.8% loss on 21st September 2018 as investors were jittery about recent default by IL&FS.
IL&FS rating was downgraded to D by ICRA, as per ICRA report, IL&FS was unable to meet the commercial paper redemption obligations due on 14th September 2018. Furthermore, on 15th September 2018, IL&FS reported that it had received notices for delays and defaults in servicing some of the inter corporate deposits (ICD) accepted by the company.
According to the annual report, as of 31 March, IL&FS total outstanding loans stood at Rs. 910.91 billion. This is about 14% more than its fiscal 2017 end borrowings outstanding at Rs 800.17 billion. Most of the debts are arising from loans given to the group subsidiaries, IL&FS has 24 direct and 135 indirect subsidiaries. Of the total outstanding debt, Rs 573.22 billion are funded through bank loans.
With the IL&FS cash crunch set to intensify, there are concerns that the impact may spill over into the wider NBFC industry, pushing up funding costs for the borrowers. However, going forward, if and when IL&FS manages to raise funds from LIC and SBI to repay loans and restructure debt, the ratings will improve. Liquidity in IL&FS bonds and its subsidiaries will completely vanish even if there is a longer-term potential if promoters pledge support, as the whole business undertakings of ILFS is under a cloud.
Click here to read our analysis on “Infrastructure Leasing & Financial Services Limited (IL&FS) Rating Downgrade – Effects & After Effects”.
The INR touched a new all-time low of Rs 73 per USD in the month of September 2018. Since the beginning of the year, it lost nearly 14% against the USD amid importers rising demand for foreign currencies due to higher oil prices, capital outflows and general USD strength.