The market volatility is making fund managers index their portfolios to stay as close to benchmarks on performance. This leads to the question of paying higher fees than passive index funds, where fees are extremely low. Our portfolio analysis too shows that peer group performance is making all funds portfolios almost identical.
Sensex & Nifty witnessed spurt in volatility with benchmark indices correcting sharply in the month of October 2018. Rise in US Treasury yields, sharp fall in INR along with rising crude oil prices, which have raised macro concerns for India are some of the factors that are placing foreign investors on the back foot. The benchmark BSE Sensex jumped over 700 points or 2.1% on 29th October 2018, but it has tumbled over 12 per cent in the last two months. Sensex, Nifty, CNX Midcap & CNX Smallcap declined by 7.2%, 7.4%, 2.4% & 3% respectively in the last one month. Nifty VIX (volatility index) surged by 22% in the month of October 2018.
On the global front, Wall Street indices nose-dived due to worries over a possible slowdown in corporate earnings growth, as well as in the global economy. YTD, Wall Street indices have been boosted by strong corporate earnings and solid economic growth. Quarterly earnings of U.S listed companies witnessed 10% growth in the last 5-6 quarters (Source: FactSet). Meanwhile, US economy advanced at an annualized rate of 3.5% during Q3Fy18, beating market expectations of 3.3%.
FIIs/FPIs have sold Indian equity shares worth Rs. 108 billion & Rs. 273 billion in the month of September 2018 & October 2018 respectively. While YTD, FIIs/FPIs have sold shares worth Rs. 406 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 rates would increase further depending on growth and inflationary trends.
- Trade wars are making equity markets volatile as export dependent economies would face the effect of slowdown in 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 a party would keep the upward trend intact for Sensex and Nifty but any fractured mandate would pave the way for a steeper correction.
Central Banks Monetary Policy
The Reserve Bank of India unexpectedly left its key policy rate steady at 6.5% on 5th October 2018 policy-meeting, following a 25bps hike in the previous meeting, surprising markets that expected a similar rise to support a falling currency and curb inflationary pressures from oil prices. Policymakers said the decision is consistent with a calibrated tightening that aims to achieve a 4% +/- 2% inflation target and support growth.
Click here to read our analysis on “RBI Status Quo will not Provide Comfort to Markets- RBI October 2018 Policy Review”
The ECB held its benchmark refinancing rate at 0% on 25th October 2018 policy-meeting and said it will continue to make net purchases under the asset purchase programme at the new monthly pace of Euros 15 billion until the end of December 2018. Policymakers expect key interest rates to remain at record low levels at least through the summer of 2019.
Bank Indonesia raised its rate by 25 bps to 5.50% during its September 2018 policy-meeting, matching expectations. It was the fifth hike in last six policy-meetings, in an attempt to support the country’s falling currency.
China’s central bank cut some banks’ reserve requirement ratio by 100 basis points to inject an additional 750 billion yuan (USD 109.2 billion) into the banking system, amid trade tensions with the US. The reserve requirement cut, the fourth by PBOC this year, comes after Beijing has pledged to expedite plans to invest billions of dollars in infrastructure projects as the economy shows signs of cooling further, with investment growth slowing to a record low. The reserve requirement ratios (RRRs) cut will take effect on 15th October 2018, RRRs are currently 15.5% for large institutions and 13.5% for smaller banks.
Bank of Korea held its base rate steady at 1.5% on 17th October 2018 policy-meeting, as expected, amid new signs of a slowdown in the economy, meagre job growth and risks from global trade tensions. For 2018, the central bank revised down its earlier economic growth forecast to 2.7% from 2.9% made in July 2018.
The Central Bank of Mexico held its benchmark interest rate steady at 7.75% at its October 2018 policy-meeting, as widely expected.
The Bank of Russia held its benchmark one-week repo rate at 7.5% on 26th October 2018 after an unexpected 25 bps hike in the previous policy-meeting, saying pro-inflationary risks remain elevated and uncertainties over future external conditions persist.
Global Economy
The US economy advanced at an annualized 3.5% during Q3Fy18, beating market expectations of 3.3%, the advance estimate showed. It follows a 4.2% growth in the previous period which was the highest since Q3Fy14. The increase in real GDP reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, state and local & federal government spending.
Annual inflation in the US fell to 2.3% in September 2018 from 2.7% in August 2018 and below market expectations of 2.4%. It is the lowest inflation rate in seven months, mainly due to a sharp slowdown in gas prices and smaller increases in fuel and shelter costs.
The unemployment rate in the US declined to 3.7% in September of 2018 from 3.9% in each of the previous two months and below market expectations of 3.8%. It is the lowest jobless rate since December of 1969. The number of unemployed persons decreased by 270,000 to 6 million. Non-farm payrolls in the United States increased by 134,000 in September 2018, following an upwardly revised 270,000 in August and well below market expectations of 185,000.
US exports of goods and services fell 0.8% to USD 209.4 billion in August 2018. Soybean exports dropped by USD 1 billion and shipments of crude oil fell by USD 0.9 billion. Imports in the United States increased by 0.6% to 262.67 USD Billion in August 2018, the most on record. The biggest increases came from automotive vehicles, parts, and engines.
The annual inflation rate in the Euro Area is expected to pick up to 2.1% in September 2018, matching July’s five-and-a-half-year high and market expectations.
Industrial production in the Euro Area increased 0.9% (Y-o-Y) in August 2018, following a 0.3% rise in July and beating market expectations of a 0.2% drop. Production rose faster for non-durables but continued to fall for energy and durable goods.
The current account surplus in the Euro Area narrowed to EUR 20.5 billion in August 2018 from EUR 34.7 billion in the same month of the previous year, below market expectations of EUR 21.4 billion.
Uk’s economy expanded 1.2% (Y-o-Y) in Q2Fy18, revised from a preliminary estimate of 1.3% and little-changed from a near six-year low of 1.1% in the previous period.
Annual inflation rate in UK eased to 2.4% in September 2018 from 2.7% in August 2018, below market expectations of 2.6%.
The current account gap in the UK widened to 20.3 billion Pounds in Q2Fy18 from a downwardly revised 15.7 billion Pounds in the previous quarter and compared to market expectations of a 19.4 billion Pounds deficit. It was the largest current account gap since the Q2Fy17.
Japan’s annual inflation rate edged down to 1.2% in September 2018 from 1.3% in the previous month, mainly due to lower prices of food. Still, it is the second-highest figure in the last 7 months.
Japan’s trade surplus narrowed to JPY 140 billion in September 2018, compared to a JPY 654 billion surplus in the same month a year ago, but above market expectations of a JPY 50 billion deficit. Imports jumped 7% mainly nudged by a 35.4% increase in purchases from the Middle East. In contrast, exports contracted by 1.2%.
Chinese economy advanced 6.5% (Y-o-Y) in Q2Fy19, after a 6.7% growth in the previous period and missing market consensus of 6.6%. It was the lowest growth rate since Q1Fy10 amid intense tariff dispute with the US.
China’s current account surplus narrowed sharply to USD 5.3 billion in Q2Fy18 from USD 52.6 billion in the same period of 2017 and below a preliminary estimate of USD 5.8 billion.
China’s trade surplus widened to USD 31.69 billion in September 2018 from USD 27.38 billion in the same month a year earlier and easily beating market consensus of USD 19.4 billion. It was the largest trade surplus since June 2018, as exports increased at a faster 14.5% (Y-o-Y) to USD 226.5 billion, while imports grew by 14.3% (Y-o-Y) to USD 189.49 billion.
The People’s Bank of China cut the amount of cash commercial banks have to keep at the central bank by 100bps on 7th October 2018, aiming to support the economy, optimize the liquidity structure of commercial banks and financial markets, reduce financing costs and increase support for small, micro, private and innovative enterprises.
China’s foreign exchange reserves fell by USD 22.69 billion to a 14-month low of USD 3.087 trillion in September 2018, compared with a decline of USD 8.23 billion in August 2018 and market expectations of a USD 5 billion drop.
South Korea’s annual inflation accelerated to 1.9% in September 2018 from 1.4% in the previous month and well above market expectations of 1.5%.
The South Korean economy expanded by 2% (Y-o-Y) during Q3Fy18, slowing from a 2.8% growth in the previous quarter and below estimates of 2.2% . It was the weakest growth rate in nine years, as construction plunged 7.8 percent.
Global PMI Levels:
The IHS Markit US Services PMI was revised higher to 53.5 levels in September 2018 from a preliminary reading of 52.9 levels. Still, it fell from 54.8 levels seen in August 2018, pointing to the slowest growth in the services sector since January 2018
UK Services PMI fell to 53.9 levels in September 2018 from 54.3 levels in the previous month and slightly below market expectations of 54 levels.
Eurozone Services PMI came in at 54.7 levels in September 2018, the same as in the preliminary estimate and slightly higher than 54.4 levels seen in August 2018.
Global Markets
Wall Street closed sharply in red on 31st October 2018 to notch the best two-day rally since 2016, as stocks recovered some of the deep losses across global markets.
European stock markets closed in the green on 31st October 2018 as a rebound on Wall Street and robust earnings reports boosted investors sentiment.
Indian Markets
The Nikkei India Services PMI declined to a four-month low of 50.9 in September of 2018 from 51.5 in the previous month amid a broad stagnation of new business orders and the weakest increase in employment since last November.
Annual consumer inflation in India edged up to 3.77% in September 2018 from 3.69% in August 2018, but below market expectations of 4%. Food inflation increased only slightly, in line with central bank expectations.
India’s industrial production increased by 4.3% from a year earlier in August 2018, slowing from a downwardly revised 6.5% gain in the previous month and above market expectations of a 4% rise.
India trade deficit widened to USD 13.98 billion in September 2018 from USD 9.4 billion a year earlier. Exports declined 2.2% to USD 27.95 billion. Imports went up 10.5% to USD 41.9 billion.
India’s fiscal deficit widened to Rs. 5.95 trillion in April-September 2018 from Rs. 4.99 trillion in the same period of the previous fiscal year. Total expenditure went up 13.5% to Rs. 13.04 trillion and revenues rose 9.1% to Rs. 7.09 trillion. The budget gap is equivalent to 95.3% of the government’s target for the whole financial year, compared with 91.3% a year ago. India’s government expects to cut the deficit to 3.3% of GDP this fiscal year, after meeting its deficit target of 3.5% of GDP in 2017/18.
Quarterly Earnings Trend -Q2Fy19
Q2Fy19 earnings had kicked off with TCS reporting 21% (Y-o-Y) growth in consolidated revenue and net profit surging by 22% (Y-o-Y) to Rs.79 billion. On segment-wise performance, revenue from BFSI came in at Rs 146 billion up by 20% (Y-o-Y), revenue from manufacturing was at Rs 39 billion higher by 19.19% (Y-o-Y) and retail and consumer business rose by 24.25% (Y-o-Y) to Rs 63 billion. BSE IT index has declined by 10.21% and underperformed the Sensex by 3% in the month of October 2018. Depreciating INR acts like a catalyst to the IT industry’s turnover.
FMCG giant, Hindustan Unilever reported 20% (Y-o-Y) jump in net profit due to increase in consumption and healthy growth in FMCG sector. Volume growth, a key measure that looks at growth without price increases, was at 10% in the September quarter. Rural markets, which account for approximately 40% of overall revenue, continued to grow ahead of urban markets. Rural has grown ahead of urban even for peers like Dabur India Ltd and Godrej Consumer Products Ltd (GCPL). Recently, a few of ITC’s business have witnessed decent growth including a positive outlook for hotel business. However, cigarette business growth is still fragile and dragging the margins (due to higher tax rate for this segment). Net revenue for ITC increased by 7.3% (Y-o-Y) and EBITDA margins improved by 150 bps (Y-o-Y) on account of positive leverage and improved fundamentals of non-cigarette businesses. Consumer companies are optimistic on seeing consumption recovery with volume growth in double digits in 2019. This will also help the companies in retail space to post strong results going ahead. S&P BSE FMCG index has outperformed Sensex by 2.62% in the month of October 2018.
Airline companies’ current problem is higher crude oil prices as fuel costs eat up a major portion of total costs. Interglobe Aviation which was the most profitable airline company in India posted its first ever net loss for Q2Fy19. Interglobe Aviation has witnessed fall in yields for Q2y19 indicating pricing pressure and increasing cost expenses pressure. However, net profit & net profit margin would improve going ahead due to company’s efficient cost structure and addition of new fleet in the coming quarters. Currently, Jet Airways is seeking cash injection to run current operations and Spice Jet’s balance would be weakened due to higher costs. As per the data of Airport Authority of India, passenger growth has witnessed 21% jump in September 2018. All airline companies are running at close to 80% – 90% capacity utilization as on September 2018.
Auto Sales Update
Passenger Vehicles Sales Registered a negative growth due to base effect while high double digit growth continued in Commercial Vehicles segment of the Indian Automobile Industry. The industry produced a total 16,646,445 vehicles including passenger vehicles, commercial vehicles, three wheelers, two wheelers and quadricycle in April-September 2018 as against 14,690,347 in April-September 2017, registering a growth of 13.32 percent over the same period last year.
The sale of Passenger Vehicles grew by 6.88 percent in April-September 2018 over the same period last year. Within the Passenger Vehicles, the sales for Passenger Cars, Utility Vehicle & Vans grew by 6.80 percent, 5.42 percent and 14.51 percent respectively in April-September 2018 over the same period last year.
The overall Commercial Vehicles segment registered a growth of 37.82 percent in April-September 2018 as compared to the same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) increased by 47.88 percent and Light Commercial Vehicles grew by 32.05 percent in April-September 2018 over the same period last year.
Three Wheelers sales increased by 36.50 percent in April-September 2018 over the same period last year. Within the Three Wheelers, Passenger Carrier sales registered a growth of 42.26 percent and Goods Carrier grew by 14.72 percent in April-September 2018 over April-September 2017.
Two Wheelers sales registered a growth at 10.07 percent in April-September 2018 over April-September 2017. Within the Two Wheelers segment, Scooters, Motorcycles and Mopeds grew by 4.91 percent, 13.18 percent and 5.75 percent respectively in April-September 2018 over April-September 2017.
Currency:
The USD 75 billion currency swap agreement with Japan will help stabilize the INR that has fallen to record lows on the back of various domestic and global issues. The lines may not be dawn into but the fact that its there will provide confidence to markets on USD liquidity for the country. During the month of October 2018, INR depreciated by 1.58% against USD.
Click here to read our analysis on”USD 75 bn Currency Swap with Japan is a Big Confidence Booster for INR“
