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  • October 9, 2018
    Quantum Equity Team

    September turned out to be a volatile month for Indian financial markets including equities. S&P BSE Sensex fell by 6.21%. This was highest monthly fall in the calendar year so far. Mid cap and small cap stocks were meted even more severe treatment. S&P BSE Midcap index declines 12.44% while BSE Smallcap index was down 15.95% in September. For the 9 months of year 2018, S&P BSE Sensex has risen 7.44%. In comparison, S&P BSE Smallcap and S&P BSE Midcap have fallen 24.4% and 16.5% respectively.

    IT and FMCG were the two sectors which had positive returns during the month of September. Continuing currency depreciation was boon for exporters including IT services firms. Among losing sectors, real estate, telecom and banks were prominent. Markets were complacent for large parts of the year, as measured by VIX. This rose in the month of September as in early 2 months of 2018.

    FIIs sold stocks heavily in the month of September. Their sales were USD 1.31 Bn for the month. So far in current year, FIIs have offloaded stocks worth USD 2 Bn. Domestic institutions were buyers to the tune of USD 1.3 Bn during the month. Of this, USD 1.1 Bn came from mutual funds while insurers bought worth USD 630 Mn. USD 12.2 Bn has been pumped in equities by domestic institutions so far in current year. Indian rupee depreciated 2.1% during the month against US dollar.

    Market Performance at a Glance
     Market Returns %*
     September 2018
    S&P BSE SENSEX **-6.21%
    S&P BSE MIDCAP **-12.44%
    S&P BSE SMALL CAP**-15.95%
    BEST PERFORMER SECTORSIT and FMCG
    LAGGARD SECTORSTelecom, Real Estate, and Banks
    * On Total Return Basis
    ** Source-Bloomberg

    In global markets, cost of money has risen and liquidity becomes tighter. US central bank raised interest rates by 0.25%, for the third time in 2018. There are expectations that it will hike once more in current year. Better wage growth and lesser employment are leading to tighter monetary policy in an economy which is growing strongly. Europe is also looking to reduce its asset purchases and rise in interest rates could be around the corner. Other developed countries such as UK have also been raising interest rates.

    Japan remains the only major economy which is unlikely to end loose monetary policy in the near future. As interest rates rise, there is risk of foreigners withdrawing from emerging markets. Most asset classes were inflated due to surge of liquidity at zero interest rates in developed markets post Lehman crisis. There could be decline in equity and other asset classes as foreigners prefer their home markets.

    Tariff war between US and China continues and higher duties has been implemented for goods worth USD 200 Bn. This has a disproportionate effect on Chinese economy and led to significant fall in its stock markets. There are expectations that the two countries could compromise after China making concessions. Brexit negotiations are also hanging in balance. Unfavourable outcome of the same could impact global financial markets.

    The state of financial markets in India also was tumultuous during the month of September. It started with default made by ILFS on interest payments to some its creditors. This led to downgrade of its rating by several notches overnight. Many mutual funds were caught holding its paper in their debt schemes – liquid as well as longer term schemes. They were forced to take a write down. Subsequent to this, there was news of a mutual fund selling paper of another NBFC at very high yield (meaning low price). This set rumors in debt/equity markets that there could be defaults/ liquidity crunch. Many NBFC stocks saw their stock price crashing.

    The contagion spread to stocks of other sectors as well. Many stocks which were quoting at rich valuations witnessed larger decline. MD of a decent size private sector bank saw non-renewal of his term by the regulator, RBI. Another bank, which listed on stock market few months back was constrained by RBI from opening new branches as it didn’t meet its shareholding criteria. This was preceded by regulations from SEBI for mutual funds. SEBI announced a number of measures in investors’ interest including banning of upfront commission by AMCs. Regulatory risks came to the fore in the month and spooked investor wealth in those stocks.

    On the macroeconomic front, crude oil price surpassed USD 80/bbl as supply was constrained. Sanctions on Iran led to surge in oil. This doesn’t bode well for India given the dependence on oil imports. Inflation was well contained at 3.7% for the month of August. RBI’s monetary policy in early part of October has maintained status quo in interest rates. India’s macro situation has worsened even as micro (companies’ level) continues to improve.

    There has been a good correction in stock prices and the same has been continuing. Many stocks which looked highly valued now seem to come within reach. We are likely to find new stocks for our portfolio and cash level can fall further. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors can expect decent return from equities over a long period in future. Investors should take advantage of recent fall in stock markets and put more money.

    Data Source: Bloomberg


    Disclaimer, Statutory Details & Risk Factors:

    The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

    Mutual fund investments are subject to market risks read all scheme related documents carefully.

    Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

  • October 9, 2018
    Quantum Fixed Income Team

    Persistent weakness in the Emerging Markets and surging crude oil continues to weaken the investor sentiment in bonds markets. This led to the Indian Rupee touching the low of Rs.74 per USD and the 10 year government bond yields topping at 8.23% in the past month.

    An additional risk emerged in the corporate bonds space after the IL&FS and its subsidiaries defaulted on their debt repayments. This spread to broader NBFC companies as concerns on refinancing impacted share prices and bond yields of many NBFC issuers. Even the AAA PSUs were not spared and 2-3 year PSU bonds got traded at around the 9.0% mark at peak.

    The RBI released multiple press statements to assuage the market on meeting liquidity needs of the system and also announced Open Market Operations (OMO) and Term Liquidity Repos. The RBI conducted an OMO of Rs. 200 in September and announced to purchase total of Rs. 360bn of government securities under OMO in October.

    The government also moved in to ease the pressure from the bond markets by cutting its second half borrowing program by Rs. 200bn. These measures led to a relief rally in the bond markets and the 10 year yield dipped below 8.0% mark on the announcements. But it could not sustain there for long and retraced back to 8.20% following sharp rise in crude oil and the US treasury yields.

    Another positive surprise came from the RBI as in its bi-monthly monetary policy, the MPC decided to keep the policy rates unchanged at 6.5% against the market expectations of 25-50 bps hike. Bond markets cheered the move as the 10 year bond yield eased again to near 8.0% post policy announcement.

    With this move, the RBI has sent a message to the markets that they won’t use interest rates to defend the depreciating currency. But at the same time to maintain its inflation fighting credibility they changed the policy stance from “Neutral” to “Calibrated Tightening” to indicate that if Oil prices increases they will hike the Repo Rate in the coming months. This stance also clearly indicates that the RBI will not be cutting interest rates anytime soon.

    In July 2013, post the global episode of ‘taper tantrum’, the RBI had hiked interest rates by 300 bps (3%) to curb speculation on the Indian Rupee, which further depressed sentiment and led to an even sharper sell off in bonds, equities and currencies. With the Indian Rupee, depreciating now, market participants and analysts have been expecting a similar reaction by the RBI in hiking interest rates.

    With the RBI now pausing, at a time when the Indian rupee has sold off sharply and markets expectations were riding high on a 50 bps rate hike, the RBI seems to be signaling that they don’t yet see the reason to panic on the external front. The Rupee is depreciating largely due to a rise in oil prices and the RBI has quite a few other means to manage the Rupee. They can sell dollars from their Forex Reserves, open a special window for Oil companies to borrow dollars directly from the RBI, offer higher interest rates on NRI Deposits to get inflows from NRIs.

    The other reason for them to not hike interest rates could have also been due to the turmoil in the equity and credit markets. The issue with the default by IL&FS and the steep fall in stock prices of some banks and NBFCs has impacted sentiment in the broader market. The RBI, by hiking interest rates could have further hampered sentiment. As it is, Indian bond yields are already high enough with the 10 year government bond yield at above 8.0% and 3 year AAA PSU bonds near 9.0%. A 50 bps rate hike at this juncture may have led to a further increase in market interest rates.

    The RBI having already raised the interest rate by 50 bps in the last 4 months also had the comfort from the slowing inflation. CPI inflation, especially food inflation, continues to shoot below RBIs projections and the previous two pre-emptive hikes does ensure that the RBI Repo rate is ahead of the current inflation trend.

    However, given the trajectory of oil prices, if it stays at the current levels or moves up further, we would see the RBI hiking rates in the forthcoming policies. We thus expect the Repo rate to move up to 7.0% from the current level of 6.5% by March 2019.

    With the OMO support and lower borrowing, the 10 year government Bond yield may hover around 8.0% for now and move towards 8.25% if the market expects RBI to hike by more than 50 bps. As for now, we still do not expect 10 year government bond yields to go up considerable above 8.25% unless macro situation changes materially.

    If the INR continues to depreciate on falling equity markets and higher oil prices, we expect market interest rates to move higher from the current levels. Also, risks in the system would rise and investment sentiment will fall.

    In such a scenario, we would advise investors to remain invested in debt funds which prioritize safety and high liquidity and manage money with prudence by being true to the investment objective of the fund.

    Quantum Liquid Fund prioritizes safety and liquidity over returns and is invested only in less than 91 day maturity instruments issued by Government Securities, treasury bills and AAA Rated PSU bonds.

    Quantum Dynamic Bond Fund, takes higher interest risks, but does not take any credit risks and is invested only in Government Securities, treasury bills and AAA Rated PSU bonds.

    We have always advised investors in general to have a longer time frame if they invest in bond funds and should also note that the bond fund returns are not like fixed deposit returns and can remain highly volatile or even negative in a shorter time frame.

    Data Source: Bloomberg, RBI
    * Controller General of Accounts, Ministry of Finance


    Product Labeling
    Name of the SchemeThis product is suitable for investors who are seeking*Riskometer
    Quantum Dynamic Bond Fund

    (An Open Ended Dynamic Debt Scheme Investing Across Duration)
    • Regular income over short to medium term and capital appreciation

    • Investment in Debt / Money Market Instruments / Government Securities
    Quantum Long Term Equity Fund
    Investors understand that their principal will be at Moderately Risk
    Quantum Liquid Fund

    (An Open Ended Liquid Scheme)
    • Income over the short term

    • Investments in debt / money market instruments
    Quantum Long Term Equity Fund
    Investors understand that their principal will be at Low Risk
    * Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

    Disclaimer, Statutory Details & Risk Factors:

    The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

    Mutual fund investments are subject to market risks read all scheme related documents carefully.

    Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

  • October 9, 2018
    Quantum Alternative Investments Team

    Gold has been negative for six straight months now. Last time when gold had such consecutive monthly losses was all the way back in 1997; this tells how hard gold’s been hit. A combination of rising U.S interest rates, a strong dollar and a hawkish Fed has been a perfect recipe for gold’s dire state. However, a bruising trade conflict between the U.S. and China has failed to revive demand for gold in a big way but has lent enough support for gold to cling to the $1200 an ounce levels. Gold prices decline by -0.7% for the month of September, taking the year to date losses to -8.5%. There are plenty of loose strings impacting the global macro environment right from trade wars, Brexit uncertainty, Italian crisis to the U.S midterm elections. With most of the negatives to a large extent priced in, any of these triggers can boost gold prices.

    Fed hiked rate by much anticipated 0.25% but more importantly, it laid the groundwork for one more rate hike this year. Markets predict about 77% probability that there will be one last rate hike for this year in December. While the financial markets had factored the September rate hike, it was a more hawkish demeanor that reignited selling pressure in gold as it has created strong tailwinds taking the U.S. dollar higher. Fed Chairman Powell spoke about the unique and sensitive balance act that the Federal Reserve must adhere to in order to allow economic growth to continue while not letting the current economic expansion overheat. However, it’s easier said than done. History suggests that the central bank has accomplished this balance only once in its 104-years of operations i.e. deliberating a soft landing i.e. Prevent overheating by raising rates but not so much that they trigger a recession.

    Trump intensified an ongoing trade war by rolling out 10% tariffs on $200 bn worth of Chinese exports to the U.S., while threatening levies on another $267 bn of Chinese goods. China retaliated with tariffs on another $60 bn. Even though American companies have complained that such moves will raise business costs and eventually consumer costs, this will be the second time the U.S. places duties on Chinese goods. At one end, trade tensions are good for gold. Whereas on the other end, it could boost inflation more than desired by Federal Reserve policymakers, who might feel the need to raise rates more aggressively than planned.

    Outlook

    Markets base case still remains that Trump is simply using trade tactics to secure a better deal with Beijing and at some point will make a u-turn, strike a deal and register a political win before the mid-term elections. However, Investors are reluctant to appreciate that China will not let down and is gearing up for a prolonged period of trade friction, and dismissing optionality around potential macroeconomic shocks. If the posturing is for real and we do not see a deal, it will have profound implications which should not be underestimated as it will require a rethink on trade, investments and globalization as we know it today and have profound impact on global growth, inflation and currencies.

    The U.S. midterm elections could play a big part in shaping the outlook for gold. In the contests, control of the House of Representatives and Senate are up for grabs. Should Democrats regain majorities; that could put them in a position to step up scrutiny of Trump’s administration and might raise the likelihood of Congressional gridlock that slows the president’s policy initiatives? The polls are still indicating the Democrats winning back the House of Representatives. But it looks like a close race and turnout will be critical. The major risk for Trump is losing both the US congress and senate to the democrats, and if that happened he would face tremendous pressure to do something to remedy the growing isolation of America’s government in the world government community.

    Although the headline level for the U.S. business cycle looks healthy thanks to Trump tax cuts, there are some concerns over credit stress, making it questionable whether the U.S. consumer can withstand materially higher interest rates. The Fed’s reverse QE program, along with its eight rate hikes is putting pressure on the most interest rate sensitive parts of the U.S. economy. For example, the housing market is cooling. Existing Home Sales, which makes a large chunk of the housing market, has dropped 4 months in a row and are down 1.5% year-on-year. In addition, Pending Home Sales have suffered losses 7 months in a row and slumped 2.3% YoY.

    Not only is the next rate decision expected to be Hawkish in 14 out of the 20 nations but the pace of monthly Quantitative Easing on a net basis is projected to drop to zero by the end of 2018, from $180 billion at its peak in March of last year. These central banks are being forced into a tightening monetary policy due to rising consumer prices and asset bubbles that have become a major risk to economic stability. Otherwise, these countries risk intractable inflation and a destructive rise in long-term interest rates. Debt levels have seen a significant rise over the past decade. Debt has increased by $70 trillion since 2007, to reach $250 trillion--an increase of over 40%! Not only has the nominal level of debt soared but the leverage ratio is up too. The world economy suffers a debt to GDP ratio of 320%; it was 270% leading up to the financial crisis. The truth is as long as the bond bubble kept inflating it was able to mask the huge imbalances built up in debt and asset values. But, it no longer will be sustainable given that central banks are now forced to run a tighter monetary policy.

    The world continues to remain in state of great disequilibrium, both with respect to the global economy and geopolitics as well. Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby helping you to reduce overall portfolio risk.

    Source: Bloomberg, World Gold Council


    Disclaimer, Statutory Details & Risk Factors:

    The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

    Mutual fund investments are subject to market risks read all scheme related documents carefully.

    Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

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