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  • August 08, 2018
    Quantum Equity Team

    During the month of July, S&P BSE Sensex rose 6.36% on total return basis. Sensex touched new all-time high in the month. S&P BSE Mid cap and S&P BSE Small cap indices were in positive territory in July after sharp falls earlier. S&P BSE Mid cap index appreciated 3.98% whereas S&P BSE Small cap index increased 3.68%. So far for the 7 months of 2018, S&P BSE Mid cap and S&P BSE Small cap index have fallen 9.64% and 13.43% respectively. In the same period, S&P BSE Sensex has risen 11.34%.

    Among sectors, oil & gas and FMCG were among the better performing during the month. Leading FMCG companies recorded sharp volume growth led by better rural demand. Metals, real estate and telecom were among the sectors which didn’t perform well. Market breadth remains narrow, with Reliance and ITC contributing 44% of gain in S&P BSE Sensex for the month. Only a handful of stocks have driven the markets in 2018. Indian rupee depreciated 0.11% during the month against US dollar.

    FIIs bought stocks worth USD 208 Mn during the month after being sellers earlier. Cumulatively FIIs have been sellers to the tune of USD 414 Mn till July 2018. Domestic institutions (DIIs) were buyers of USD 613 Mn. While MFs bought stocks of USD 803 Mn, insurers were sellers to the tune of USD 190 Mn. In 2018 so far, DIIs have been buyers of USD 10.1 Bn worth of stocks.

    Market Performance at a Glance
     Market Returns %*
     July 2018
    S&P BSE SENSEX **6.36%
    S&P BSE MIDCAP **3.98%
    S&P BSE SMALL CAP**3.68%
    BEST PERFORMER SECTORSOil & Gas and FMCG
    LAGGARD SECTORSMetals, Real Estate and Telecom
    * On Total Return Basis
    ** Source-Bloomberg

    Global central bank actions have important effect on the investment return from various asset classes. US Fed has raised interest rates twice in the current year and is likely to go for another 2 rate increases. Rise in US interest rates is likely to cause money pull from emerging markets such as India. This can affect equity markets in India, at least temporarily. Other big central bank of Japan has indicated to maintain its liquidity and low interest rates. Europe also isn’t likely to change stance from low interest rates in the near term.

    Heated exchange of words continues between US and China related to trade sanctions. This could be damaging specially for Chinese economy apart from derailing global GDP growth. Slowdown in Chinese economy is a possibility and this could have ramifications on countries including India. Decrease in demand for various commodities, of which China is a big driver as well as dumping of goods given lack of US demand can be concerning factors for us. Nevertheless, India has strong domestic demand and is thus insulated from global trade problems.

    On the domestic side, RBI raised interest rates by 0.25% at the start of August given the inflation pressures seen in economy. Government did rationalization of GST rates on a number of articles, this being 4th round of rationalization since it was introduced a year ago. The same has narrowed down the list of goods on which higher rate of 28% was charged, apart from reducing rates on various other goods. On the political side, opposition parties initiated no-confidence motion against ruling party, which was defeated. Monsoon has covered large part of the country, however there has been deficiency of 4%. Parts of East and North east haven’t received adequate rains.

    Many companies continue to report quarterly results. Barring few exceptions, companies have been reporting decent financial performance. Lower private capital expenditure, which dragged GDP growth for few years could be turning around. Capacity utilization of companies has reached 75%, and they could be looking at expanding their production.

    Barring a few sectors, valuations of stocks are at high levels. While share prices have run up, earning of companies are picking up now only after 4 year hiatus. High level of liquidity globally has driven up stock prices. With Lok Sabha elections due next year, stock markets could be spooked by political uncertainty. 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. Valuations, however, leave moderate upside in the near term. Investors at this point should continue to invest in equities through SIPs.

    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.

  • August 08, 2018
    Quantum Fixed Income Team

    The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) raised the policy repo rate by 25 bps for the second time in two meetings. Given the rising inflation trend and various upside risks to future trajectory, the rate hike was warranted. However, by delivering two back to back rate hikes, the RBI has reaffirmed its proactive approach towards inflation targeting. This will boost investors’ confidence on the RBI and hence will support the Indian rupee and local debt.

    Apart from rate hike, the RBI maintained a balanced tone over future inflation trajectory. They acknowledged the risks form hardening input prices, rising inflation expectations and fiscal slippage. However, they chose to wait for the actual impact of revised minimum support prices (MSP) but at the same time factored the effect of the reduced GST rates on various consumer products.

    Despite the higher MSP announcement, bond market investors’ sentiment has improved considerably since mid of June. We believe this revival was due to two major developments i.e. (1) PSU banks have restarted their activity in the bond markets which has addressed the issue of demand-supply mis-match to some extent; and (2) market has dialed back the possibility of sustained rally in the crude oil prices after the agreement between major oil producing nations to boost supply.

    These two developments along with lower than expected headline CPI print for May and June revived the confidence in bond markets. Bond yields across the curve, except for upto 1 year maturity treasury bills, fell since the RBI’s last policy meeting in June. The 10 year government security yield fell from the high of 8.0% after the June policy to touch 7.7% on this policy announcement. On the other hand, the 1 year Treasury bill rate rose by around 28 bps during this period as the money markets adjusted for the expected rate hike in August and also to the tighter liquidity conditions in the second half of the year.

    Going ahead market interest rates will be driven by a combination of following factors:
    • Domestic inflation trajectory
    • Movement of global rates and currency
    • Demand supply dynamics in local bond market

    Since the start of FY19, the headline CPI inflation had surprised the market experts on downside primarily due to lower seasonal pick up in food prices. Normally, Vegetable prices increases during the summer but this time curiously it stayed very low. So despite the non-food component of inflation gathering further upside momentum especially in health, education and transportation, the overall inflation remained below expectations.

    The core-CPI inflation (inflation calculated by removing prices of food and fuel) has grown by an average of 0.52% on monthly basis in last 12 months compared to 0.37% in 2 years prior to that. Though we may see some deceleration in core inflation trend in coming quarters but it may remain well above the RBI’s comfort zone. Government’s push to increase rural income, increased government spending and rising input costs pose additional risks.

    On the other hand, food inflation will be dependent on the method used by the government to pass on the minimum support prices to the farmers. In the past there had been incidents when the MSP rise had not affected the market prices. But this time, with an eye of general election next year, government will intend to fully compensate the farmers either with direct procurement at higher prices or compensate for the difference between MSP and market prices. In any case the outcome is unlikely to be favorable for bonds. Higher procurements can lead to spike in food inflation and compensation mechanism will hit the fiscal balance.

    The RBI has kept its one year forward (April-June 2019) inflation forecast at 5%. We believe the risk is tilted on the upside to this projection and hence the RBI may need to hike the policy rates by another 50 bps in next 12 months.

    Global rates are set to move higher as the US Fed continues to hike rates along with increased supply of US federal debt. Additionally, the European Union may also start tightening the monetary conditions very soon unless global growth faces any major headwind.

    These factors will conflict in case of currencies especially the effect on US Dollar. The continued monetary tightening by FED is positive for USD while higher budget deficit is negative. Additionally, the cloud of a full blown trade war is also creating confusion in the currency markets.

    Following the high volatility in April-June, emerging markets (EM) were relatively stable in the last month. However, we cannot rule out a possibility of turbulence in EM financial markets and currencies in the next 12 months. This remains a potent risk to the Indian bond markets and Indian Currency.

    The RBI has reduced its foreign exchange reserves by USD 20 bn since Apr’18 to defend the INR at 69 per USD. But if the other EM currencies weaken, the RBI may allow the INR to depreciate gradually.
    If the INR weakens , it will impact the bond market also.

    Another major factor to influence the bond yields going forward is the demand supply dynamics. The central government, in response to hardening bond yields, had decided to borrow a lower proportion (48% vs 60%-65% usual trend) of total requirement during April-September 2018 period. So the issuance of central government securities may rise substantially in the second half. Additionally, a major portion of states loan issuances had been cancelled during Apr-Jun’18 due to poor demand. This increased supply may also hit the market in second half.

    On the other hand, credit cycle usually picks up during September-March and hence it tends to lower the demand for government bonds. However, we expect the RBI will increase the pace of OMO purchases from September which will balance the demand side to a large extent. To keep the durable liquidity near neutral, RBI may have to conduct Open Market Operations (OMOs – RBI buying government bonds from the markets to add liquidity into the banking system) of over Rs. 1.0 trillion in the rest of FY19.

    If the outlook on interest rates and INR does not improve, demand supply dynamics may turn unfavorable putting upward pressure on long term bond yields (10 yr and above). While the short end (government securities upto 5 year maturity) may get support from the RBI OMOs.

    We believe the bond yields across the maturity curve are already pricing for reasonable monetary tightness. The 10 year government Bond yield will likely remain in the 7.70% - 8.0% range for now and move above towards 8.25% if the market expects RBI to hike by more than 50 bps.

    We continue to maintain our neutral stance on bond market rates over the medium term. However, as explained above short maturity bonds look attractive at current valuations.

    We always advise investors to have a longer time frame if they invest in bond funds and should also note that the bond fund returns can be highly volatile or even negative in a shorter time frame.

    Data Source: Bloomberg, RBI


    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.

  • August 8, 2018
    Quantum Alternative Investments Team

    Gold has been under major pressure and losing value since April when it traded to the highest value this year and began to sell off. Even this month gold posted a decline of -2.3% for the month taking the year to date losses to -6.1%. The latest round of weakness in gold price was motivated by the hawkish rhetoric from the Fed Chair Jay Powell. He argued that the US economy remains strong enough to support further gradual increases in interest rates. Implication of this monetary stance and a relatively better economy has led to a stronger dollar which has masked any benefit to gold on account of the ongoing trade tensions. The strong risk on sentiment as evidenced in U.S. stock indices near record highs is ensuring Investors flight from gold to equities.

    Most recently, statements made by Fed Chairman Jerome Powell indicated a more hawkish stance as the Central Bank continues its monetary policy of quantitative normalization. His most recent testimony suggested that they would implement a total of four rate hikes this year and continue to raise interest rates next year as well. At the same time, the Federal Reserve has been shrinking its balance sheet since October of last year and has already shrunk it by about $179 billion, with an expectation of eventually shrinking by $1.9 trillion. This puts Feds monetary policy in stark aggression to its counterparts, leading to a renewed strength in the dollar.

    The lack of demand for gold during tensions over international trade has been telling. The current trade dispute, which has a real possibility of becoming a trade war, has not moved the needle in terms of gold pricing. Traders continue to focus upon rising U.S. equities and the risk-on market sentiment that has been so prevalent over the last couple of years. The trade war issues have not been fully priced into the financial markets, as most analysts continue to believe that the U.S. position is more one of posturing than execution. However, the threat from further aggravation of trade war is real. Powell’s testimony also highlighted the uncertainty facing the Fed as it gauges how high to raise rates as fiscal stimulus boosts growth, while prospects of a trade war increase headwinds.

    Outlook

    U.S. GDP grew at the fastest pace since 2014, a testament of Powell’s optimistic assessment of the U.S economy. However, the details about the housing market raised some red flags on some glaring signs of unrest. Existing-home sales, which make up about 90% of the market, fell for a third straight month in June, indicating a shortage of affordable listings while rising prices continue to limit demand. And new residential construction, or housing starts, softened in June to an annual rate of 1.17 million units, compared to an annual rate of 1.33 million in March. Residential investment, which includes construction and brokers' fees, shrank last quarter for a third quarter out of four. It's very hard to escape the slump, given the rise in mortgage rates since last fall and the gradual tightening of lending standards.

    It’s also puzzling given the tightness of the labour market as showcased by the robust unemployment numbers, wage growth has had little participation. The average hourly earnings rose by 5 cents to $26.98, which implies that they have increased 2.7 percent over the year. Although it’s the same percent change as in May and it missed the expectations of economists, wages are rising gradually.

    The balance sheet shrinking is contributing to push the effective federal funds rate closer to the top of the range the Fed specifies, which was not supposed to happen so early. Also, the trade wars and central bank tightening are pulling down the spread between the U.S. 2 and 10 year bond yield, which is now just around 30 basis points, down from 265 in 2014. With a couple of more rate hikes, we could be potentially staring at an inverted yield curve. History suggests that a recession generally follows an inversion by 6-24 months. This could compel Fed to pause raising rates. However, given the level of debt and asset price distortions extant today, it will take much more than just a neutral Fed to stop the slowdown. In response, the Fed would naturally resort to the same old unconventional policies and this would certainly boost gold.

    Lastly on the U.S - China trade war, China has more bullets in the form of its massive treasury holdings than just putting a tariff on all US exports. And, seemingly China has more to lose on face value, an all-out trade war is an extremely negative sum game for all parties involved. China could also dump $1.2 trillion worth of its US Treasury holdings. The timing for this would hurt the US particularly hard because deficits are already projected to be over $1 trillion in fiscal 2019 that begin in October. When you add to this the Fed’s balance sheet unwinding, you get a condition that could completely overwhelm the private sector’s demand for this debt. Economically speaking, there are signs of reversal due to the impending complete removal of central banks’ bid for inflated asset prices on a net basis, is further exacerbated by the Trade war.

    Debt-fueled Tax cuts have greatly boosted earnings growth on a one-time basis. And this has been completely priced in by the Wall Street. However, with the global trade war and as the bond bubble slowly dilapidates, given its effect on record debt and asset prices--should more than offset the benefit from tax cuts in the coming quarters. Feds attempt to get ahead of its QE unwind is providing investors with a buying opportunity in gold before adversely impacting market and economy. Downside seems limited because the negative fundamentals for the market are for the most part already factored into prices.

    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


    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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