Aditya Birla Sun Life Mutual Fund - June 2018
Aditya Birla Sun Life Mutual Fund - June 2018
www.facebook.com/abcabslmf https://twitter.com/abcabslmf mutualfund.adityabirlacapital.com The bygone month witnessed volatility on the back of rising oil price, foreign outflows, and also due to the fear of earnings cycle not inching up. Due to these events there is a divergence in Large and Midcap sectors. According to the past trend, Every year the month of May always remains to be a bit uncertain. All indications are that it will be a normal monsoon for the coming season and we have already welcomed monsoons in Kerala recently. Going forward, good monsoons should help to moderately recover the broad economy.
During this time, Interest rate cycle also turned out to be volatile with the borrowing costs going up significantly. As you all know, SEBI (Regulator of capital markets and mutual funds) to bring in standardisation in the definitions of schemes and create a uniform template of communication for the industry shared circular to all mutual fund players. The objective was to streamline the MF industry, product positioning and alignment of schemes according to their investment pattern. When it all began?
In the year 2015, AMFI with the help of erstwhile SEBI chairman made a representation to the Ministry of Finance and requested to consider that any transfer of unit or units that happens in the process of Consolidating Scheme of a mutual fund, will not be treated as transfer and will not result in short term / long term capital gain / loss in the hands of the unit holders. While this move was to make it more tax efficient for the investors but the larger purpose was to encourage consolidation of existing schemes. Looking at the larger interest of the investors and the need of the industry, the Ministry agreed to the proposal in all fairness.
Post which there was a provision made under ‘The Finance Act, 2015’ Section 47, to provide tax neutrality on transfer of units of a scheme under the process of consolidation of schemes of Mutual Funds as per SEBI (Mutual Funds) Regulations, 1996.
While the investors got benefitted from this amendment, the larger purpose of reducing or curtailing the growing number of schemes did not transpire. Investors too had a tendency to get attracted towards new fund launches. But, over a period of time through continuous Investor education events and improved understanding of investments, the investor behaviour changed. They started accepting the existing schemes irrespective of the NAV at which it was being offered and money started coming into the existing open ended funds. Therefore the need for launching a new fund also got reduced, both from an investor and distributor point of view.
This increased acceptance is well coinciding with the current consolidation exercise which has a clear goal and standardised definition. Sebi has now defined 10 categories of equity funds, 16 categories of debt funds, 6 categories of hybrid funds, 2 categories of solutions- based funds and 1 category each for index funds/exchange-traded funds (ETF) and fund of funds (FOF)—a total of 36 categories. What’s in it for Investors/Distributors?
The re-categorisation exercise has investors and distributors at the heart of it, so as to simplify the process of fund selection and investment. With the clear definitions, duration bands (average maturity of a fixed income portfolio) and the perfect tag line, the distributor is empowered to guide to make an informed choice. Once this classification exercise is completed, this will enhance the ease of comparing funds across industry. Distributors can help in offering the right products to the customer and also make them understand the purpose of the fund clearly. This is of course a unique exercise conducted by the Indian mutual fund industry and SEBI which is first of its kind in the world.
The Indian regulator is ahead of the curve and has always been proactive in streamlining the Indian capital market and protecting the best interests of investors and distributors on many areas. There is much to compliment SEBI as well as the entire industry in the manner this has been thought out and executed.
What’s in it for the MF industry? The exercise is taking place at a time when the industry is at the cusp of big growth. The next round of growth for the industry will come from what we are doing now. Going forward the money managers will have to operate within the defined parameters which will be a bit more tighter than the current practice. It also gives clarity and a level of comfort for them to follow a set of guidelines in identifying securities. While it sets the practice of managing the portfolio and generating alpha not only on the basis of market cap investing but also purely on the basis of stock selection differentiation and individual capability, to select the right sectors and stocks.
Operating with a clear mandate and set of standardised parameters will not only increase the probability in forecasting accurately but also caps the downside risk.
A Balasubramanian CEO Perspective I
www.facebook.com/abcabslmf https://twitter.com/abcabslmf mutualfund.adityabirlacapital.com The month of May was primarily driven by discussions on increase in Oil price due to US pulling out of the Iran deal and as a result Indian rupee coming under pressure. The brent crude briefly touched the USD 80 / bbl mark before closing the month with a 3.2% gain. The rupee has briefly crossed 68 during the month to close 1.5% weaker. During the month, some of the emerging markets were under severe pressure. The currencies of Argentina and Turkey fell in double digits.
Mexico, Brazil, Hungary and Poland saw their currencies correct by over 5%. Considering the EM stress, INR has done well.
The weakness of the currency and additional surveillance on some stocks led to the tale of two market capitalizations in terms of performance. The large cap index, Nifty50, remained flat, while both the midcap and smallcap indices declined over 6% each. FII flows were negative in May with a USD 1.5 Bn outflow in equities and a USD 2.6 Bn outflow in the debt market. However, DIIs remained net equity buyers for the 14th consecutive month at USD 2 Bn in May. Coming to the macro front for India, we have a mixed bag. The positives are: India’s Q4FY18 GDP came in above expectations at 7.7% driven by a pickup in investment activity and government • consumption expenditure.
Private consumption and exports have been weak but should rebound shortly. IMD has predicted a normal monsoon for the year.
• However, there are some concerns, such as: • GST collections for May’18 dropped to INR 94,000 Cr., after crossing ` 1 lakh Cr. in April. • IIP growth for Mar’18 moderated to a five-month low of 4.4%, significantly lower than expectations, led largely by a slowdown in manufacturing. • CPI inflation rose more than expected to 4.6% in April from 4.3% in March. • Trade deficit was flat in April at USD 13.7 billion, mainly due to surprisingly lower oil imports, despite an 8% oil price increase. However, given the leads and lags involved, oil price increase will eventually translate into higher oil imports.
Among the global developments, US President Trump continues his flip flop on issues such as meeting North Korean leader Kim Jong Un, imposing tariffs on metal imports from some earlier friendly nations and reiterates reducing trade balance with China. South Korea increased wages across the working class by 18% which is good for consumption but would impact corporate profitability. There has been political confusion in Italy leading to a scare that Italy could eventually exit EU but things have gotten under control over the last few days.
Coming to the equity market view: Among the 500 of the BSE500 stocks, half of them lost over 25% in the recent correction of which 90% belongs to small and midcap segment. We are looking at some companies that have good earnings visibility and are available at reasonable valuation after the correction. Though FY18 has ended with single digit earnings growth, there are indications of a much better FY19 earnings growth. Thank you and Happy investing! USD: United States Dollar; YTD: Year To Date; FPI: Foreign Portfolio Investors; DII: Domestic Institutional Investors; WPI: Wholesale Price Index; CPI: Consumer Price Index; GDP: Gross Domestic Product; GVA: Gross Value Added; GST: Goods and Sales Tax; EPS: Earnings per share; EU: European Union; Investment Outlook- Equity II
www.facebook.com/abcabslmf https://twitter.com/abcabslmf mutualfund.adityabirlacapital.com Growth Most high frequency indicators suggest some moderation of growth momentum. It needs to be noted that the recent data points also enjoy a very comfortable base given the pre GST slowdown in Q1 FY18. Steel consumption however has scaled new highs hinting at strong undercurrents to the recovery in the investment cycle. Railway freight also posted very strong growth even as port cargo growth declined slightly from the highs. Recent employment data also suggests continued positive momentum despite PMI services declining for the third time since Nov 2017.
Manufacturing PMI has also settled lower from the post GST highs, but continues to show steady expansion. Fuel consumption has come off from peak but continues to grow faster than long term average levels.
IIP growth for March declined to 4.4% y-y (7.0 % y-y in Feb), partially on adverse base. Capital goods growth declined to -1.8% y-y, again on adverse base, but infrastructure and construction at 8.8% y-y was strong. On consumption side, consumer non-durable grew at a strong 10.9% y-y but growth in durables remained muted at 2.9% y-y. Passenger vehicle sales have stabilized around long term median levels even as two wheeler and commercial vehicle sales continued to grow at a rapid pace. (Source: CEIC) Inflation Inflation at 4.58% was a negative surprise in many ways. While the headline number itself was a mild surprise, the discomfort arose more from the quality of the data.
“Core inflation” as defined by us rose sharply second month in a row. While it has shown a spike previously also for a month or so for various idiosyncratic reasons, sharp rise for two months in a row is a very worrying signs. We have enjoyed a benign inflationary environment for almost 3-4 years and hence should be extra vigilant for any negative surprise. In last couple of weeks we have seen rise in both cereals and veggies prices while the rise in veggies is seasonal and hence not a cause of worry, the same cannot be said for cereal prices and hence should be monitored. Negative surprises in most front as far as inflation is concerned means that there is a risk of June print trending towards 5.75%.
(Source: RBI, MOSPI) External account India’s trade deficit remained flat m-m at US$13.7bn in April with both exports and imports declining, partially on seasonality. Gold imports remained flat while oil imports declined marginally. Jan to April trade data suggest CAD running at run-rate of 2% of GDP, which we expect to rise towards 2.5-3% levels due to higher crude price and increasing domestic demand. Capital outflows continued in both equity and bond markets, with outflows of US$1.4 and US$2.6bn, respectively. Global backdrop of capital inflows to EM markets looks less promising with rising USD funding cost amidst high EM debt levels.
Given the rising CAD and subdued capital inflows, INR continued to face depreciating pressure, partially offset by RBI interventions. (Source: CEIC) Other developments RBI MPC delivered the anticipated 25bp rate hike in a surprisingly emphatic 6-0 vote, while reiterating its commitment to achieving the medium term headline inflation target of 4% on a durable basis. However, it retained the “neutral stance” signalling that it’s not intending to embark on long monetary policy hike cycle and remains data dependent.
The policy statement cited rising oil prices, higher household inflation expectation, higher core inflation momentum, signs of stronger growth and closing output gap as the main reason for the decision to hike rates. RBI also cautioned against fiscal profligacy to ensure that public finances do not crowd out private investments. The RBI retained its GDP growth projection of 7.4% y-o-y in FY19, while CPI inflation forecast was revised upwards to 4.8-4.9% y-o-y in H1FY19 (from 4.7-5.1%) and H2 projection revised up to 4.7% (from 4.4%). We believe that the rate hike had become important to signal RBI’s commitment to 4% inflation given the upside inflation risk (higher crude price, rising core inflation, MSP hike and weaker INR) and would help in anchoring long term inflationary expectations.
US 10 year yields spiked to 3.11% in mid-May, before declining sharply owing to political developments in Italy and not-so-hawkish minutes of US Fed. Crude price also corrected in second half of May following comments from Saudi and Russia regarding discussion on boosting output in OPEC’s June 22 meeting. DXY rally to 95 level, as Euro came under pressure owing to political development in Italy, before coming off on easing pf political stalemate in Italy. With global dollar debt at record high and USD funding cost elevated, USD strength needs to be carefully watched. DM equities remained supported while volatility edged lower before spiking towards May end.
EM equities trended downwards in the month. (Source: Bloomberg) Portfolio positioning After a period of heightened volatility we saw relative stability in the Govt bond market as it remained in a range. Corporate bond curve on the other hand saw a big sell-off as we saw a sharp spike across tenors. While 1yr CD moved by 55 bps during the month, 5 yr AAA PSU also moved by 40 bps basis during the month. Worsening of inflation data coupled with heightened uncertainty globally meant that RBI hiked rate in the new month. Markets have been discounting this rate hike for quite some time and hence while we saw a sell-off post the hike it was limited in its extent.
The evolution of local macro-economic data would be the mover for the market and in that context the recent worsening of inflation data compels us to be cautious. Looking ahead we look to capture any opportunity tactically on the liquid portion of the curve while broadly remaining very cautious on overall portfolio positioning.
USD: United States Dollar; RBI: Reserve Bank of India; MPC: Monetary Policy Committee; CAD: Current Account Deficit; EM: Emerging Markets; CSO: Central Statistical Organisation; IIP: Index of Industrial Production; GVA: Gross Value Added; PMI: Purchasing Managers’ Index’; PSU: Public Sector Undertaking Investment Outlook- Debt III