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  • January 07, 2019
    Quantum Equity Team

    2018 turned out to be an eventful year for economy and stock markets. In the beginning, equity markets were pretty complacent. This changed as the year progressed with volatility rising especially in the latter half of the year. Long term capital gain tax was introduced in Union Budget for equities, move not welcome by markets.

    Indian economy faced headwinds during the year. Crude oil rose to c85$/barrel. Inflation touched 5% levels. RBI raised interest rates twice during the year, after a 4 year pause. Indian rupee saw a sharp depreciation, similar to other economies as US dollar strengthened. The macroeconomic benefits that India reaped over the past 3 years seemed to reverse.

    However, crude prices have cooled as we come to end of the year. Economic sanction on Iran was among the drivers of crude prices. As India is exempted from the sanctions for 6 months, there has been a respite on macro front. Keeping with high gyrations, crude oil price has crashed to c50$/bbl. Inflation has also come down to very low levels. Low food prices have contributed to subdued inflation, which can be temporary. Many market participants now are looking at lower interest rates.

    Economy does face challenges on fiscal deficit, as tax collections remain lower in GST era. With elections around the corner, agriculture and rural spending remains the focus of Government. Desperation to get funds for spending, among few other issues also led to spat with RBI. This culminated into resignation by the Governor of Indian Central bank.

    Central bank of US played a crucial role in setting expectations for the global financial markets. Interest rates were hiked 4 times in the course of year by US Fed. Unemployment there has fallen to very low levels and economy continues to do well. This had impact of dollar liquidity waning and many emerging market stock markets took a beating. Fed later clarified that interest rates there are just below normal. Markets were relieved and now expect lesser rate hikes in 2019.

    Tightening of interest rates in the US and other developed markets are likely to lead to decline in equities markets in emerging markets including India. As western investors get higher interest rates in home economy, they would be less willing to take risk outside. Eurozone could also raise interest rates going ahead. US is also shrinking its balance sheet, which had expanded post financial crisis in 2008. This leaves Japan as one which may continue following loose monetary policy.

    Trade deficit and jobs moving overseas, which was a major election issue for President Trump came to roost in 2018. US and China fought each other with tariffs and counter-tariffs. This particularly hurt the Chinese economy as it runs a trade surplus. Its stock markets fell by c25% in 2018. As expected, India has been relatively insulated from US tariff/visa issues. There were fears in 2016 since Trump election that Indian IT firms will be impacted significantly. Measures taken since then weren’t as harsh as expected and most IT companies adapted their business model.

    Corporate earnings have been recovering in India. However, markets were expecting earning of Sensex companies to grow at c20% in FY19. Progress so far suggests actual delivery to be much lower, touching early teens. Private companies aren’t investing in capacity expansion yet. While capacity utilization in the economy has touched 75%, many companies are still awaiting election results and new party at government before committing capital expenditure.

    We expect corporate profitability to pick up significantly in future and achieve growth closer to market expectations. Many companies will reach optimum capacity and have pricing power as new production facilities will take months to fruition since committing to them. So far corporate profit has eluded investors for past 4 years.

    2018 will also be remembered for IL&FS saga, which created much upheaval in financial and money market. Default by IL&FS on debt, considered by many as quasi government company, took all by surprise. Many banks and mutual funds who lent to the former were trapped. This followed news of another MF selling a NBFC co. paper at discount triggering fears of default by a number of private companies.

    Many NBFCs were running mismatch on asset liability duration. Markets faced liquidity crunch and were gripped by fear that many may not be able to roll over their short term debt. Stocks of many NBFC and sectors depending on consumer finance (autos, 2 wheeler, etc) took a beating in September and October. Situation on the liquidity front has improved much since then. Many took recourse to selling their advances as means to free their balance sheet. Other sources of funds such as bank lending, higher tenor debentures also opened up.

    Valuation of Indian stocks saw a decent correction in 2018 led by events of September and October. Many sectors which were valued quite richly by investors saw a return to normal levels. Risk adjusted returns for equities look much favourable now than they were in year before. Companies raising money through IPO was much lower than in 2017, which was a record year. 311 Bn INR was raised in 2018 by investment bankers for IPO as compared to 671 Bn INR in 2017.

    S&P BSE Sensex gained 7.4% in 2018 (total return index), much lower than 29.6% in year before. S&P BSE Mid cap and Small cap indices faced significant pressure during the year. 12.5% and 23.1% was the decline in Mid cap and small cap indices respectively. These indices were performing much better than BSE Sensex for 4 years consecutively and correction was long due.

    Among sectors, IT did extremely well. Apart from visa/immigration worries waning, companies saw good orders as clients were more willing to spend. FMCG and banking were other sectors that gave positive returns. Telecom and real estate were among the biggest drags during the year. Intense competition among players has dented into business model of telcos.

    FIIs were net sellers in Indian equities in 2018, pulling out USD 4.38 Bn. Retail investors continued to show faith in Indian growth story. Retail flows have been very strong since 2014, when incumbent government was voted to power. Net equity money by investors in MFs was Rs 1,239 Bn (USD 17.7 Bn) in 11 months of 2018, similar to last year but much above past history.

    We remain long term bulls on the Indian economy and equities. It is likely to be one of fastest growing economies in the world for many years to come. Consumption and infrastructure investments are themes for India which have long legs. Being a domestic consumption led economy, India is well protected from any global problems. Fall in markets in past months gave us an opportunity to deploy significant part of our cash, after a long wait. Retail investors should continue to invest through systematic plans given that our portfolio offers a reasonable upside. Those with under-allocation to equities can consider putting lump sum to take advantage.

    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.

  • January 07, 2019
    Quantum Fixed Income Team

    After riding a roller coaster in 2017 and 2018 the bond markets are likely to face another year of extreme uncertainty in 2019 as well. Domestic inflation trajectory, political developments, crude oil prices and global rates may continue to defy any market expectations of stability.

    Bond yields have been on declining trend since mid-September 2018 following a sharp decline in crude oil prices, muted inflation trend and an aggressive OMO (government bond) purchases by the RBI. Moreover, the change in RBI’s top management has also set an optimistic tone (easy liquidity; rate cuts) in the market going into the New Year


    We acknowledge the recent improvements in the macroeconomic environment especially from the lower oil prices and softer global climate. But we see an increased uncertainty around the interest rate cycle emanating from (1) potential populist policy measures by the government to address rural distress, (2) sharp reversal in food prices and consequently in overall inflation, (3) uncertainty on crude oil prices and (4) political developments (uncertainty) around 2019 elections.

    The CPI inflation has been on declining trend throughout 2018. But the internal components of the CPI basket had shown a divergent trend. While the food price had been declining sharply which pulled down the headline CPI, the non-food CPI basket continued to move higher. The government sharply raised the minimum support prices (MSP) on various food items but till now it has failed to revive prices in the agricultural market.


    The current level of food inflation looks unsustainable for the agricultural economy; however if it continues it can further aggravate the rural distress. This can also derail the government’s electoral promise of doubling the farm income by 2022. Given the rural influence in electoral outcomes, the government policies may also be shaped to push up the food prices.


    Looking into the political campaigns for state assembly elections in the last two years, it is clearly evident that the populist spending in the rural economy is going to increase substantially in the form of farm loan waivers, income support schemes and/or other market intervention mechanism. These steps will boost the rural consumption going forward but will also put an upward pressure on the inflation cycle over the period. Additionally it will also require some reduction in capital expenditure budget and increase in fiscal deficit for states and the central governments. Indian governments have very high share of committed expenditure, like Salaries, Interest repayments, Subsidies and hence any increase in such populist schemes prior to elections should ideally lead to higher fiscal deficit.

    Apart from the worries on inflation and fiscal, the uncertainty in the global crude oil market may also continue. A sharp move in any direction can have a significant impact on the inflation trajectory and on the direction of the Indian Rupee.

    Though we do not expect CPI inflation to move higher into an alarming zone but there are significant upside risks to the current trajectory.

    The RBI in its latest monetary policy review had lowered its inflation forecast for the next year and also hinted towards a potential rate cut if inflation continues to remain low. The new RBI governor Mr. Shaktikanta Das in his initial comments seemed a lot more growth focused to us and we believe he will add a dovish (easing) tilt into the monetary policy committee (MPC). There is thus a reasonable probability of reduction in policy repo rates by 25-50 basis points in next two quarters. However, we believe the uncertainty around the future inflation trajectory will pose a challenge in front of the MPC while setting the policy rates.

    The bond markets will also be watchful of the developments over the RBI’s conflict with the government about its capital reserves position and request for surplus transfer to the government. The impact on the bond markets will be dependent on the modality of excess reserves transfer, if any. In near term bond yields may dip from the current levels in expectation of easier monetary policy. But considering the heightened uncertainties, we are cautious on the interest rate cycle over medium term and do not expect yields to fall and sustain substantially lower than current levels. We still see higher chance of rebound in the inflation readings and due to the likely compromise on fiscal targets by states and central government.

    The global situation also remains uncertain with concerns on the escalating trade war, global growth and on expectations of interest rate and liquidity changes by the central banks of US, EU and other developed market central banks.

    In 2019, for the first time since 2009, global central banks will tighten liquidity (Quantitative Tightening - QT) as against Quantitative Easing (QE). This is likely to have impact on global markets including India. Although, the Indian economy may not be impacted, but Indian Rupee, Equities and bonds will get impacted on foreign flows if global markets turn negative.


    In the current environment of heightened uncertainties, we advise investors to have a cautious approach about interest rate and credit risk in their portfolio. In our opinion it would be prudent for existing debt investors to reduce their exposure to long duration bond funds and credit funds in this current rally.

    For debt fund allocation, investors should focus only on debt funds with shorter maturity profile and good credit quality portfolio. Shorter-dated bonds are by no means immune to rising rates, but their returns tend to be less volatile than longer term bonds.

    Quantum Liquid Fund (QLF) prioritizes safety and liquidity over returns and invests only in less than 91 day maturity instruments issued by Government Securities, treasury bills and top rated PSUs.

    Quantum Dynamic Bond Fund (QDBF) takes higher interest risks, but does not take any credit risks and is invested only in Government Securities, treasury bills and top rated PSU bonds. In line with our interest rate view, we are keeping a shorter maturity profile in the QDBF portfolio with an objective to have lower interest rate risk. However, we keep looking for signs of mispricing in market and position the portfolio to exploit the opportunity tactically.

    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 are not like fixed deposit and can be highly volatile or even negative in a shorter time frame.

    Data Source: Bloomberg, RBI


    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.

  • January 07, 2019
    Quantum Alternative Investments Team

    2018 has been a choppy year for gold. Although ending lower for the year with its fair share of ups and downs, broadly speaking gold’s held well given that dollar gained about 9% from the lows and commodities collapsed. Gold which traditionally does well in times of political uncertainty has a lot going for it. But gold prices have largely struggled this year as the market has had to readjust its expectations of Federal Reserve policy and its resulting impact in form of a stronger U.S Dollar. Investors have flocked to the U.S. where tax cuts and deregulation have sparked a pick-up in economic growth. This stability in the U.S. economy comes as sluggish growth and a loss of momentum are taking hold elsewhere, making U.S. Treasuries and the dollar the main focus on investor attraction.

    Two critical factors that have exerted the greatest selling pressure in gold has been the strong US dollar and the Federal Reserve’s current monetary policy of quantitative normalization resulting in gold dipping below the $1200 an ounce levels in mid-2018. It’s been trading sideways as Investors shunned gold and favored the dollar and Treasuries instead; as they weighed the uncertainties surrounding the impact of a U.S.-China trade war on global growth. Despite uncertainty with respect to Trumps unpredictability surrounding decisions still have investors place their bets in dollar for now as opposed to the yellow metal.

    Given the recent pessimism on outlook for growth in the U.S and other parts of the globe and the fact that Fed can only showcase limited aggression in such a decelerating economic environment, gold has attracted some buying as equity markets now look shaky. Although, prices have recovered from the lows, gold will still end the year with a loss of -3% for the year 2018.

    Outlook

    US Economy to slowdown

    US economic growth momentum continues on the back of tax cuts, fiscal stimulus and strong business and consumer confidence. However, there are now some definite signs of slowing and the momentum will certainly fade in the course of 2019 with rising interest rates, further Fed quantitative tightening and as the fiscal stimulus will have run its course. The impact of tightening is now really beginning to kick in, which is not so surprising with the Fed balance sheet having already shrunk by US$383bn since the commencement of the asset reduction plan in October 2017 and on course, under the current schedule, to shrink another US$50bn a month. It is important to look beyond the front-end-loaded impact on the data of tax reform to assess the cyclical threat posed by ongoing monetary tightening. Traditional sectors like housing and autos are well under pressure and will prove a big drag on the economy. The deflationary trend will sooner or later reassert itself as the cyclical momentum succumbs to prevailing high debt levels and higher interest rates. With further slowdown, it’s highly expected that Trump in a bid to revive the economy will fire his second bazooka, his infrastructure agenda. But, his practical ability to do so has been significantly diminished by the outcome of the November mid-term elections. A lack of policy momentum resulting from the loss of House control, hence an inability to enact proactive policy to counter the looming fiscal cliff will be something that the markets will be seriously concerned.

    Fed may overtighten only to take a U-turn

    The Fed will continue along the lines of what it has been saying. Despite evidence of a slowing economy, it will be hard for it to stop tightening so long as measures of core CPI and wages appear to be trending up. There’s really not an impetus for the Fed to halt what it has been doing as it seeks to rebuild credibility. The Fed has raised rates to 2.5% and the “dots chart” now guides for two more rate increases in 2019 to 3%. Adopting to continue to unwind the balance sheet, the Fed suggests that they are less worried on growth and more concerned to stop the economy from overheating.

    The difference between short-term and long-dated Treasury yields has been constantly narrowing. If short-term yields move above the long-end of the curve it will end up in what is known as an inverted yield curve. As the Fed continues to tighten in 2019, there is a clear risk that Fed tightens much more than the economy can handle as the underlying cyclical recovery is largely fueled by stimulus, tax cuts and cheap liquidity. The inverted yield curve with potentially put further brakes on economic expansion and undermine confidence and investments. This will have a profound impact on asset markets as this will fuel debate on recession and markets start pricing in a more pessimistic growth outlook than the Fed as it believes that the Fed will overtighten. Yet this will become a stance increasingly hard to maintain in the face of not only falling stocks but also, much more importantly, rising credit spreads as it will badly impact the high yield market which increasingly looks like a bubble.

    Fed tightening stance continues to remain aggressive in comparison to other central banks. Major fallout of this is a relatively stronger dollar. The fact that Trump will find it difficult to deliver further fiscal or infrastructure boost as a response to economic slowdown; he will increase his attack on the Fed to force them towards further liquidity measures and ways to weaken the dollar. Such a scenario will make financial markets nervous and boost gold. If the Fed takes a u-turn in policy as a response to slowing growth and falling asset prices by beginning to cut rates or adopt further unconventional measures like QE; it will be perceived by the markets that the central banks will not be able to normalize monetary policy and that will be a big boost for gold prices.

    Europe’s political crises set to get worsen

    The expansion in Europe is moderating as a toughening global economic environment challenges their external sector. However, the bigger challenge with Eurozone is concerning its political crises with Italy been a major issue. Last time Italy found itself near bankruptcy, it was saved by the ECB’s decision to launch into a decade of money-printing, heavy intervention and massive government bond purchases. However, the ECB is now set to stop and reverse the measures that facilitated this favorable environment that supported the entire European economy after the last recession. This might prove catastrophic for Italy. Rising interest rates will make the debt near-impossible to service without impacting major spending programs and government services. Without external, systemic and extensive support, the country is bound to struggle heavily over the next years. Unlike Greece, Italy will be a far greater challenge to bail out and the failure to do so will have far grimmer implications.

    It might not be yet clear exactly what kind of move by the EU, the new Italian government would interpret as “a step too far” and cause them to make good on their warning to launch their alternative plan of considering to exit. However, what we can tell for sure is that the European project, the common currency and the Brussels supremacy will definitely not be able to sustain the blow of another exit, especially if it’s Italy that decides to leave. That being said, it should also be obvious that the systemic problems that existed since 2008 have not disappeared; on the contrary, they just became worse.

    Conclusion

    Trade tensions, political risks, unwinding fiscal stimulus are the biggest risks to the global economy. Business cycles are maturing in most economies and growth rates are gradually reverting to slower trends in the medium-term. While global growth will continue to decelerate, the economy will also become increasingly vulnerable to shocks as liquidity measures from central banks also come to an end. On a global basis G7 central bank balance sheets have stopped expanding in US dollar terms since April and are on path to a complete stop. All this is likely to undermine confidence, business investment, global trade and growth next year and result in more geo-political tensions that will probably unnerve global financial markets – a perfect mix for more volatility in equity, bond and currency markets globally.

    The financial, economic and political trends in many countries are increasingly getting more supportive of higher gold prices. The world continues to remain in state of great disequilibrium, both with respect to the global economy and geopolitics as well. The fallout of the geopolitics globally seems to now cap the downsides in gold. Given the macroeconomic picture, gold prices should move up gradually and prove to 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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