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  • September 10, 2018
    Quantum Equity Team

    During the month of August, S&P BSE Sensex rose by 2.88% on total return basis. Mid cap and small cap indices which were under pressure for the past 6 months recovered well this month. S&P BSE Midcap index increased 5.62% while S&P BSE Smallcap index appreciated 3.84% in August. For the 8 months of year 2018, S&P BSE Sensex has risen 14.55%. In comparison, S&P BSE Smallcap and S&P BSE Midcap have fallen 10.11% and 4.58% respectively. The rout in earlier months continues to hurt investors in mid/small stocks.

    Healthcare stocks topped gains among sectors, providing double digit gain of 12.38% in the month gone by. Apart from investors correcting under-ownership in sector, rupee depreciation works in its favour. Metal and power were other prominent sectors that gave superior return. Telecom, oil & gas and automobile appreciated less than the index. Reliance Industries stock continued upward climb with 4.69% return during the month. Its stock price has increased 35.65% so far in calendar year.

    FIIs were net sellers during the current month. They sold stocks worth USD 278 Mn. So far in the year 2018, FIIs have been sellers of USD 692 Mn. Domestic institutions saw net inflow of USD 403 Mn during the month. While MFs contributed USD 546 Mn to this, insurers were sellers to the extent of USD 143 Mn. So far DIIs have invested USD 10.5 Bn in 8 months. The Indian rupee depreciated 3.57% against the U.S. dollar. This follows many emerging market currencies taking a hit, while the U.S. dollar has been strengthening.

    Market Performance at a Glance
     Market Returns %*
     August 2018
    S&P BSE SENSEX **2.88%
    S&P BSE MIDCAP **5.62%
    S&P BSE SMALL CAP**3.84%
    BEST PERFORMER SECTORSHealthcare, Metal & Power
    LAGGARD SECTORSTelecom, Oil & Gas and Automobile
    * On Total Return Basis
    ** Source-Bloomberg

    In the next few days, there will be 10th anniversary of the global financial crisis (GFC) which culminated into failure of investment bank Lehman brothers. There was a credit freeze arising from lack of trust among financial sector participants. The crisis was fueled by excesses in housing sector, where loans were given to customers who didn’t have much income to service them. These loans were packaged in complex securities such as CDO/CDS and sold to investors who did little due diligence. As housing market fell and borrowers’ default rose, these securities became far less valuable than what they were carried at in books. All the excesses in housing and financial markets of many years led to big implosion. Risk management systems were found weak in most global firms.

    While the past 10 years has seen repair of problems and global economic growth has returned, many problems still remain. There was a huge liquidity provided by central banks post crisis including schemes such as Troubled Asset Relief Program (TARP), a large part of this continues to float around. The U.S. Fed is gradually purchasing some securities and reducing the bloated balance sheet. Other central banks such as Europe and Japan still have to follow this path. Leveraging/indebtedness of many countries have risen since GFC and are of concern. Countries such as China have very high debt/GDP ratio leading to worries of collapse or hard landing.

    Most emerging markets have also seen sell off in equity markets as well as currency recently. India’s equity markets have been relatively stable, with domestic retail investors showing faith and shoveling money in mutual funds. Rise in U.S. interest rates further could cause more volatility and lead to fall in equity prices in emerging markets including India.

    Among current events, GDP data was released for first quarter of the fiscal year 2019. It showed that GDP growth was very strong at 8.2%, much higher than 7.4% predicted by economists. Preceding this, there was also release of GDP data of new series for previous years to provide greater transparency. India adopted a new series in 2015 with 2011-12 as base year. New series data for older years points that India grew faster in years before fiscal 2012 than reported by old series. Monsoon in India is on last legs and likely to withdraw in the coming days. There is significant rainfall shortage in Eastern India (27%) while other regions have fared well.

    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 the Lok Sabha elections due next year, stock markets could be spooked by political uncertainty. Rising crude prices, rupee depreciation are macroeconomic concerns in the near term. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors can expect decent returns 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.

  • September 10, 2018
    Quantum Fixed Income Team

    The emerging market contagion gained currency in the last few months as the market turbulence in Turkey and Argentina spilled over to other emerging nations. India was no exception; the Indian Rupee has fallen over 11% since start of 2018 to close the month near all-time low of INR 71/USD.

    EM contagion was not the only reason for this selloff in the Rupee. The usual suspect Crude oil also played its part. In the past month, the Brent oil price jumped from the low of USD $70/Brl to around USD $78/Brl now on continued concerns on Iran Oil supply as the US Government sanctions kick in by November.

    The sharp move in currency and crude oil hit the investors’ sentiment in the bond markets as well. Bond yields across the curve moved higher in August. The 10 year benchmark government bond yield surged by 18 basis points to end the month at 7.95% and similar move was witnessed in other maturity profiles as well. Compared to Government, impact on corporate bonds was lot lower which moved up by 5-10 bps only, but we have seen over years the corporate bond yields respond to market volatility with a lag and we would expect to see similar yields increase in corporate bonds also.

    So far in September the Indian Rupee and Bonds continues to slide. The INR made a new low at 72.67/ USD and the 10 year benchmark bond yield topped near 8.15%.

    Emerging market volatility and crude oil concerns is likely to be the main driver for the Indian rupee and bond markets in near term. However, in our view, any sell-off would be a good buying opportunity for long term bond investors to accumulate Indian government bonds. Our constructive view on the bond markets is based on following assessments:

    1) At current valuations bonds are already pricing for most of the material risks. The 10 year government bond is currently trading at 150 bps over the repo rate against the long term median spread of around 70 bps. Even if the RBI hikes the Repo Rate by another 50 bps (0.5%), the bond yields will still be trading above their long term fair valuation levels.
    2) The real rates (market interest rates minus CPI inflation) are on the higher side and the RBI has established its credibility of maintaining positive real rates by proactive policy adjustments.
    3) After the “taper tantrum” in 2013, the RBI has built a considerable buffer of foreign exchange reserves which currently stands at over USD 400 billion which can be used in case of extreme volatility.

    An added concerning factor which will influence the bond yields going forward is the demand supply dynamics. The central government had borrowed a lower proportion (48% vs 60%-65% usual trend) of total requirement during Apr-Sep’18. So the issuance of central government securities may rise substantially in the second half. We would also see higher borrowing by state governments.

    However, we expect the RBI will need to increase the pace of open market operation (buy government securities to infuse liquidity) from September which will balance the demand side over time to large extent. To keep the durable liquidity near neutral as with their stated liquidity stance, we expect the RBI may have to conduct OMOs of over Rs. 1.0 trillion in the rest of FY19. The OMOs in such large size if it materializes should support the bond yields from rising.

    If the outlook INR does not improve and sentiment towards emerging markets continues to remain weak, the INR may weaken further and impact the sentiment in the bond market also putting upward pressure on especially the long term bond yields (10 yr and above) despite the prospect of OMOs. 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.

    For that, we would draw investors caution to two issues/ data points -
    • Oil prices continue to rise towards the USD $100/Brl.
    • Political sentiment risks emanating out of a likelihood of Modi/BJP government not winning the 2019 elections and/or being replaced by a disparate coalition.

    We would strongly advise investors to keep these issues in mind as either or both of the scenarios panning out could mean an even weaker rupee and higher bond yields.

    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


    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.

  • September 10, 2018
    Quantum Alternative Investments Team

    Gold prices continued to reel under pressure from strength in the U.S. dollar and dynamic U.S. equities markets creating a favorable and continued risk-on market sentiment. With revised U.S. Q2GDP numbers at 4.2%, it helped validate market expectations of the Fed to further its agenda of quantitative normalization by raising interest rates as well as reducing its balance sheet, leading to further selling in gold. There was some relief rally seen towards the end of the month aided by a relatively dovish speech from the Fed chair Powell and Trumps criticism of the Fed in an attempt to pressure it to be more accommodative in line with other central banks and thereby limiting gains in the dollar. However, the gains weren’t enough to drive gold in the positive; it ended the month at $1201.4 an ounce, a decline of -1.9%. This takes the year to date tally at -7.8%.

    Fed minutes revealed a high likelihood that September’s meeting will result in the third rate hike this year. Market assigns a 96% probability that the Fed will raise Fed fund rates in September. The minutes also revealed that there is a high likelihood that the Federal Reserve will change the language describing their monetary policy from “accommodative” to “neutral.” Jay Powell said that the central bank's gradual path of interest rate hikes remains “appropriate “ as there does not seem to be “an elevated risk of overheating.” This seemed a touch dovish as opposed to market expectations for an aggressive hawkish stance. However, one increasingly gets a feeling that there is also a growing disagreement within the Fed on how much more tightening is needed.

    President Trump criticized the Fed chair Powell for raising rates and called out China and Europe for weakening their currencies; his proactive stance on keeping the dollar rally in check is a factor helping gold. Markets are almost certainly bracing for two U.S. interest rate hikes this year, but they are already, if not fully priced, fairly nearly. So there isn’t a huge scope for a negative surprise for gold here. However, given some rising disagreements in the Fed, a seemingly dovish Fed chair and pressure from Trump could now put the December rate hike in question and given the September increase fully priced in, the dollar rally could falter.

    A trade war between the world’s two biggest economies continues to escalate as the U.S. said it will begin imposing 25 percent duties on an additional $16 billion in Chinese imports soon. Items on the new list range from motorcycles to steam turbines to railway cars. 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 in about the past month. Manufacturers are slowing production due to ongoing global trade spats. Reports showed that factory activity in the U.S., Europe and the Asia Pacific region slowed in July. Additionally, the fewest number of companies said that new orders are getting better since November 2016.

    Outlook

    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. In retaliation, China announced plans to impose tariffs on an additional $60 billion worth of U.S. goods. Part of that includes a 25-percent tariff on imports of American liquefied natural gas (LNG). This is the first time fuel has been included in the growing U.S.-China trade war and could have serious implications for U.S. producers of LNG. As Russia is set to launch a new gas pipeline into China in 2019, long-term contacts for imports of LNG from the U.S. could be less attractive to Chinese companies.

    U.S. government debt has more than tripled since 2007, while tax cuts and new federal spending have fueled a budget deficit that the Congressional Budget Office predicts will reach $1 trillion in 2020. With the Federal Reserve winding down debt holdings, U.S. note and bond sales have risen to levels last seen in the aftermath of the recession that ended in 2009.Although the headline level for the U.S. business cycle looks healthy, there are some concerns over credit stress, making it questionable whether the U.S. consumer can withstand materially higher interest rates.

    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. Trump may try to strike deals on trade before the contests, potentially boosting his party’s appeal. The stakes are very high, with the midterms framed as a referendum on the president. The fiscal outlook is deteriorating and political risk is looming over the dollar.

    Falling gold prices in the absence of rising real yields indicate that gold has cheapened relative to other U.S.-dominates flight-to-quality assets, like TIPS and Treasuries. With prices falling for five straight months, there has been a record short build up in gold. The possibility of a short-covering rally in the coming months is seen on expectations of the U.S. dollar depreciation amid rising inflation, economic growth peaking and increasing geopolitical uncertainty. Investors tolerance for economic uncertainty is rising, and at some point that risk may come back to bite them, which will act as a positive trigger for gold.

    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 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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