The Reserve Bank of India (RBI) voted to cut interest rates by 25bps at the outset of the month, bringing the repo rate to 6%, its lowest level since September 2010. This cut was made as they await the impact of factors such as the recent introduction of a Goods and Services Tax (GST) and the monsoon.
Early indications are that GST’s impact has been positive and the late June/early July inventory issues have been ironed out. GST will be inherently positive for Indian trade in the years to come and is another stepping stone in Modi’s push to reduce corruption while enhancing tax revenues and the fiscal strength of the country.
Following a strong month in July where indices hit all-time highs, August gave back some returns. The Fund’s overweight positions to consumer discretionary and real estate stocks contributed positively to the performance. However the underweight to the energy sector, especially oil marketing companies, and profit-booking in a couple of the stronger performing financial stocks held back the returns on the month.
The IPO market has continued to deliver fresh capital to the markets, with domestic investors selectively participating in the new issues, as well as injections of foreign flow. The Fund participated in an IPO for Security and Intelligence Services (SIS), India’s largest security services company. SIS has operations across India, as well as a secondary business in Australia following its acquisition of Chubb Security in 2008. Security needs globally are increasing, and SIS is well positioned to benefit from this growing requirement across a host of sectors and geographies.
No other trading took place during the month.
GST, and the first data since its 1 July 2017 introduction was perhaps the most highly anticipated set of data during August and it has pleasantly surprised. Inventory re-stocking began in earnest in early July and filings of around 65% were ahead of expectations at this early stage.
The RBI cut was welcomed by most, although some market watchers had hoped for 50bps. However, we believe that the more cautious approach by the monetary policy committee is the most sensible way forward as we near the end of the monsoon season and the full impact of GST. Inflation, particularly food price inflation is a sensitive matter so the RBI and the government are aware of the implications if the economy is allowed to overheat too quickly.
Domestic investor inflows continued into the equity markets while global events have seen foreign flows ease more recently. Year to date, domestic flows stand at US$10.7bn, exceeding 2016 full year figures of US$7.1bn, while foreign flows of US$6.9bn exceed the full year cumulative flows of 2015 and 2016.
Growth and earnings were a disappointment once all the results had been reported. However, given this was a quarter that many companies were destocking ahead of the uncertainty of GST, we believe that the coming quarters, and the second half of the financial year will demonstrate an improvement in earnings and consequently a better GDP data point in due course.
In fact, a growing number of CEOs have indicated an increasingly positive sentiment towards the upcoming quarters, and are optimistic on the growth outlook. There is an awareness that the first quarter of FY18 has been weak, and much of that has been due to the speed at which reforms are now being implemented, ie GST, affordable housing and demonetisation. As such, in the very short term things are not as rosy as hoped, but from CEO reports/comments, there are a growing number that have indicated that they are turning the corner and that as reforms bed in things will improve, incrementally at first, and then we hope at a faster pace as we move to re-election year 2019.
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