Summary

• The Fund performed strongly over the course of the month versus the benchmark with stock selection as well as sector allocation contributing positively.  The overweight to consumer discretionary stocks and the continued avoidance of staples companies, which remain at elevated valuations, were the primary reasons for this outperformance.
• The 50 stock Nifty index reached new highs mid-month before profit-booking took the markets slightly lower into the quarter end. The strength of domestic buyers of equities remains in place, with continued appetite for the initial public offerings diverting some liquidity from established listings, which could be one reason for the market not pushing on further at this juncture.
• The latest growth figures from around Asia have impacted India from a foreign investment perspective, with some investors choosing to sit on the sidelines. We would argue that India’s current growth data is largely an effect from the demonetisation announcement of late 2016, coupled with the introduction of the Goods and Services Tax (GST) in July 2017.  It is to be expected that both decisions would have near-term implications for growth, however India’s future growth trajectory remains firmly on the path of consistently being the fastest growing major economy.

Fund activity

At the outset of the month we purchased an initial position in Sun TV Networks, a stock that we have been closely tracking for some time. Sun TV is south India’s largest broadcaster, with more than 30 channels across four languages. The greatest opportunity for the company is the push to digital TV access in the state of Tamil Nadu. Previous hurdles are being taken down, with Sun TV expected to be a primary beneficiary of the move to digital TV in the region. In addition, recent exclusivity deals with prime content producers, combined with a strong movie library and growing ad revenues make the stock increasingly attractive.

A further addition to the portfolio in the month was the participation in the initial public offering of Dixon Technologies, a leading company engaged in the manufacturing of consumer durables; including washing machines and televisions, lighting and mobile phones. Strategic partnerships with global companies such as Philips for lighting solutions and with Panasonic for televisions demonstrates the capabilities of the company and its management team. 

Towards the end of September we booked profits with partial sales of a couple of our positions in banks, reducing that strong overweight, as well as reducing exposure to the IT sector.

Outlook

The opening week of October began with the Reserve Bank of India (RBI) announcing that it was to keep interest rates on hold, while continuing to monitor closely the inflation pressures that are rising in some parts of the economy. Crude oil prices have become more expensive, especially so with the recent strengthening of the US dollar as India imports 75% of its oil requirement. 

Some parts of the economy are seeing declining pricing dynamics, and with a need to reinvigorate growth and kick start the lending cycle once more, the RBI are clearly caught in the middle, hence their neutral stance for now.

The end of the first quarter since GST was introduced will provide the government and organised sectors an insight into how much of the unorganised parts of the market have been dragged into the more formal arena. The news on the ground has been encouraging but this is just one goal of GST. Teething problems remain with the filing of paperwork and people still grappling with the implications to their enterprises. It is anticipated that these will be ironed out in the next couple of quarters and that the long term benefits of GST will begin to shine through before the March year end 2018.

Festival season is now upon us, however for some companies that have failed to repay their debts from the heady days of the mid-2000s, they may not feel like partying. The RBI is expected to continue its programme of cleaning up the balance sheets of the private as well as public sector banks, and we expect further news on this in the coming weeks. So while there may be some disruption in the near term, we can expect loan growth to get a much needed kick-start, the start of which we have seen in the latest data.