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Dear Investors,

Month of September saw BSE Sensex correcting by another 1%. This follows a 2.4% correction witnessed in the month of August. As in August, volatility remained high. Key factors were further escalation of tensions between US and North Korea, concern on India’s fiscal deficit post a dismal GDP reporting and depreciating rupee.

After outperforming other markets for reasonable time, Indian equities started underperforming to developed markets and few emerging markets like China, Brazil and Russia. Indian equities were down by 1% in September, while China was down by 0.8%, Brazil was up by 3.5% and Russia was up by 4.6%. Developed markets did much better than emerging markets. US was up by 2.2%, Germany was up by 6% and Japan was up by 5.2% while FTSE declined by 0.3%.

Coming to Geopolitical scenario, tension was escalated on the back of intensified war of words between US and North Korea. North Korea launched missiles over Japan on August 29th and September 15th. Less than six years in to his reign, Kim Jong Un, the North Korean leader has tested more missiles than his father and grandfather combined. Trump warned North Korea that any U.S. military option would be “devastating” for Pyongyang, but said the use of force was not Washington’s first option to deal with the country’s ballistic nuclear weapons program.

Domestically, data points were weak. Headline CPI inflation rose to 3.4% in August (2.4% in July). Fruits and vegetables continued to lead the pack in food inflation while core inflation also moved higher. This uptick was due to a lift in the vegetable price inflation to a positive zone at 6.2% after successive negative readings since for almost a year. The base effect in the vegetable component also had a part to play, apart from rise in prices of certain specific items such as tomatoes, cabbages and onions. Inflation for fruit prices also sprinted higher to 5.3% (2.9% in July) y-o-y despite a favorable base effect. This has driven overall food inflation from 0.4% in July to a 2% reading in August.

India’s GDP growth further decelerated to 5.7% in 1Q FY18, the lowest growth in last three years. IIP grew at 1.2% in July vs 4.5% a year ago. Growth of the manufacturing sector, which makes up 77.6 per cent of the index, decelerated sharply to 0.1% in July compared to 5.3% in the same period of 2016.

Coming to flows, Indian Equities saw continued selling pressure from FPIs after having seen a net outflow of US$ 2bn in August. DIIs were quite aggressive buyers and outpaced FPIs by turning a net buyer to the tune of US$ 1.4 bn, while FPIs were net seller to the tune of US$ 1.1 bn.

After reaching a new high during September, Nifty-50 started its south-word journey. Last time we highlighted that we see high probability of a phase of consolidation ahead due to likely weak earnings, high fund raising activity by corporates and rich market valuations. We think risk of cut in earnings remains and needs to be tracked closely. We are cautiously optimistic on the market.

Sanjay Chawla
Chief Investment Officer
Source: Bloomberg, Economic Times
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