USFC February 2019 CIO Report

inv out feb Welcome to the February 2019 Investment Outlook provided by US Freedom Capital!

CONTINUED SLOWING OF US ECONOMIC GROWTH

The US economy is growing; however, the pace of growth is slowing. We are clearly shifting to the downside of the business cycle in 2019. Slowing rise and/or contraction should be the expectation going forward for most markets and companies.

OUR ECONOMIC OUTLOOK (US)

US Consumer Sales finished up a strong 5.0% in 2018. We expect further growth in 2019. Wholesale Trade was up 7.9% in 2018. We expect further growth in 2019, turning negative going into 2020.Total Manufacturing finished 2018 up 2.8%. We expect further growth in 2019, turning negative going into 2020.

The Trump Tax Act of 2017 continues to extend the current economic cycle. As a result, certain sectors of the economy will maintain above negative growth and possibly keep the US economy from entering a recession before turning back up in mid-2020. As a reminder, the term “recession” means two consecutive quarters of decline (negative growth) of the US Gross Domestic Product. While there are headwinds across economic sectors, the overall economy will experience only a mild recession or possible avoid a defined recession altogether.

Economic Area	2019	2020	2021
US overall	Slowing Growth	Q1 & Q2 Flat - Remainder Growth	Strong Growth
Texas	Slowing Growth	Q1 & Q2 Flat - Remainder Growth	Strong Growth

INVESTMENT OUTLOOK (US)

We see US real estate continuing as a superior investment for our offshore investors, as this asset class is an incoming producing hedge against inflation and a hedge against the increasing volatility of the equities markets. Texas will continue to benefit from the fallout from the 2017 Tax Act, as companies in high tax states are faced with significantly higher local taxes in 2018 and beyond and many make the choice to relocate to states with low or zero state income taxes.

OUR FEBRUARY ECONOMIC REVIEW (INDIA)

The month of February witnessed the Reserve Bank of India (RBI) announce its monetary policy under a new governor, Mr. Shaktikanta Das, who announced a cut in Indian benchmark rates by 25bps. Mr. Das also signaled an accommodative stance by changing the policy to ‘neutral’ from ‘calibrated tightening’ as announced in the December policy when inflation continued to range below RBI’s target of 4% (CPI as on December was 2.19%).

Indian equities were occupied with the Q3 earnings season which came as a mixed bag. Q3 earnings of 41 out of the 50 entities in the NIFTY matched or beat market expectations. Yet, a significant slowdown in the automobile space ensured that the combined NIFTY EPS of 97 rupees for Q3 came largely below the initial consensus estimate of 119, a decline of 17%.

Foreign Portfolio Investors (FPIs) net inflows for the month totaled rough $16 million. While equities witnessed a cumulative net inflow of US$ 287 million, Indian fixed income witnessed net outflows of $271 million. While global ‘risk-off’ sentiments may be partly blamed as a reason for the outflows, the fact that Indian fixed income witnessed net outflows shows concerns on fiscal imbalance post a populist interim union budget.

The Indian rupee breached the 71 handle against the US dollar as Indian fixed income instruments continued to see FPI withdrawals. However, the currency pair stabilized above the 71 handle and has traded in a thin range over the month.

OUR MARKET OUTLOOK (INDIA)

Overall, we expect Indian equities to be under pressure as valuation remains high vis-à-vis the earnings growth while Indian fixed income investments are expected to remain under pressure Indian G-Sec’s however can expect some relief from RBI as they have been increasingly communicating a dovish stance on monetary policy. However, the rate cut and a dovish narrative from RBI could further narrow spreads between US and Indian 10 year yields leading to such investments becoming less attractive over the near term from an FPI perspective. This along with current the escalation in geo-political tension in South Asia may keep the Indian rupee under pressure.