2. Contents Index Page No. Economic Update 4 Equity Outlook 8
Debt Outlook 12 Forex 14 Commodities 15 Real Estate 16 2
3. From the Desk of CIO Dear Investors, The inflation headwinds
have continued to be a major hindrance for economic quite badly,
Argentina following suit. Other emerging markets are not far
recovery in India. Add to that the change in stance at RBI in terms
of the behind in the rout. While Rupee is much better placed now
than it was in the inflation index of focus from WPI to CPI &
it is likely that the tracked mid-2013 (when tapering speculations
first began), it is hard to gauge the inflation remains high for
quite some time to come. For several quarters now, actual effect of
the tapering on foreign fund flows to India. There are the food
& fuel price increases kept the CPI high even as the WPI had
started arguments for & against investing into India for global
investors & the easing. Fundamentally, the sensitivity of food
& fuel prices to monetary prospect of general elections in
India in near future makes matters rather risky conditions is much
lower than that of say industrial input goods. The former for any
investor not keen to take a bet on who comes to power at the centre
are consumption driven while the latter are investment driven.
Monetary in May. The repo rate increase of RBI was probably also
keeping in mind the tightening operates through reduced investment
demand by increasing the possible downward pressure on Rupee with
the continued tapering in US. cost of borrowing. Its effect on
consumption demand is only indirect & second-level. Hence a
tight monetary policy affects investment demand quite Interestingly
enough, while inflationary expectations are starting to get quickly
as is evident from the reduced order book of most infrastructure
entrenched in Indian economy, there seems to be another curious
companies. However, it is likely to take much longer to affect food
& fuel development as regard interest rates. Increasingly, it
would seem that the prices. The operating mechanism for that is
expected to be the reduced high interest rate regime is also
getting entrenched in the economic system. circulation of money in
the economy due to the tight monetary policy which Companies &
individuals alike are seemingly getting resigned to continued in
turn is expected to reduce the amount of money available for
consumption high interest rates. Such stabilization of beliefs in
continued high interest rate as well. How long before this
mechanism starts to take effect is anybodys environment may on one
hand aid growth by getting companies & individuals guess. to
act on their investment plans albeit with lesser profitability
rather than postpone them with the expectations of lower rates
later. On the other hand, Besides inflation, RBI seems to be
cognizant of another worry on the global these rates may also keep
most of the savings in relatively safe financial side thus
prompting it to raise the interest rates in January, in a surprise
instruments such as government debt or quasi-government debt. The
risk move. The long-awaited & much-feared tapering of the
monetary stimulus aversion of investors coupled with high yields
may starve several potentially from the US Federal Reserve (also
called quantitative easing III) has profitable investment projects
of funds thus delaying the recovery. continued in the Feds latest
meeting. The monthly purchase of US debt Hopefully, a change of
guard at the centre after the election would propel securities by
the Fed has been reduced from $85 billion earlier to $65 billion
investment activity with drivers other than cost of borrowing. That
could end now, in two steps. Several emerging market currencies
have suffered from the interest rate - low growth spiral. what
seems like the beginning of a run. Turkey in particular has
suffered Advisory services are provided through Karvy Capital
having SEBI Registration No: INP000001512. Investments are subject
to market risks. Please read the disclaimer on slide 18 3
4. Economic Update - Snapshot of Key Markets As on 24th Jan
2014 Change over last month Change over last year BSE Sensex 21134
0.5% 6.1% S&P Nifty 6267 0.0% S&P 500 1790 -2.3% 19.8%
9.3000 15392 -3.9% 44.9% CNX Nifty Nikkei 225 4.1% Nikkei 225
Equity Markets S & P BSE Sensex S&P 500 165 155 145 135 125
115 105 95 85 75 8.3000 10 yr Gsec 8.8000 7.8000 7.3000 6.8000
10-yr G-Sec Yield Debt Markets 8.70% (14 bps) 81 bps Call Markets
6.58% (217 bps) (145 bps) 34000 32000 Fixed Deposit* 9.00% 0 bps 50
bps Gold 30000 28000 26000 RICI Index Commodity Markets 3509 (1.4%)
(7.5%) Gold (`/10gm) 29703 0.9% (2.8%) Crude Oil ($/bbl) 109.14
(2.2%) (4.2%) Rupee/Dollar 62.18 (0.5%) (13.39%) Yen/Dollar 102.88
1.5% (13.1%) (As on 24th January) Forex Markets 24000 70 68 66 64
62 60 58 56 54 52 50 `/$ 4 Indicates SBI one-year FD New 10 Year
benchmark paper(8.15%, 2022 Maturity) was listed in the month of
June , the 1 year yield is compared to the earlier benchmark(2021
Maturity)
5. Economy Update - Global U.S. Manufacturing PMI fell to 53.7
in January from 55.0 in December. US The U.S. unemployment rate
fell 0.3% to 6.7%, its lowest level since October 2008, despite the
smallest monthly job gains in three years. Fed trims asset
purchases by another US$10bn to $65bn a month. Italy's cabinet
approved the privatization of up to 40% of the post office as the
government tries to bring down its huge public debt. Europe
Consumer prices in Germany, rose 0.5% on the month in December, but
the annual inflation dropped to 1.2% from 1.6% in November. Britain
needs to cut 25 billion pounds ($41 billion) in spending after next
year's election to reduce borrowing as per finance minister. Japan
January manufacturing PMI rose to a seasonally adjusted 56.6 in
January from 55.2 in December, a 8-year high number. Japan Japan
Dec jobless rate falls to 3.7%, lowest since 2007. Japan's core
consumer inflation, excluding fresh food, rose at the fastest pace
in more than five years in December by 1.3% IMF revises India's
growth forecast in 2014-15 (Apr-Mar) to 5.4% from 5.0% in October.
Emerging economies Exports of gold jewellery from India in December
dropped 30.4% from a year ago to $443.19 million China's urban
unemployment rate ticked up slightly to 4.05% at the end of
December 2013 from 4.04% three months earlier. 5
6. Economy Outlook - Domestic 3.0% IIP 2.0% 1.0% 0.0% -1.0%
-2.0% Q2FY14 GDP growth improved to 4.8% YoY as compared to 4.4% in
the previous quarter leading to growth of 4.6% in first half of
this fiscal. Strong agriculture sector growth and meager
improvement in industrial sector aided in pushing the growth in the
economy in the second quarter. While growth in services sector
continued to slow down. GDP at Market Price which had trended below
GDP at Factor Cost for five consecutive quarters rose above FC at
5.7% as subsidies dropped in second quarter as compared to previous
year. -3.0% -4.0% Nov Dec Jan Feb Mar Apr May Jun 12 12 13 13 13 13
13 13 Jul Aug Sep Oct Nov 13 13 13 13 13 Nov13 IIP surprises with a
continued deceleration in the growth, as the performance declines
by 2.1% YoY, compared to 1.6% degrowth and 2.0% growth in Oct13
& Sep13. Sharper than expected deceleration in Consumer
Durables sector dragged the IIP performance. 12MMA IIP further
dropped to 0.4%, which is near to four year low levels. Headline
figure for Oct13 is revised upwards by 24bps to (1.6)% YoY
primarily driven by upward revision in Food products and Chemical
related products. Food products sector was also revised Agriculture
growth rose to 4.6 per cent during July-September from 2.7 per cent
in April-June; the growth for the first half of 2013-14 for the
farm sector, according to the data released, is 3.6 per cent. The
agriculture growth achieved in the first half of 201314 is just
about the long term average. Contribution of Services sector to
overall GDP growth in Q2FY14 slowed down further to 76.5% of the
GDP. Growth slowed down sharply to 5.9% YoY from peak growth of
10.9% in Mar11. 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 6.9 GDP growth 6.1
5.3 5.5 5.3 4.5 4.8 4.4 4.8 upwards by 1.2% in Aug13 IIP numbers.
6
7. Economic Outlook - Domestic Growth in credit & deposits
of SCBs 20.0% Bank Credit Aggregate Deposits 18.0% 16.0% 14.0%
12.0% 10.0% 8.0% Dec13 WPI dropped to a 5 month low at 6.16% YoY,
vis--vis reading of 7.52% in Nov13 and 7.24% in Oct13. The sharp
drop in Inflation in Dec13 is driven by 29.66% MoM decline in
Vegetable prices. However, Vegetable prices have more than doubled
so far in this fiscal. Nov13. WPI for the month of Oct13 has been
revised upwards by 22bps to 7.24% YoY due to 33bps upward revision
in Manufacturing Inflation and 4.9% revision in LPG prices. The
average WPI for Apr-Dec13 remains elevated at 6.15% YoY as compared
to 7.60% in the year-ago period As on Dec 2013 Bank credits grew by
14.5% on a Y-o-Y basis which is about 0.7% lower than the growth
witnessed in Dec 2012. Aggregate deposits on a Y-o-Y basis grew at
15.8%, viz-a viz a growth of 16.1% in Dec 2012. On 28th Jan, RBI
increased the repo & MSF rate by 25bps. There was no change to
liquidity measures. Despite the recent cool-off in headline
inflation numbers, the stickiness in core CPI has been worrisome.
RBI seems to have endorsed Dr. Urijit Patel Committee
recommendations for a glide path to disinflation. RBI will be
targeting to reduce headline CPI to 8% by January 2015. RBI stated
that further policy steps will be data dependent, if the
disinflationary process evolves, further policy tightening in the
near term would not be anticipated at current juncture * End of
period figures Headline CPI eased to 9.87% YoY in Dec 13, as
compared to 11.16% in Nov13. The emphasis on CPI as an inflation
metric has become the cornerstone of Indias new monetary policy
under Governor Rajan. With a target for CPI to be 4% with a range
of +/-2% in a time span of 2 years. 8.00% 7.50% 7.00% 6.50% 6.00%
5.50% 5.00% 4.50% 4.00% Wholesale Price Index 7
8. Equity Outlook Indian equity markets remained subdued last
month. RBI hiked interest rates again, the third rates hike in last
four months. Global markets remained volatile due to further
reduction in US Federal Reserve. The quantum of quantitative easing
(QE3) has been reduced to 65 billion dollars per month. There has
been two consequent tapering actions in the last two months due to
strong macroeconomic recovery in United States. The revival of US
growth is good news for global economy and sooner or later, markets
will start focusing on the positive side of reduction in monetary
stimulus. RBI Governor increased the repo rate by 25bps in the last
policy review. Despite the recent cool-off in headline inflation
numbers, the stickiness in core CPI has been worrisome. RBI seems
to have clearly endorsed Dr. Urijit Patel Committee recommendations
for a glide path to disinflation. RBI will be targeting to reduce
headline CPI to 8% by January 2015. We expect RBI to maintain a
hawkish stance to achieve these objectives as a significant drop in
inflation appears unlikely in the short term. GDP growth in the
last two quarters has remained below 5%. The slowdown is expected
to have continued in third quarter also. Manufacturing sector
remains extremely weak and there are no signs of revival in
industrial activity. RBI believes that expected pick-up in
agriculture should provide some support to growth. 8
9. Equity Outlook The emphasis on core CPI as an inflation
metric has become the cornerstone of Indias new monetary policy
under Governor Rajan. It is interesting to see RBI link rupee
devaluation to CPI inflation. The current account deficit for FY14
is now expected at 2.5% as compared to 4.8% in FY13. This puts
India into a relatively comfortable position compared to other
emerging market peers given the uncertain external environment. The
political activity in the country is going to get more and more
interesting as we approach the General elections scheduled in May.
The recent opinion polls indicate support building up for NDA lead
by Narendra Modi, which is being taken positively by equity
markets. The quarterly earnings have been largely in-line with
expectations. While IT, Healthcare & telecom sectors have
delivered strong earnings growth, some banks have shown further
deterioration in asset quality. Currently, Public sector banks are
trading at quite cheap valuations and we expect significant
outperformance from that space in the next two to three years. We
expect export oriented sectors like IT & healthcare to continue
to benefit from the significant rupee depreciation seen last year.
Telecom is another sector which might deliver strong earnings due
to return of pricing power & reduction in competitive
intensity. We maintain our year-end Sensex target of 24,800 and are
aggressive buyers of Indian equity. 9
10. Sector View Sector Stance Remarks Overweight We believe in
the large sized opportunity presented by Pharma sector in India.
Indias strength in generics is difficult to replicate due to
quality and quantity of available skilled manpower. With the
developed world keen to cut healthcare costs, and a vast pipeline
of drugs going off-patent, Indian pharma players are at the cusp of
rapid growth. Telecom Overweight The regulatory hurdles and
competitive pressures seem to be reducing. Incumbents have started
to increase tariffs slowly and pricing power is returning. We
believe that consolidation will happen sooner than expected.
IT/ITES Overweight Demand seems to be coming back in US. North
American volume growth has also remained resilient. With
significant rupee depreciation in the last few months, margins will
get a boost. BFSI Neutral The recent rate hikes will cause pressure
on asset quality in the short term. We expect public sector to
significantly outperform private sector due to cheap valuations and
stabilization in asset quality. Power Utilities Neutral We like the
regulated return characteristic of this space. This space provides
steady growth in earnings and decent return on capital. Healthcare
10
11. Sector View Sector Stance Remarks Automobiles Neutral We
are positive on SUVs and agricultural vehicles segment due to
lesser competition and higher pricing power. FMCG Neutral We like
the secular consumption theme. We prefer discretionary consumption
beneficiaries such as Cigarettes, IT hardware, durables and branded
garments, as the growth in this segment will be disproportionately
higher vis--vis the increase in disposable incomes. E&C
Underweight The significant slowdown in order inflow activity
combined with lack of demand has hurt the sector. It will take some
time before capex activity revives Energy Underweight With the
ongoing price deregulation of diesel, we believe the total subsidy
burden on Oil PSUs will come down during the course of the year.
However, rupee depreciation will reverse most of those gains.
Metals Underweight Steel companies will benefit because of rupee
depreciation. However, commodity demand stays demand globally due
to low capex activity Cement Underweight Cement industry is facing
over capacity issues and lacklustre demand. With regulator taking a
strong view against pricing discipline, the profits of the sector
are expected to stay muted. 11
12. Yield curve 10-yr G-sec yield 9.3000 8.8000 8.3000 (%) 9.40
9.20 9.00 8.80 8.60 8.40 8.20 8.00 7.80 7.60 7.40 7.8000 7.3000
6.8000 0.0 0.8 1.5 2.3 3.0 3.8 4.5 5.3 6.0 6.8 7.5 8.2 9.0 9.7 10.5
11.2 12.0 12.7 13.5 14.2 15.0 15.7 16.5 17.2 18.0 18.7 19.5 (%)
Debt Outlook The yields on 10 Yr Gsec crossed 9% mark due to fear
of Fed tapering and additional borrowing by Government of India
which let to spread contraction between corporate bonds and
sovereign bonds. Bond yields have risen over last few days also due
to the overhang from Urjit Patel Committee recommendations combined
with recent renewed emerging market fears. During the month, The
RBI surprised by hiking repo rate by 25 bps today to 8%.
Correspondingly, the reverse repo and MSF rates have also been
hiked to 7% and 9% respectively. All other rates were kept
unchanged Year 2013 had been a wild ride for bond markets. It
witnessed the highest levels of volatility in bond yields in four
years. The 10-year government bond yield, which started the year at
eight per cent, saw a low of about seven per cent and then a high
of 9.5 per cent, before cooling towards the year-end. 12
13. Debt Strategy Category Short Tenure Debt Credit Long Tenure
Debt Outlook Details With the current 25 bps repo rate hike and
influence of domestic and global factors in the market, some
uncertainty is coupled with the interest rate scenario in the
coming quarters, hence, we would suggest to invest in and hold on
to current investments in short term debt. Due to liquidity
pressures increasing in the market as RBI has a huge borrowing
plan, short term yields would remain higher. Short Term funds still
have high YTMs (9.5%10%) providing interesting investment
opportunities. Some AA and select A rated securities are very
attractive at the current yields. A similar trend can be seen in
the Fixed Deposits also. Tight liquidity in the system has also
contributed to widening of the spreads making entry at current
levels attractive. Our recommendations regarding long term debt is
neither buy nor sell for now. And after the volatility settles
Investors could look to add to dynamic and medium to long term
income funds over the next few months. Long term debt is likely to
see capital appreciation owing to the expected monetary easing.
There is lesser probability of rate cuts in the near future and
there could be a lot of volatility in the g-sec yields as well. An
important point to note is that as commodity prices are cooling
down, current account deficit may reduce to some extent. But all
this is coupled with uncertainty. We suggest matching risk appetite
and investment horizon to fund selection. Hence we recommend that
if investing for a period of 2 years or above then long term can be
looked upon or else holding/profit booking could be a good idea.
Investors who may want to stay invested for the medium term
(exiting when prices appreciate) and those who would want to lock
in high yields for the longer term can also invest in longer 13
tenure papers/Funds.
14. Forex Rupee movement vis--vis other currencies (M-o-M)
0.00% -0.50% -0.50% Trade balance and export-import data 20 15 10 5
0 -5 -10 -15 -20 -0.52% -1.00% Export(%) Import 0 Trade Balance (mn
$) -5000 -10000 -15000 -20000 -25000 -1.28% -1.50% -2.00% -2.20%
-2.50% USD GBP EURO YEN The Indian Rupee appreciated against all
the four major currencies in the last month. It saw a depreciation
of 0.5% against USD, 1.28% against Japanese Yen & 2.2% against
GBP. While emerging market jittered in the last week of Jan, with
sharp falls in the Argentinean peso and the Turkish lira, the Fed's
announcement has clearly spread the impact wider. Strikingly, while
the Indian rupee was amongst the hardest-hit currencies when the
idea of a taper first emerged last May, it has been amongst the
most stable this time around due to a rise in the interest rates
that could accelerate foreign fund flows into Indian debt. Rupee
fell to near 62 against dollar on QE cut. To guard itself from any
selling, unlike Argentina, who had spent almost $4.5bn last year to
defend peso from falling, RBI has also built its foreign exchange
kitty. Currently India's foreign exchange reserves are at $292
billion. Next, India is also making a conscious effort to bring
down its fiscal deficit. Exports during December, 2013 were valued
at US $ 26.35bn which was 3.49% higher than the level of US $ 25.46
bn during December, 2012. Imports during December,2013 were valued
at US $ 36.49 Bn representing a negative growth of 15.25% over the
level of imports valued at US $ 43.05 Bn in December 2012
translating into a trade deficit of $10.14 Bn. 140000 FY14(Q2)
90000 40000 -10000 FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY
12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1) The projected capital
account balance for Q3 FY 13 is projected at Rs. 171984 crores
along with the Q1 and Q2 being at 88013 Cr and 130409 Cr
respectively. We expect factors such as higher interest rates to
attract more investments to India. Increased limits for investment
by FIIs would also help in bringing in more funds though
uncertainty in the global markets could prove to be a dampener.
14
15. Commodities Precious Metals Given the sharp sell off last
year, the global commodity indices increased their 2014 weightage
to the bullions given the attractive risk reward ratio. It seems
that gold has moved past the tapering concerns given the macro
uncertainties surrounding the world and safe haven is back. The
sharp fell off in emerging market currencies and slew of central
bankers surprising with rate hikes supports a bullish argument for
the metal. The talks of India relaxing the import norms and
reducing the custom duty further kept prices elevated in
anticipation of demand spike that was largely absent last year.
Expect prices to remain. 34000 33000 Gold 32000 31000 30000 29000
28000 27000 26000 25000 24000 125 Oil & Gas WTI crude rose
trimming the biggest monthly decline for January since 2010, as
demand for distillate fuel countered a second weekly increase in
U.S. crude stockpiles. The record US cold keep energy prices firmer
as the distillate demand rose 20% to 4.52 million barrels a day,
the highest level since February 2008, the EIA said. Cold weather
will dominate the central U.S. and Canada through mid-February that
would support higher prices going forward. Expect prices to remain
firm. 120 115 Crude 110 105 100 95 90 15
16. Real Estate Outlook Asset Classes Residential Tier I Tier
II Due to a flurry of new launches in the first quarter of the
year, most markets witnessed an increase in the unsold inventory
levels even with relatively steady sales. Consequently, last
quarter saw lesser new Demand in Tier II cities is largely driven
by the trend towards nuclear families, increasing disposable
launches. income, rising aspiration to own quality products and
With reduced new launches and steady absorption, the demand supply
the growth in infrastructure facilities in these cities. Price
appreciation is more concentrated to specific gap is expected to
reduce over the coming months. micro-markets in these cities.
Cities like Chandigarh, Mid-income residential segment with Rs.
4,000 6,000 per sq. ft. Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur,
Patna entry pricing with good developers in Pune, Bangalore, NCR
and and Cochin are expected to perform well. Mumbai suburbs cane be
expected to continue generating good percentage returns with
relatively lower risk. The over-supply in commercial asset class
still continues, thereby dampening the capital values.
Commercial/IT While rentals have been seen increasing at a slow
pace over the last couple of months, they still remain lower than
the peal values achieved in the past. In relative terms, Bangalore
market continues to outperform other markets owing primarily to the
demand from the IT industry. Lease rentals as well as capital
values continue to be stable at their current levels in the
commercial asset class. Low unit sizes have played an important
role in maintaining the absorption levels in these markets.
Specific pre-leased properties with good tenant profile and larger
lockin periods continue to be good investment opportunities over a
longterm horizon. Please Note: Tier I* markets include Mumbai,
Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I
markets 16
17. Real Estate Outlook Asset Classes Tier I Tier II Retail
Capital values as well as lease rentals continue to be stagnant.
The effects of the change in FDI policy to allow 51% foreign
ownership in multi-brand retail and 100% in single-brand retail are
yet to have any effect of the market for retails assets. Developers
continue to defer the construction costs as absorption continues to
be low unsold inventory levels high. Land Agricultural /
non-agricultural lands with connectivity to Tier I cities and in
proximity to upcoming industrial and other Land in Tier II and III
cities along upcoming / established growth infrastructure
developments present good investment corridors have seen good
percentage appreciation due to low opportunities. Caution should
however be exercised due to the investment base in such areas.
complexities typically involved in land investments. Tier II cities
see a preference of hi-street retail as compared to mall space in
Tier I cities. While not much data on these rentals gets reported,
these are expected to have been stagnant. The mall culture has
repeatedly failed in the past n the Tier-2 cities. Whether the FDI
in retail can change this phenomenon can be known with more
certainty once the effect of FDI is more visible in Tier I cities.
Please Note: Tier I* markets include Mumbai, Delhi & NCR,
Bangalore, Pune, Chennai, Hyderabad and Kolkatta Tier II* markets
includes all state capitals other than the Tier I markets 17
18. Disclaimer The information and views presented here are
prepared by Karvy Capital Ltd. The information contained herein is
based on our analysis and upon sources that we consider reliable.
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