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ADVICE for the WISE
Newsletter – MARCH 2012
2
Economic Update 4
Equity Outlook 8
Debt Outlook 12
Forex 14
Commodities 15
Index Page No.
Contents
Real Estate 16
Dear Investor,
This calendar year, along with 4 years before it, has brought home an
important structural feature of the modern global financial system –
volatility. Of course volatility of asset prices is probably as old as any
market for financial securities. However, what has changed in recent
times is the unprecedented growth in liquid assets and along with it the
proportion of wealth held in easily tradable instruments. This unusually
high and ever-growing liquidity of assets has translated into higher
turnover – as investors flock to some assets or flee some others from
time to time. The tremendous ease of transactions means that the
opinion or outlook can readily lead to buy-sell decisions. Why does this
matter? It does because this fundamentally entrenched feature of the
modern financial system implies frequent and long-lasting deviation of
asset prices from their fundamental value.
This deviation is confusing in its mild form but highly corrosive in its
extreme form. It has the potential to inflict large real and opportunity
costs on investors – especially the non-institutional ones. It also leads the
investors to miss the woods for the trees since the large movements in
asset prices make most investors overestimate the actual volatility of the
prices – often causing needless panic. The practical implication of this is
that investors often find themselves selling at the worst times, buying at
highs, paying too much for very little outperformance over passive
indexing and so on.
If this is the face of the brave new world, the investors need to
recalibrate their expectations, thumb-rules and investment heuristics. 3
From the Desk of the CIO…
“Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.19”
For example, a relatively harmless and in fact positive statement by the
US Fed Chairman on the 29th February this year, regarding the cautiously
optimistic state of the economic growth, caused widespread selling of
commodities and emerging market equities. The underlying reason was
his connected statement regarding there being no immediate possibility
of another round of quantitative easing (QE) in US. The logic here is that
with no QE, there will not be another bout of easy liquidity pushing asset
prices up. Hence many investors looked to exit the riskier assets which
had their prices rise sharply after an exercise similar to quantitative
easing in December last year – this time in EU.
The equities rally in January and most of February this year along with
the emergence of caution towards the end of February, as also the sharp
fall in second half of 2011 are outcomes of the same structural volatility
of markets around the world. If 2003 to 2007 was the period of the great
moderation, 2008 to 2012 definitely counts as the period of great
turbulence. It is very likely that the turbulence will continue through
much of the rest of the decade
Learning to live with volatility is a bit like getting used to making a
conversation in a very noisy café. It is stressful to start with but one often
gets accustomed soon enough – adjusting the pitch and intensity of one’s
voice almost subconsciously. In a similar vein, building wealth through
the turbulence of this period, one would do well to get into a habit of
filtering out noise, focusing on the task at hand and having the patience
of almost an ascetic!
4
As on 29th Feb 2012
Change over last month
Change over last year
Equity Markets
BSE Sensex 17753 3.3% (0.4%)
S&P Nifty 5385 3.6% 1.0%
S&P 500 1366 4.1% 2.9%
Nikkei 225 9723 10.5% (8.5%)
Debt Markets
10-yr G-Sec Yield 8.20% (8 bps) 20 bps
Call Markets 9.05% (5 bps) 220 bps
Fixed Deposit* 9.25% 0 bps 100 bps
Commodity Markets
RICI Index 3915 4.4% (6.2%)
Gold (Rs./10gm) 28599 1.7 37.5
Crude Oil ($/bbl) 124.02 12.5% 10.5%
Forex
Markets
Rupee/Dollar 48.94 1.52% (7.68%)
Yen/Dollar 80.47 (4.8%) 1.6%
Economic Update - Snapshot of Key Markets
10 yr Gsec
Gold
* Indicates SBI one-year FD
6.80
7.30
7.80
8.30
8.80
9.30
15000
17000
19000
21000
23000
25000
27000
29000
31000
40.00
42.00
44.00
46.00
48.00
50.00
52.00
54.00
56.00
`/$
75
80
85
90
95
100
105
110
115
120 Sensex Nifty S&P 500 Nikkei 225
5
US
Europe
Japan
Emerging economies
• India’s activity in the manufacturing sector continued to expand in February, although at a slightly slower pace. The seasonally adjusted HSBC Purchasing Managers’ Index (PMI), registered 56.6 in February, slightly down from 57.5 in January.
• China’s HSBC Purchasing Managers’ Index – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – registered 49.6 in February, up from 48.8 in the preceding month.
• The Consumer Price Index for all Urban Consumers increased 0.2% in January on a seasonally adjusted basis. Over the last 12 months, the all items index increased 2.9% before seasonal adjustment.
• Total U.S. nonfarm payroll employment rose by 243,000 in January 2012. The unemployment rate decreased by 0.2% to 8.3% from an 8.5% in December 2011. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing.
• The European Central Bank released the second round of its 3-year LTRO operation on 29th February 2012, which amounted to €529.53 billion to support the banking sector and help stem the crisis. This allotment was higher than the amount of €489 billion the ECB had allotted in month of December 2011.
• Consumer prices in the 17 countries that use the euro rose by 2.6%(y-o-y) in January 2012 down from 2.7% in month of December 2011.
• The seasonally adjusted Markit /JMMA Purchasing Managers’ Index (PMI) was at 50.5 in February, slightly down from 50.7 in January, signalling a continued, albeit marginal, improvement in manufacturing sector business conditions.
• Japan's unemployment rate inched up to 4.6% in January from a revised 4.5% in the previous month while household spending fell by 2.3% year-on-year. Japan's core consumer prices fell 0.1% in January from a year earlier, the fourth consecutive month of decline.
Economy Update - Global
6
Economy Outlook - Domestic
• The double-digit expansion of consumer non-durables for the second month in a row (14.4% in November 2011 and 13.4% in December 2011) suggests some revival in consumer spending on non-durable items, following a moderation in food inflation.
• Gross domestic product in India - Asia's third-largest economy - grew at an annual 6.1% in the third quarter. It is a significant slowdown from 6.9% in the previous quarter and marks the fourth straight quarter of growth below 8%.
• The sluggish growth can be attributed to poor performance of the manufacturing, mining and farm sectors. The slowdown in the manufacturing sector, coupled with decline in mining and quarrying, is likely to put pressure on the Reserve Bank of India to cut interest rate at its mid-quarter monetary policy review on March 15, 2012.
GDP growth
• India's industrial output recorded a slow growth of 1.8% in December from 5.9% growth in November with a weaker performance across all the use-based categories except consumer non-durables. The November growth had also benefitted from factors such as a benign base effect and spurt in production levels following fewer working days in October 2011 related to the festive season, amidst others.
• In particular, capital goods underwent a contraction for the fourth consecutive month, with a steep 16.5% de-growth in December 2011, whereas intermediate goods displayed a contraction of 2.8% in the same month.
• Basic goods and consumer durables expanded by a modest 4.0% and 5.3%, respectively, in December 2011, suggesting that demand for final goods remains moderate.
IIP
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
8.6 8.1
8.4 8.3 7.8 7.7
6.9
6.1
4.0
5.0
6.0
7.0
8.0
9.0
FY10(Q4) FY11(Q1) FY11(Q2) FY11(Q3) FY11(Q4) FY12(Q1) FY12(Q2) FY12(Q3)
Economic Outlook - Domestic
As on January 27, bank credit grew by 50 bps i.e. 6.5% on a y-
o-y basis. The aggregate deposits grew by 15.7% on a y-o-y basis witnessing a decline of 150 bps as compared to last month.
We believe that if the February inflation numbers come around 6.5%, RBI might start repo rate cuts very soon. We expect a cumulative repo rate cut of 100 bps for this calendar year.
The Wholesale Price Index (WPI) based inflation, which has remained in double digits for almost two years, declined further to 6.55% in January 2012 from 7.47% in the previous month. The moderation in January 2012 was led by a fall in food inflation with prices in the manufactured and primary segment falling due to good harvest.
Wholesale food prices for the month of January grew at 0.52% compared to 0.74% in December. Prices of manufactured goods rose by 6.49%, moderating from 7.41% rise recorded in December. Notably, the WPI for the month of November has been revised upwards to 9.46% from 9.11%.
The Consumer Price Index, which was introduced keeping in mind that demand-side pricing would be a better indicator of inflation stood at 7.65% for January. The new CPI data was launched early last year and will gradually displace WPI data as the primary indicator of inflationary trends in India
Growth in credit & deposits of SCBs
7 * End of period figures
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0% Bank Credit Aggregate Deposits
6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5%
10.0%
WPI
8
Equity Outlook
With monetary policy remaining extremely easy in developed part of the world and developing markets like China & India starting the
monetary easing cycle, we expect 2012 to be a good year for equities with India emerging as a big outperformer.
European debt markets have calmed down due to massive liquidity injection (LTRO 1) done by European central bank. Bond yields of
PIIGS countries have been coming down. This supply of liquidity has resulted in big rally in risk assets across the world. Greece has
been able to arrive at a deal with private bond holders and European authorities resulting in a fresh bailout package. With new LTRO
facility delivering 529 billion Euros to European banks, we expect the risk-on trade to continue.
DXY, -1.9%
DowJones, 7.2%
FTSE, 10.1%
Nifty, 12.5%
MSCI Asia Pacific, 13.0%
CRB Index, 7.2%
USD INR, -6.6%
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%
Peformance (%)
Performance of Indices since the Beginning of LTRO 1
9
Equity Outlook
RBI has started the reversal of the tight monetary policy with a 50 bps cut in cash reserve ratio (CRR). We would expect a further CRR
cut in the March policy. We believe that if February inflation number comes around 6.5%, RBI might start repo rate cuts very soon.
We expect a cumulative repo rate cut of 100 bps for this calendar year. The biggest beneficiaries of the reversal in policy would be
interest rate sensitive sectors like banks, autos and capital goods.
Union budget would be tabled on 16th March. We expect the finance minister to move towards Fiscal consolidation by capping fiscal
deficit. Expenditure on various social sector programme and subsidies might be raised by a limited amount. Revenue increasing
measures like Increase in excise duty and widening of service tax net are expected. Government might also focus on accelerating
infrastructure spending particularly for power segment. The government might also address issues like fuel linkage and
environmental clearance for coal mines. Also, we expect removal of import duty for coal. These measures would be positive for
power and infrastructure sectors.
We believe that going forward GDP growth will bounce back to 7-7.5% with monetary easing resulting in a boost to infrastructure
activity. We expect that inflation would come down this year and could average around 7% leading to nominal growth of 14-15%.
That would lead to corporate earnings growth of 15%. We expect Sensex earnings of INR 1300 for FY13 and around 1500 for FY14.
We arrive at a year end Sensex target of 22500 based on 15 times FY14 earnings which would give an upside of 30% from current
levels.
10
Sector View
Sector Stance Remarks
E&C Overweight
The USD 1 trillion Infra opportunity is hard to ignore. However, The significant slowdown in order inflow
activity combined with high interest rates has hurt the sector. Now since the interest rate cycle has
started to reverse, we have turned more constructive on this space. Expected budget push will also be a
trigger.
BFSI Overweight
Financial sector is undeniably the lubricant for economic growth. Whether the growth comes from
consumption or investments, credit growth is inevitable. Being a well regulated sector, BFSI in India has
good asset quality and capital adequacy ratios. The reversal of the interest rate cycle will assist in
managing asset quality better and would lead to increase in credit growth
Healthcare Neutral
We believe in the large sized opportunity presented by Pharma sector in India. India’s 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. We would bet on the opportunity in Generics and
CRAMS space
FMCG Neutral We prefer “discretionary consumption” beneficiaries such as Cigarettes and branded garments, as the
growth in this segment will be disproportionately higher vis-à-vis the increase in disposable incomes.
Telecom Neutral
The regulatory hurdles, competitive pressures and leverage prevent any return to high profitability levels
in the short to medium term. However, incumbents have started to increase tariffs slowly and we
believe that consolidation will happen sooner than expected.
Sector View
11
Sector Stance Remarks
IT/ITES Neutral
While US and European customers of Indian IT companies are in good health, Order inflows might slow
down in near term. However, in the next few quarters big rupee depreciation will provide cushion to IT
companies earnings .
Automobiles Neutral
Demand outlook remains robust with strong earnings growth. Raw material prices have started coming
down which would boost margins. We are more bullish on two-wheeler and agricultural vehicles
segment due to lesser competition and higher pricing power.
Metals Neutral
Commodity prices have corrected significantly over the last few months due to concerns about growth
in developed parts of the world. We believe the commodity prices will bounce back once growth
recovers and hence would be positive on industrial metals space.
Cement Neutral Cement demand will certainly grow over the next three years. With pricing power returning, e are
becoming constructive on this space.
Power Utilities Neutral We like the regulated return characteristics of this space. This space provides steady growth in
earnings and decent return on capital.
Energy Underweight We would stay away from oil PSUs, due to issues of cross subsidization distorting the underlying
economics of oil exploration and refinery businesses.
12
Debt Outlook
• The 10 year benchmark G–Sec yield decreased by 8 bps in February to close at 8.20%.
• The 10-year G-sec yields were rather volatile and started dipping in the month end due to the GDP figures which came in at 6.1%, below market expectations. The LTRO announcement though helped the yields to jump back and end at 8.24% on 1st March 2012.
• The AAA rated corporate bonds are giving an yield of around 10.75%.
10-yr G-sec yield Yield curve
(%)
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
0.0
0
.9
1.8
2
.7
3.5
4
.4
5.3
6
.2
7.1
8
.0
8.8
9
.7
10
.6
11
.5
12
.4
13
.3
14
.1
15
.0
15
.9
16
.8
17
.7
18
.5
19
.4
6.80
7.30
7.80
8.30
8.80
9.30
Debt Strategy
Outlook Category Details
Long Tenure Debt
With the expected trend reversal in the interest rates, we would strongly recommend investment in Longer term papers. These, while being available at attractive yields, also provide an opportunity for Capital appreciation due to a decrease in interest rates. Hence, these would be suitable for both - 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.
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.
13
With the pause by RBI and the expected trend reversal of the interest rates, we would not recommend investment in Shorter term debt funds unless money necessarily needs to be parked for the shorter term by the investor. However, the ST funds still have high YTMs (9.5% – 10%) providing interesting investment opportunities to clients for the shorter term.
Short Tenure Debt
Credit
14
Forex
• Indian rupee posted a second straight month of gains against the US Dollar. The rupee appreciated by 1.52% against the dollar in month of February.
• However, surging crude oil prices and their cascading impact on inflation and growth in India, which imports about 80 per cent of its oil requirements, is expected to limit the rise in the rupee.
• Rupee depreciated against Euro due to expectation during the month that European Central Bank (ECB) will inject nearly half a trillion Euros into banks in three-year refinancing operation.
Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data
• India’s exports grew 10.1% to $25.35 billion in January 2012, compared to $23.02 billion in the same year-ago month, while imports were up 20.25% at $40.10 billion translating into a trade deficit of $14.75 billion.
• The projected capital account balance for Q2 FY 12 is at Rs. 84,400 Cr. while the Q1 figure was revised upwards to Rs.1,02,100 Crores.
• 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.
-25000
-20000
-15000
-10000
-5000
0
-20
0
20
40
60
80
100 Export Import Trade Balance (mn $)
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
USD GBP EURO YEN
-10000
40000
90000
140000
FY 10 (Q3) FY 10 (Q4) FY 11 (Q1) FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2)
Capital Account Balance
15
Commodities
Precious
Metals
Oil & Gas
As the US and Europe are out of the woods so far, the expectation of economic revival pushed Crude Oil prices further higher. Iran issue continues to be centre of focus, while U.S. officials escalated warnings that the nation may join Israel in attacking Iran to stop the development of nuclear weapons. Despite, Saudi Arabia deploying the most oil rigs in four years as it prepares for possible shortages caused by tension with Iran, the recent rumours of Saudi pipeline explosion further pushed prices higher. We continue to maintain our bullish stance on oil and expect oil to trade at an elevated levels with a possibility of spike moving forward.
Crude
Gold
Having staged a good up move during most of February, gold went for a sharp selloff following comments from the Feb Chairman Ben Bernanke. The expectation of QE3 that the metal market has been pricing did not materialize the way the markets were expecting, thereby denting its safer haven status, while ECB announcing LTRO2 postponed the default events in the Euro zone which triggered profit taking amongst the bulls. On the flip side, any such sharp down fall is currently supported by the physical off take. But, given the festive and marriage season behind us, expect weakness in the counter. Nevertheless, gold was behaving as we expected and as quoted earlier, we expect softness in during the 1HCY2012. Expect range bound markets with a negative bias.
18000
20000
22000
24000
26000
28000
30000
31/D
ec/1
0
31
/Jan
/11
28/F
eb/1
1
31/M
ar/1
1
30/A
pr/
11
31/M
ay/1
1
30/J
un
/11
31/J
ul/
11
31/A
ug/
11
30/S
ep/1
1
31/O
ct/1
1
30/N
ov/
11
31/D
ec/1
1
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
31-…
31-…
28-…
31-…
30-…
31-…
30-…
31-…
31-…
30-…
31-…
30-…
31-…
Real Estate Outlook - I
16
Asset Classes Outlook
Residential
In the residential space, low sales volumes have led to a sharp decline in the absorption rate from 21.4% in Q1
2011 to 11.5% in Q3 2011. However, strong pre-launch sales have kept the developers far from any correction.
Though sales have gone down to almost 35% as compared to last year, no correction has been witnessed in the
prices. The over-supplied locations remain stagnant and are expected to remain so for the next two quarters. In
cities like Pune, NCR, Hyderabad, Chennai and Bangalore entry points in the range of Rs. 3000 – Rs. 4600 per
Sqft are still valued by first time home -buyers. Infrastructure development and the new airports in these cities
have supported the residential development. On an average, prices in this segment still remain affordable.
Mumbai stands tall with prices at the peak in an over-supplied market also. Corrections are being reported by
media, however not being witnessed on ground level. The retail investors (second home buyers) and HNI
investors are postponing their decision due to expectations of price correction.
Commercial/IT
Average q-o-q rental growth in 3Q11 was recorded at 2.5%. Mumbai SBD BKC was among the most expensive markets and Bangalore and Chennai among the least expensive in Asia Pacific, on the basis of Net Effective Rents. Among the fastest growing office market in the world, India is constructing 100 million Sqft every 7-10 quarters. Office stock is expected to become 500 million Sqft by 2015. The Net Absorption is expected to grow from 30.5 million Sqft in 2010 to 39.1 million Sqft in 2013. Absorption rate has been recorded at 13.3% in 3Q11. 8.5 million Sqft of office space was absorbed in 3Q11 compared to 10.5 million sq ft in 2Q11.
Still in the shadows of over-supply and cautious expansion approach by corporates, this segment has gone through a correction. Rates per Sqft have seen almost 30% down-trend and is expected to be stagnant for the coming 2-3 quarters. After this correction we believe the segment is bottoming out and is the best time to buy for companies looking at long term holding of real estate office space. With signs of recovery in the global economy, the Indian office markets are expected to be nearing the end of the downturn. Despite improving demand conditions, vacancies are rising in the short term due to massive infusion of office space. Markets of Bangalore, Mumbai and NCR-Delhi are leading the property cycle as rentals have started to increase in these markets.
Real Estate Outlook - II
17
The IC note is proposed to be presented every quarter
Asset Classes Outlook
Retail
The FDI allowance has given lot of impetus to this sector. Since 2009 retail has seen a major transformation in
all its business aspects and has been built to suit Indian way of consumerism. Low cost, wide reach, more
variety, less innovation, close existence with competition, maximizing bottom line than top-line approach have
been making the retailers smarter. In the retail space, unorganized markets are still a preferred choice. Most
high-street locations are still expensive. Investors prefer Hi-street locations than malls since they would always
have capital appreciation due to dearth of available space.
Of 9.9 mn sq ft forecasted for absorption in 2011, 7.1 mn sq ft has already been absorbed till 3Q11 and another
1.3 mn sq ft is pre-committed. The northern regions of India rate high on propensity to consume followed by
the western, eastern and southern regions. Industrial towns are similar to each other in consumer preferences
and socio-economic & demographic profiles. Most of them remain equally under-served despite recent mall
developments in the last couple of years.
Land
The trend of investment in land is still nascent since lack of transparency and unclear national land acquisition policy/rules makes it tough for the organized players/investors to transact. However this seems to be a very interesting time to buy land which is being traded more as a commodity now. It is getting absorbed fast. Land sees immense opportunity since it can be used as a tangible asset and is the most credible pledge against business. With the growing commitment of the Government in improving infrastructure (roads, bridges, airports, rail metros), in the last 5 years many far flung areas now have very good connectivity to the CBD locations.
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Honest, unbiased advise
18
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Pedigreed Senior Management Team
19
Disclaimer
The information and views presented here are prepared by Karvy Private Wealth(a division of Karvy Stock Broking Limited) or other Karvy Group
companies. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the
accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it.
The investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisions based on
their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any
information or analysis mentioned here, investors may please note that neither Karvy nor any person connected with any associated companies of
Karvy accepts any liability arising from the use of this information and views mentioned here.
The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned companies from time to
time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that
they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other
securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further
restricted to place orders only through Karvy Stock Broking Ltd.
The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consult their
respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws once the new
Direct Tax Code is in force – this could change the applicability and incidence of tax on investments
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20
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