Economic Update 4
Equity Outlook 8
Debt Outlook 12
Real Estate Outlook 15
Index Page No.
From the Desk of the CIO
“Advisory services are provided through Karvy Capital having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide 17”
The Union Budget announced at the beginning of the month was an important
influencer for short term market sentiment as well as long term forecasts
regarding the Indian economy. We have already sent our views on the budget in
an earlier communication. To summarize– we believe that the budget, while
making no big-bang announcement, focused on right areas such as
infrastructure besides also demonstrating an overall intent to put growth on
The reaction to the Budget amongst equity market participants was mixed. Part
of this unenthusiastic reaction was excessive expectations from the budget. The
other part of the reason for largely sideways movement in overall market levels
through July was also the divergent actions by institutional and retail investors.
While institutional investors continued to invest, albeit selectively, many retail
investors have continued to exit. Part of the exit was driven by a lull in the
upward momentum in the markets post budget, which many took to be a good
enough sign to book whatever profits they have made so far and call it quits.
We believe that, barring tactical portfolio reallocations, exit from equities at this
stage of business cycle is poorly timed.
The results of several companies, including some in infrastructure and banking,
disappointed investors. That disappointment is somewhat surprising for the
simple fact that the revival of sentiment is as recent as mid-May and it will be
well over 3-4 quarters for any real effect of economic activity revival to show in
corporate earnings. The entire financial year 2014-15 will in fact be marked by
very high trailing P/E ratios for this reason. That in itself should not flummox
investors. During any period of turnaround, the trailing 12 months and forward
12 months are going to look very different. There is of course the crucial
question of whether the turnaround is real, but that is unlikely to be answered
by analysing the earnings of the quarters gone by. Better forward-looking
indicators for the same would be purchasing managers’ surveys, capital raising
by companies and greenfield investment plans announced by public and private
sector. On most of such forward-looking measures, the macro indicators look
quite promising for now.
The budget did away with the preferential treatment of debt mutual funds for
rates and holding period for long term taxation. With long term for debt mutual
funds now defined as 3 years and taxed at 20%, investors have been forced to
reconsider their debt investment decisions for short and medium term. We
continue to believe that for long term debt allocation, debt mutual funds are a
good avenue. For medium term holding (between 1 to 3 years), other
alternatives such as listed NCDs (for higher yield) and arbitrage mutual funds
(for lower tax) could be evaluated.
• US Federal Reserve reduced its monthly bond buying program from $35 bn to $25 bn.
• US initial claims for state unemployment benefits declined 19,000 to a seasonally adjusted 284,000 for
the week ended July 19, the lowest level since February 2006.
• US Treasury Department reports a budget surplus of $71bn in June, following a $130bn deficit in May.
Economy Update - Global
• Japan’s industrial production fell 3.3% month-on-month in June after a 0.7% rise in May.
• Japan's retail sales fell 0.6% year-on-year in June, compared with a 0.4% decline in May.
• China’s economy expanded 7.5% annually in Q2 2014 compared to 7.4% in the previous quarter.
• Asian Development Bank (ADB) upgrades India's economic growth forecast to 6.3% in 2015-16 on hopes
of speedy reform process, but retains growth forecast of 5.5% for this year.
• World Bank offers India up to $18bn in financial support over the next three years.
• Euro zone’s services PMI climbed to a 38-month high of 54.4 in July, from 52.8 in June.
• UK’s economy expanded 3.1% on an annualized basis in Q2 2014, the fastest pace since the end of 2007.
• Euro zone’s industrial production fell 1.1% month-on-month in May, the biggest drop since September
Economy Outlook - Domestic
• Q4FY14 GDP grew at 4.6% Y-o-Y as against 4.7% in the previous
quarter. As per data released by Central Statistics Office ( CSO )
the economy grew at the rate of 4.7% in 2013-2014, slightly above
the 4.5% growth registered in the previous year.
• Growth in 2013-14 was helped by a smart rebound in the farm
sector which grew at an annual 4.7% compared to 4.5% growth
registered in a year earlier period. Electricity sector also grew at a
healthy rate of 5.9% in 13-14 as against 2.3% in 12-13.
• This is the second consecutive year in which the economy has
grown at a sub 5% level, primarily hurt by policy delays, high
inflation and global slowdown.
• Industrial Output in May ’14 grew by 4.7% , the highest monthly
rise since October 2012. This comes on the back of a 3.4% growth in
April ‘14 thereby raising hope of a recovery.
• Manufacturing saw the highest uptick –it grew by 4.8% in May ‘14
as against a meagre 2.5% growth witnessed in April ‘14. Growth in
the manufacturing sector was well diversified with capital goods
growing at 4.5% and consumer durables growing at 3.2% after
months of contraction. Recovery in automobile sales also
contributed to the good show in the manufacturing segment.
• Mining sector was flat as it registered a growth of 2.7% in May ‘14.
Electricity, on the other hand saw a slowdown as it grew by 6.3% in
May ‘14 versus a growth of 11.9% registered in April ‘14.
4.8 4.7 4.6
5.6 GDP Growth
Economic Outlook - Domestic
As on June 2014 Bank credits grew by 13.8% on a Y-o-Y basis.
Aggregate deposits on a Y-o-Y basis grew at 14.1% which is 2.3%
more than growth registered in June 2013.
The Honorable Finance Minister presented the Union Budget on
10th July and it proved to be a shift away from the subsidy and
hand outs driven approach of the previous Government to a
more growth focused and development focused budget.
Infrastructure got a special mention in the budget speech with a
lot of reforms being announced for the sector. The Finance
minister also laid down a clear roadmap for fiscal consolidation
by pegging FY15 fiscal deficit at 4.1% and 3.6% for FY16.
The Finance Minister has increased the personal income tax
exemption limit for individuals, long term capital gain tax on
debt mutual funds has been increased to 20% and tenure has
been increased from 12 months to 36 months.
WPI inflation for the month of June ‘14 came in at 5.43% a four
month low after the Government announced curbs on farm
exports. Food inflation cooled off to 8.14% in June ’14 from a
high of 9.50% in May ‘14.
Inflation for fuel and light dipped to 4.6% while that for housing
dipped to 9.1%.
Headline CPI came in at 7.3% in June ‘14 against 8.28% last
month. The fall in the headline number was mainly due to fall
in food prices.
Growth in credit & deposits of SCBs
20.0% Bank Credit Aggregate Deposits
Growth is Bubbling Under!
The macroeconomic data points coming in the last few months have been very encouraging. IIP data for May came in at a 19-
month high of 4.7% raising hopes of a sustained recovery. This was driven by improved performance of the manufacturing
sector, we believe a macro-economic revival is on the anvil.
India’s core sectors grew at 7.3% in June 2014 compared to 1.2% growth in the year-ago month. Activity in the eight core
sectors - coal, crude oil, natural gas, petroleum refinery products, fertilizers, steel, cement and electricity – are considered as
vital cog in economic growth and a higher growth number should reflect in heightened industrial activity and GDP growth
numbers for the quarter. Cement and four –wheeler sales numbers have also been on the uptrend.
GDP growth has stagnated at 4.5%-5.0% for last eight quarters pulled down by poor performance of manufacturing and
industrial sectors. We believe that the worst is behind us. We would expect a GDP growth of 6% in FY15 and believe that
economy will see a revival of growth and earnings cycle.
Global Macro Outlook
Continued recovery in the US & a stable Euro area are significant positives for Indian equity markets. Global growth outlook
remains supportive of equity investments as well.
US Federal Reserve has decided to reduce the monthly bond buying being carried out as part of QE3. Beginning August,
Federal Reserve will buy $25bn worth of debt securities instead of $35 billion per month. This is on the back of reducing
unemployment rate and normalization in labor markets. We expect US interest rates to remain low going into 2015.
European Central Bank has carried out a fresh monetary stimulus by bringing deposit rates into negative territory. This will
help stabilize European economies.
The revival in global risk appetite has resulted in fresh FII inflows into emerging market equities with India turning out to be a
big beneficiary. India has been one of the top performing equity markets since January this year with fresh equity inflows of
$12 billion . We expect the remaining months of this fiscal to witness healthy portfolio inflows.
Insurance bill is likely to be tabled in Parliament in the current budget session. FII limit in both Insurance and pension sectors
is being raised to 49%.
Environmental clearances, a big road-block for large projects, has been IT enabled thereby cutting lead times and expediting
GST is likely to be implemented from next financial year, it is expected that a successful implementation of GST will add 1% to
GDP growth rate.
Large stalled projects are being revived to give a boost to capital formation activity and restart the investment cycle.
Dedicated Freight corridor between Mumbai and Delhi is being fast-tracked.
Large spending will be carried out to construct new roads and highways. Budget has made a provision of 38,000 Cr this fiscal
for the road sector.
Corporate earnings growth has started to recover since the last quarter. Sensex earnings growth has improved from 5% in
FY13 to about 10% in FY14 on the back of INR depreciation. Q1 FY15 results have been inline with expectations with IT,
healthcare and private banks coming in with good numbers. For FY15, we would expect a Sensex EPS growth of around of
15%. We would expect earnings growth to accelerate once investment activity is revived and average at 20%-25% for the
next six years.
We arrive at a year end Sensex target of 29,300 based on 15 times FY16 earnings and continue to maintain a 2020 target of
100,000 on Sensex.
Sector Stance Remarks
Private sector banks and NBFC’s are expected to deliver healthy earnings growth. We expect public
sector to significantly outperform due to cheap valuations and stabilization in asset quality.
With the ongoing price deregulation of diesel, we believe the total subsidy burden on Oil PSU’s
will come down during the course of the year. Rupee appreciation will also help.
The significant slowdown in order inflow activity will reverse in the next few quarters. We see a
new infrastructure cycle taking shape this year.
We are positive on SUV’s and agricultural vehicles segment due to lesser competition and higher
pricing power. Two wheeler and four wheeler sales are also showing signs of upturn.
Power Utilities Neutral
We like the regulated return characteristic of this space. This space provides steady growth in
earnings and decent return on capital.
Sector Stance Remarks
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 like the secular consumption theme. We prefer discretionary consumption beneficiaries such as
cigarettes, durables and branded garments, as the growth in this segment will be disproportionately
higher vis-à-vis the increase in disposable incomes.
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.
Cement industry has seen good volume growth in the last quarter. The sector has also seen price
hikes which would boost profitability.
While regulatory hurdles seem to be reducing, recent aggressive bidding for spectrum has revived
fears of unhealthy competition. Emergent competition from the social media space also present a
Steel companies will benefit because of rupee depreciation. However, commodity demand stays
low globally due to low capex activity.
•The yields on 10 Yr G sec closed at 8.66% which is 4 bps lower than the last months close of 8.70%.
• The RBI announced the new 10 year 8.40% G-sec 2024 benchmark. Hence, the yields of the current 10 year
benchmark G-sec 8.83% maturing in 2023 ended lower by 10 bps on Friday in comparison to the previous
•The 364‐Days T‐Bill auction worth Rs 6,000 Cr was fully subscribed. The cut‐off for 364‐Days T‐Bill was set at
Rs 92.02, implying an yield of 8.70%.
•The spread on the 10 year AAA rated corporate bond increased to 43 bps on 25th July, 2014 from 27 bps (as
on 25th June, 2014).
10-yr G-sec yieldYield curve
Our recommendations regarding long term debt is that investors could look to add to
dynamic and medium term income funds over the next few months. Macro economic
data-particularly inflation is pointing towards a declining interest rate regime with few
caveats. Dynamically managed funds have the flexibility to go extremely short or long
depending on the fund managers view on interest rates. 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. Hence entry into pure long term
debt should be avoided, 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.
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.
With RBI maintaining status quo on key interest rates in the economy 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 in the
first half of the new fiscal, short term yields would remain higher. Short Term funds
still have high YTMs (9.5%–10%) providing interesting investment opportunities.
• The Indian Rupee was more or less flat with ~0.03% gains against the
dollar , 0.02% gains against GBP and Yen. However, against Euro the
appreciation was steep with 1.27% .
• The Indian Rupee continued a pattern of range bound trading as solid
foreign inflows into debt and stocks were offset by month end dollar
demand from importers.
• The central bank is also stepping-in to buy dollars when the rupee
strengthens, further capping gains. Data showed India's foreign
exchange reserves rose to $317.85 billion as of July 18, the highest since
Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data
• 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.
Exports during June,2014 were valued at US $ 26.47 bn which was
10.22% higher than the level of US $24.02 bn during June, 2013.
Imports during June, 2014 were valued at US $ 38.24 bn
representing a growth of 8.33% over the level of imports valued at
US $ 35.30 bn in June, 2013 translating into a trade deficit of $11.76
FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1)
USD GBP EURO YEN
Export(%) Import Trade Balance (mn $)
Real Estate Outlook
Tier I Tier II
There has been some positive news for affordable housing segment in the
recent budget. Issuance of bonds by financial institutions for lending to
affordable housing segment shall be exempt from CRR and SLR
requirements. (In the Tier I cities, loans to affordable housing segment mean
loans of up to Rs. 50 lacs for homes worth up to Rs. 65 lacs. This could
translate into some reduction in the interest cost for home buyers and could
give some boost to sales of mid-income projects in the Tier I cities.
With a single party majority at the Centre and the consequent stable political
outlook, enquires and foot-falls at residential projects have started
increasing. With a lag of a few months, this is expected to translate into
The sops on lending to affordable housing segment
announced in the recent budget may affect the sales in
Tier II cities as well with a lag of a few months. In Tier II
cities, loans to affordable housing mean loans of up to
Rs. 40 lacs for homes worth up to Rs. 50 lacs.
Demand in Tier II cities is largely driven by the trend
towards nuclear families, increasing disposable
income, rising aspiration to own quality products & the
growth in infrastructure facilities in these cities. Price
appreciation is more concentrated to specific micro-
markets in these cities. Cities like Chandigarh, Jaipur,
Lucknow, Ahmedabad, Bhopal, Nagpur, Patna & Cochin
are expected to perform well.
Currently, the over-supply in commercial asset class still continues, thereby
dampening the capital values. 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.
Enquiries have started from companies across industries such as IT,
consultancy & e-commerce for leasing & buying office space in expectations
of an economic boom under a stable central govt. The change in the uptake
of commercial asset class is slower than residential & it could take a couple
of quarters before commercial asset class absorption starts increasing.
In the recent budget, clarifications have been offered on the tax aspects of
REITs (Real Estate Investment Trusts). The final regulations are expected in
the next 2-3 months. Once the regulations come into effect & provided the
much needed exit option to developers & funds, institutional interest in the
asset class could increase, thereby giving it a boost.
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.
Asset Classes Tier I Tier II
Capital values as well as lease rentals continue to be stagnant.
Developers continue to defer the construction costs as
absorption continues to be low unsold inventory levels high.
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.
Agricultural / non-agricultural lands with connectivity to Tier I
cities and in proximity to upcoming industrial and other
infrastructure developments present good investment
opportunities. Caution should however be exercised due to the
complexities typically involved in land investments.
Land in Tier II and III cities along upcoming / established growth
corridors have seen good percentage appreciation due to low
investment base in such areas.
Real Estate Outlook
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
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