Advice for the wise August '14

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Advice for the wise - August 2014

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Advice for the wise August '14

  1. 1. 1 ADVICE for the WISE Newsletter –AUGUST 2014
  2. 2. Economic Update 4 Equity Outlook 8 Debt Outlook 12 Forex 14 Real Estate Outlook 15 Index Page No. Contents 2
  3. 3. 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” Dear Investors, 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 fast track. 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. 3
  4. 4. As on 25th July 2014 Change over last month Change over last year Equity Markets BSE Sensex 26127 3.2% 32.3% S&P Nifty 7790 2.9% 32.4% S&P 500 1978 1.0% 16.9% Nikkei 225 15458 1.3% 13.2% Debt Markets 10-yr G-Sec Yield 8.66% (4 bps) 27 bps Call Markets 7.98% 1 bps 81 bps Fixed Deposit* 9.00% 0 bps 25 bps Commodity Markets RICI Index 3596 (4.8%) 0.7% Gold (`/10gm) 27724 (1.3%) 0.2% Crude Oil ($/bbl) 106.89 (5.1%) (1.2%) Forex Markets Rupee/Dollar 60.14 0.03% (2.0%) Yen/Dollar 101.62 0.3% (1.7%) Economic Update - Snapshot of Key Markets 10 yr Gsec Gold • Indicates SBI one-year FD 4 75 85 95 105 115 125 135 145 155 165 S & P BSE Sensex CNX Nifty S&P 500 Nikkei 225 6.8000 7.3000 7.8000 8.3000 8.8000 9.3000 24000 25000 26000 27000 28000 29000 30000 31000 32000 33000 34000 50 52 54 56 58 60 62 64 66 68 70 `/$
  5. 5. US Europe Japan Emerging economies • 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. 5 • 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 2012.
  6. 6. 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. IIP 6 5.3 5.5 5.3 4.5 4.8 4.4 4.8 4.7 4.6 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 GDP Growth -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14
  7. 7. 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 7 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Bank Credit Aggregate Deposits 4.00% 6.00% 8.00% 10.00% 12.00% WPI CPI
  8. 8. Equity Outlook 8 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.
  9. 9. Equity Outlook 9 Reforms Agenda 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 infrastructure creation. 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. Market View 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.
  10. 10. Sector Stance Remarks BFSI Overweight 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. Energy Overweight 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. E&C Overweight The significant slowdown in order inflow activity will reverse in the next few quarters. We see a new infrastructure cycle taking shape this year. Automobiles Overweight 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 View 10
  11. 11. Sector Stance Remarks 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. FMCG Neutral 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. IT/ITES Neutral 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 Neutral Cement industry has seen good volume growth in the last quarter. The sector has also seen price hikes which would boost profitability. Telecom Underweight 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 formidable challenge. Metals Underweight Steel companies will benefit because of rupee depreciation. However, commodity demand stays low globally due to low capex activity. Sector View 11
  12. 12. Debt Outlook •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 week’s close. •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 (%) (%) 12 8.50 8.55 8.60 8.65 8.70 0.0 0.8 1.6 2.4 3.2 4.0 4.7 5.5 6.3 7.1 7.9 8.7 9.5 10.2 11.0 11.8 12.6 13.4 14.2 15.0 15.7 16.5 17.3 18.1 18.9 19.7 6.8000 7.3000 7.8000 8.3000 8.8000 9.3000
  13. 13. Debt Strategy OutlookCategory Details Long Tenure Debt 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. Short Tenure Debt Credit 13 Dynamic Bond Funds
  14. 14. Forex • 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 October 2011. 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. 14 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 bn. -10000 40000 90000 140000 FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1) FY14(Q2) 0.03% 0.02% 1.27% 0.02% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% USD GBP EURO YEN -14000 -12000 -10000 -8000 -6000 -4000 -2000 0 -20 -15 -10 -5 0 5 10 15 20 Export(%) Import Trade Balance (mn $)
  15. 15. 15 Real Estate Outlook Asset Classes Tier I Tier II Residential 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 actual sales. 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. Commercial /IT 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.
  16. 16. Asset Classes Tier I Tier II Retail 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. Land 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 16 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. 17. 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. 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. This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. 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 Capital Ltd nor any person connected with any associated companies of Karvy Capital Ltd accepts any liability arising from the use of this information and views mentioned here. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Karvy Capital Ltd, its affiliates, directors, its proprietary trading and investment businesses (hereinafter referred to as Karvy) may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned assets 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 and Karvy Comtrade Ltd. Any 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 equity investments. Karvy Capital Ltd Operates from within India and is subject to Indian regulations. Mumbai office Address: 702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051 17

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