From the Desk of CIO
The assembly elections during December fuelled an already
Growth below 5% seems to have become an acceptable level.
strong investor optimism, at least on the institutional side.
While the argument that it cant get much worse has some
Retail investors continued to be net sellers through December.
merit, the overdependence of a revival on significant
Debt markets received a positive surprise in the RBI
improvement in governance after the general election seems
announcement of status quo on rates. Globally, US economy
somewhat dangerous. For now though, investors seem to
threw a positive surprise. Hence even though tapering finally
have already assumed the best on this front.
began, the markets around the world reacted to it rather
We believe that growth revival is likely partly due to easing of
Going into 2014, the economic outlook remains confusing.
With food inflation getting entrenched and WPI inflation also
refusing to stay down, monetary policy easing seems rather
far. The pause in rate hike may not last long if inflation
continues at current levels. On the positive side, the trade
balance seems to have adjusted towards a better level on the
back of a depreciated Rupee. The currency instability is at
tensions globally and domestically (on currency front and the
firefighting thereafter) and partly due to an improvement in
sentiment. The latter might actually be self fulfilling unless we
witness a negative shock of some sort. Especially the
conducive global economic climate might play significant role
in buoying investor sentiment if not necessarily economic
least reduced for now, thus eliminating the need for any
firefighting response from RBI and its attendant costs.
“Advisory services are provided through Karvy Capital having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide 22”
Economic Update - Snapshot of
As on 31st
S & P BSE Sensex
10 yr Gsec
10-yr G-Sec Yield
Crude Oil ($/bbl)
(As on 26th December)
• 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)
Economy Update - Global
• The U.S. central bank would reduce its monthly $85 billion bond buying program by $10 billion starting
• The Commerce Department said housing starts jumped 22.7%, the biggest increase since January 1990,
to a seasonally adjusted annual rate of 1.09 million units.
• December's service sector PMI rose to 56.0 from 55.9.
• Irish government bonds are close to marking their second year as the euro zone's top-performing debt,
giving a 11.7% year-to-date returns.
• Britain's services PMI fell to a still very strong 60.0, its fifth highest reading since December 2006.
• Austria's 2013 budget envisioned a nominal 2.3% deficit, due to higher-than-expected tax revenue and
one-off income from a mobile frequency auction.
• Japan’s 10-year yield was up 2 basis points at 0.71%, its highest level since 18th Sept 2013.
• Japan's output of rolled copper product rose to 67,751 tonnes in November on a seasonally adjusted
basis, up 9.6% from a year earlier.
• Japan's general budget deficit is estimated at 9.5% of GDP in calendar 2013, among the worst in the
• India’s forex reserves rose by $4.4 bn to $295.7 bn the highest level since April due to foreign institutional
inflows into the equity markets.
• India's industrial production contracted for the first time in four months with a 1.8% slump in October.
• Annual consumer inflation in China unexpectedly slowed to 3% in November from an eight-month high of
Economy Outlook - Domestic
• 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.
Oct Nov Dec Jan Feb Mar Apr May Jun
12 12 12 13 13 13 13 13 13
Jul Aug Sep Oct
13 13 13 13
• Oct’13 IIP declined by 1.8% YoY, compared to 2.0% and 8.4%
growth in Sept’13 & Oct’12, respectively. Unexpected positive
performance in capital goods sector mainly led to the divergence
between our estimate and the provisional figure. Continued
slowdown was witnessed in Consumer Durables sector which
contributed significantly to the sluggish growth.
• The cumulative growth of the industrial production for the AprilOctober period year-on-year was at a standstill from a growth of
about 1.2 percent in the corresponding period of last fiscal.
• 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 Mar’11.
• The headline figure for Jul’13 IIP has been revised downwards by 17
bps to 2.6% YoY on back of 1.1% decline in basic metals.
Economic Outlook - Domestic
Growth in credit & deposits of SCBs
As on Nov 2013 Bank credits grew by 14.2% on a Y-o-Y basis
which is about 2.8% lower than the growth witnessed in Nov
2012. Aggregate deposits on a Y-o-Y basis grew at 16.1%, viz-a
viz a growth of 12.8% in Nov 2012.
On 18th Dec, RBI adopted a wait and watch approach and
retained its key operative rates; RBI maintained Repo rate at
7.75% consequently Reserve Repo rate stands at 6.75% and MSF
stands at 8.75%. Policy document clearly focused on cooling off
of Inflationary expectations in Dec’13. RBI is expecting food
inflation especially vegetable prices both at retail level and
wholesale level to come off from the current peak. However,
even with the prices of food & beverages crashing sharply, WPI
would still remain above 6.0% and CPI would stay above 9.0%
which is above RBI’s comfort zone.
* End of period figures
Headline WPI spiked unexpectedly to 7.52% YoY in Nov’13, visà-vis reading of 7.00% in Oct’13. The prices have risen across
the segments in the month, while food inflation in particular
contributed significantly to the headline figure.
Due to expected revision in Electricity index for Sep’13, WPI for
that month has been revised upwards sharply by 56 bps to
7.05% YoY. The average WPI for Apr-Nov’13 is higher at 6.12%
YoY as compared to 7.60% in the year-ago period. Core Inflation
although remained low at 2.63% YoY in Nov’13 is slightly higher
as compared to 2.58% in Oct’13.
Headline CPI spiked to 11.24% YoY in Nov’13, sharpest increase
in the entire series, as compared to 10.17% in Oct’13. The gap
between CPI and WPI inflation has narrowed down to 3.72%
from the peak of 4.74% in Mar’13 mainly due to sharp rise in
While on MoM basis, CPI index expanded by 138bps. Nearly
65.00% of the increase in general price level was contributed by
Food Inflation, which continued to remain elevated at 14.45%.
Wholesale Price Index
Equity Outlook: 2014: A new
The past year turned out to be quite constructive for Indian equity. Markets made fresh life time highs on the back of improving
domestic macros, supportive global equity and expected governance improvement in India after next general elections. Sensex crossed
the level of 21,200 after a gap of almost six years. FII reaffirmed their commitment towards Indian equities with more than 20 billion
dollars invested in 2013.
We see 2014 bringing a new bull cycle into existence. A good monsoon, strong export sector, continued recovery in US & a stable Euro
area are significant positives for equity markets. With domestic macro-economic data also on the mend, we are aggressive buyers of
Indian equity. We have a year end sensex target of 24,800.
Elections are good for Indian
Indian equity markets have tended to move up going into the general elections. The average return of Nifty in the six month period
going into the general elections has been 17.6% in the post liberalization era.
The recent opinion polls indicate support building up for Gujarat Chief Minister Narendra Modi led National Democratic Alliance
(NDA). There have been several concerns about governance and populist schemes in the last few years and markets are getting
excited about prospects of a better government emerging from the next election. We would expect a bigger rally building up going
into the election.
Global Macro Outlook
Global growth outlook remains supportive of equity. In their recent meeting, US Federal Reserve has
started the tapering of their bond buying program as unemployment rates have hit a five year low. US GDP
growth rate in last quarter was an impressive 4.1% underscoring a strong macroeconomic recovery.
The tough measures to ensure financial discipline in the peripheral eurozone area in the last few years
have began to show results. European economies have seen rebound in growth with several countries
coming out of recession. We expect this macroeconomic recovery in the Euro area to get stronger in the
next few quarters.
Japan is showing clear signs of coming out of a five year deflationary trend. GDP growth has been strong
with yen weakness benefitting the exporters. Fresh monetary stimulus and labour reforms will make the
The strong growth momentum will help sustain an upwards bias in developed and Emerging market
equities. 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 the middle of September with fresh equity inflows of 8 billion dollars.
RBI Governor surprised the market by keeping repo rate unchanged against the consensus expectations of a
25bps increase in repo rate in the recent policy statement. Despite the inflation data for last month delivering
a negative surprise, RBI has decided to hold rates at current levels. Governor believes and we agree that the
recent spike in inflation has been caused by food and vegetable prices which is expected to reverse in the
Considering the fragile economic environment, any further increase in interest rates can derail the nascent
economic recovery .
The emphasis on core CPI as an inflation metric as compared to WPI is expected to continue. We expects CPI
to average around 8-9% level for next year months thus ruling out any monetary easing in the first half.
However, core CPI should moderate to 7% which is within the tolerance limit of RBI.
We expect, at most, a 25bps rate hike in first half of 2014 with rates remaining largely stable till the time
inflation starts cooling off. The second half of the year should see interest rates coming off which would be
beneficial to interest rate sensitive sectors like banking, real estate and infrastructure.
GDP growth in the last two quarters has remained below 5%. The forecast for FY14 GDP growth has been cut
from 5.5% to 5% by RBI. We believe that growth in the next two quarters will improve due to strengthening
export growth and expected pick-up in agriculture.
Revival of large stalled projects cleared by the Cabinet Committee on Investments will give a boost to capital
formation activity. There are several large projects like Delhi Mumbai Industrial corridor which are progressing
well. Approvals have also been given recently to several large Oil & Gas and power projects. This would help
the Capex cycle in the country which can accelerate the growth rate.
We would expect a GDP growth of 6% in FY15 and believe that economy will see a revival of growth and
earnings cycle. The agriculture and services sector continue to show strong traction and gradually even
manufacturing sector should pick-up as consumer demand revives.
A real GDP growth of 6% along with Inflation of around 7% should lead to a nominal GDP growth of 13%
leading to earnings growth of around 13-16%.
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. For FY15, we would expect a Sensex EPS
growth around of 15%.
We arrive at a year end sensex target of 24,800 based on 16 times FY15 earnings. This gives a 18% upside from
the current market levels.
While Sensex has made fresh life time highs, the performance of various sectors have been quite divergent.
Pharma, IT and Auto have been best performers in the last six years, while Banking, Oil & Gas, Capital Goods
and Metals have been worst performers. We expect this trend to start to reverse going forward.
With interest rates not expected to increase a lot, we have turned positive on interest rate sensitive sectors like
banks and automobiles. 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 to
continue to benefit from the significant rupee depreciation seen this year. Telecom is another sector which
might deliver strong earnings due to return of pricing power & reduction in competitive intensity.
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.
The measures taken to stabilize the rupee have largely been reversed and we expect RBI to pause
in the short term. We expect public sector to significantly outperform due to cheap valuations and
stabilization in asset quality
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.
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.
We like the regulated return charteristic of this space. This space provides steady growth in
earnings and decent return on capital.
We are positive on SUV’s and agricultural vehicles segment due to lesser competition and higher
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-à-vis the increase in disposable incomes.
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
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. However, rupee depreciation will reverse most of those
Steel companies will benefit because of rupee depreciation. However, commodity demand stays
demand globally due to low capex activity
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.
10-yr G-sec yield
• The 10 yr g-sec closed the month at 8.82% which is 10 bps higher than the last month’s close of 8.72%.
• This year saw substantial volatility in the Indian bond markets. First, a large foreign institutional investor (FII)-buying triggered
rally in April followed by an equally swift FII sell-off and outflow on the back of US Federal Reserve Governor's comments on
tapering in May. This had a dramatic effect on not only bond yields which moved from a low of 7.11 per cent to 7.99 per cent in
these two months, but also on the currency.
• This volatility was followed by another round of sharp interest rate movements as the Reserve Bank of India (RBI) put up a
strong interest rate defence of the currency and raised the operative rate in the system from 7.25 per cent to 10.25 per cent.
Bond prices plummeted and yields went up by 1.7 per cent even as the rupee depreciated by 15 per cent to 68.8 against the
• G-sec yields saw a lot of movement during the month on account of overall bearish sentiment and policy
makers’ statement. The volumes in G-sec markets were also lack-luster with most investors preferring to stay
away from the market. RBI governor’s comment that the present status quo does not mean a pause in tightening
of interest rates affected the market sentiments.
With the last 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 tenure papers/Funds.
Rupee movement vis-à-vis other currencies (M-o-M)
Trade balance and export-import data
Trade Balance (mn $)
• The rupee ended with gains on 31st Dec, but posted a 11% fall in
2013, ending a tough year marked by a descent to a record low and
suffering from continued concerns about its outlook next year.
• The Rupee appreciated against all major currencies except Euro in the
month of December 2013. It depreciated by 0.45% against the Euro
whereas saw an appreciation of 0.8% against the US Dollar, 0.5%
against the Great Britain Pound. Also, we witnessed a huge
movement in the Rupee against the Japanese Yen where it finished
the month by appreciating by 3.39%.
• A narrowing current account deficit has allowed the rupee to
withstand the start of reduced bond purchases by the Federal
Reserve. The Finance Minister has said that he expects the CAD to be
lower at $50 billion for the current FY. The CAD was at $88 billion last
year and an improvement in the CAD figures should be good for the
Exports during November, 2013 were valued at US $ 24.67bn which
was 5.86% higher than the level of US $ 23.25 bn during November,
2012. Imports during November,2013 were valued at US $ 33.83 Bn
representing a negative growth of 16.37% over the level of imports
valued at US $ 40.45 Bn in November 2012 translating into a trade
deficit of $9.22 Bn.
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.
After 12 years in succession of a rising gold price, 2013 ended as an
unforgettable year for the yellow metal. The investment case for gold largely
depends on whether the global central banks achieve a successful exit from the
easy monetary policy. If successful, then bears have a party, if not, 2013 sell off
is a massive buying opportunity.
Some argue that gold price is discounting the falling inflation in the US, paving
way for higher real rates - the current US 10-year bond yield offers a real rate of
1.7%. This argument is flawed as rising real rates is a reason to buy gold, not sell
it. After pumping in trillions of dollar into system, the Fed has not yet achieved
its inflation target and any sign of deflation would ring alarm bells, encouraging
them to inject further more trillion dollars into the system. And, if at all there is
a rise in inflation, it won’t stop at a targeted 2.5% given the massive liquidity
infusion over these years. And, if history is of any guide, it is hard to believe that
there will be any successful exit from quantitative easing.
We thus favors a structurally bullish view on gold. With a nonstop rise in Dow
Jones Index, clearly American equities are over heated and in euphoric phase.
Short Equities, Long Gold could be the theme for this year.
Oil & Gas
The WTI crude dropped to the lowest level in four months as US stockpiles
increased and a dollar strength further capping any potential upside. The crude
output by OPEC increased to an average 30.621 million barrels and with no fresh
triggers to keep oil prices boiling amid ample supplies and increasing inventories,
crude oil prices are likely to be stay weaker.
Real Estate Outlook
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
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.
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
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.
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
Real Estate Outlook
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.
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.
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
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
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