Advice For The Wise: July, 2013Presentation Transcript
ADVICE for the WISE
Newsletter –JULY 2013
Economic Update 4
Equity Outlook 8
Debt Outlook 11
Index Page No.
Real Estate 15
From the Desk of 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”
Asset prices are driven by a combination of liquidity, sentiment and
economic growth. While economic growth is a primary driver in the long
run, the short term fluctuations are mostly influenced by sentiment and
liquidity. The response of capital markets around the world to the
announcement from the US Federal Reserve regarding ‘tapering’ of
Quantitative Easing (QE) was a testimony to this. While the
announcement came on the back of what is meant to be positive
economic news (pick up in US GDP growth) the primary thing on the
minds of investors was the reduction in liquidity that QE’s removal
implies. Emerging markets equity markets and currencies came down
virtually without exception. While Indian Rupee was the second worst
performer, other emerging market currencies were not far behind.
The slide of Rupee and the equity market has come on the back of the
reversal of FII money flows. Look a little deeper and it becomes clear
that the FII outflows are dominated by debt rather than equities. Much
of the fall of the Rupee is driven by exit from Indian debt by FIIs rather
than exit from Indian equities. However, this slide is making investors
nervous and adding fuel to the equity market fire. The divestments of
FIIs from equities are relatively modest in comparison.
The unfortunate development for net importer like India is that a sliding
Rupee contributes to inflation. Also the relative price inelasticity of
imports such as crude oil means the slide of Rupee means even greater
current account deficit at least in the short term. RBI’s and Finance
Ministry’s crackdown on gold imports has reduced those a little in terms
of volume. However crude oil imports will have no such respite. The
combination of these factors does not auger too well for further
monetary easing by RBI. That could further delay a pick-up in
investments and GDP growth.
For now, the corporate debt and absolute return strategies remain
primary investment avenues. After the long term debt story plays out
through the falling yields of long term government securities, the next
set of yields to fall are typically high quality corporate papers. For good
capital appreciation from the falling yields (in effect spreads over G-
Secs), medium to long term AAA and AA rated corporate bonds are a
good idea. These can be invested into directly or through credit-focused
debt funds. We expect these funds and bonds to deliver a fairly high
yield for certain and a moderate capital appreciation in the most likely
The other alternative during turbulent times is absolute returns
strategies. These are generally designed to benefit from moderate levels
of volatility and expected to produce stable returns irrespective of
equity market directions. Hence they are a good addition to a portfolio
during uncertain times such as now.
As on 28th
BSE Sensex 19396 (1.8%) 11.3%
S&P Nifty 5842 (2.4%) 10.7%
S&P 500 1606 (1.5%) 17.9%
Nikkei 225 13677 (0.7%) 51.9%
10-yr G-Sec Yield 7.49% (3 Bps) (89 Bps)
Call Markets 7.27% (0 Bps) (81 Bps)
Fixed Deposit* 8.75% 0 Bps (25 bps)
RICI Index 3455 (1.7%) 0.4%
Gold (`/10gm) 25180 (7.4%) (14.9%)
Crude Oil ($/bbl)
(As on 25th June)
101.51 0.3% 14.5%
Rupee/Dollar 59.7 (5.22%) (5.68%)
Yen/Dollar 98.92 2.1% (19.6%)
Economic Update - Snapshot of
10 yr Gsec
• 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)
Nifty S&P 500 Nikkei 225 Sensex
• The yield on 10-year US Treasury bonds rose to 2.47%, the highest since August 2011.
• Employers added 175,000 new jobs to their payrolls last month, with the unemployment rate ticking up a
tenth of a percentage point to 7.6 percent.
• Standard & Poor's on Monday removed the near-term threat of another credit rating downgrade for the U.S.
credit by revising its outlook to stable from negative, citing an improved economic and fiscal outlook.
• EU unemployment now stands at 11%, the highest since records began, with more than 19 million people
unemployed, a particular problem, especially in Spain, Greece, Italy, Portugal and Cyprus.
• The ECB held interest rates unchanged at a record low 0.5% in June, but said it had discussed a raft of
options it could deploy should the economy need more stimulus.
• Britain's banks will have to raise 13 billion pounds of extra capital and meet a new cap on lending ahead of
international peers as the Bank of England seeks to curb risk in the financial sector.
• Japan's core-core CPI, which excludes both food and energy, fell 0.4% in the year to May, following a 0.6
percent annual decline in April, the government data showed.
• Wage earners' household spending fell 1.6 percent in May from a year earlier, sharply below the median
estimate for a 1.4 percent increase .
• Industrial output rose by a better-than-expected 2.0 percent in May from April and the outlook is for
slight net growth in coming months.
• The weighted average for the benchmark seven-day repo rate of China fell 61 basis points to 6.13% in
early trade, still above its usual range of 3-4%. The overnight rate fell by 52 basis points to 4.92%.
• India's March quarter current account deficit was $18.1 billion, or 3.6% of GDP, lower than expected and
below the $21.7 billion deficit a year earlier, the Reserve Bank of India said on Thursday.
Economy Update - Global
Economy Outlook - Domestic
• Asia's third largest economy grew an expected 4.8% from a
year earlier in the January-March quarter, slightly faster than
an upwardly revised 4.7% growth in the previous three months,
which was the lowest in fifteen quarters.
• India's economic growth was at 6.2% for the 2011-12 fiscal. It
had grown by 5.4%, 5.2% and 4.7% in the first, second and third
quarters, respectively, of 2012-13. GDP growth remained sub
5.0% for the consecutive second quarter, at 4.8% taking the full
year’s GDP to 5.0%
• Gross fixed capital formation, as expected, has fallen
substantially mainly due to tightening of government spending
in infrastructure space as well deterioration in business
confidence in the first three quarters of fiscal.
• The manufacturing sector of the economy grew at 2.6%. Public
spending growth slowed to an annual 0.6% during the quarter
from 2.2% a quarter ago
• Apr’13 IIP slowed down to 2.0% YoY as compared to 3.4% in Mar’13
and 1.3% decline in Apr’12. Nearly 50% of the headline growth was
contributed by stellar growth in consumer non durables sector
which grew by 12.3% YoY as compared to 2.3% in the previous
year. Sharp acceleration in Apparels industry in last two months
contributed in pushing the growth in this sector.
• Mar’13 IIP is revised upwards by 88bps to 3.4% YoY primarily driven
by 5.5% upward revision in Coke refined and petroleum products
which now stand at 13.7%. Jan’13 IIP has been revised upwards by
11bps to (2.5)% also due to upward revision in Coke and refined
petroleum products. Average IIP for FY13 is now revised to 1.1%
from earlier estimate of 1.0%
• Electricity, mining drag down IIP growth. Electricity production
grew merely 0.7% in Apr'13, following 3.5% growth in Mar'13.
Mining production continued to contract for the seventh
consecutive month in Apr'13 (-3%).
Jun 12 Jul 12 Aug
Jan 13 Feb
FY11(Q4) FY12(Q1) FY12(Q2) FY12(Q3) FY12(Q4) FY13(Q1) FY13(Q2) FY13(Q3) FY13(Q4)
Economic Outlook - Domestic
As on June 2013 Bank credits grew by 13% on a Y-o-Y basis which
is about 3.5% lower than the growth witnessed in June 2012.
Aggregate deposits on a Y-o-Y basis grew at 11.8%, viz-a viz a
growth of 13.5% in May 2012.
RBI retained its key operative rate, Repo rate at 7.25%,
consequently Reserve Repo rate and MSF stands at 6.25%and
8.25% respectively. While CRR was kept unchanged at 4.0% and
liquidity is expected to be managed through the route of OMO’s.
RBI has clearly indicated that each policy stance will be viewed
in light of emerging inflationary risks and CAD position; growth
(in line with earlier policies) has taken a back seat. Sharp rupee
depreciation due to reversal of FII debt inflows on expectations
of trimming of Fed stimulus policy has raised huge concerns on
financing of CAD.
WPI tapered down to 4.70% YoY %, primarily driven by
deceleration in fuel prices and slowdown in core inflation. WPI for
the month of Mar’13 has been revised downwards by 29bps to
5.65% YoY driven by 9.84% downward revision in coal prices &
12.64% revision in LPG prices. Average inflation in FY13 now
stands adjusted at 7.36% YoY as compared to 7.23% in FY12
Total food inflation augmented to 7.64% YoY as compared to
6.27% in Apr’13 due to spike in vegetable prices. Market driven
fuel inflation for May’13 has declined by 6.50% YoY, second
consecutive decline in prices. As indicated by decline in output
prices in May’13 PMI release, Core inflation slowed to 2.35% from
2.74% in Apr’13 and 5.20% in May’12
Divergence in CPI and WPI reading has widened considerably over
400bps in last two months. Divergence in May’13 was 461 bps
with CPI at 9.31% and WPI at 4.70%. We expect the gap to narrow
down eventually. Gap has widened due to augmenting of food
prices and higher weight of food prices in CPI as compared to WPI .
Growth in credit & deposits of SCBs
* End of period figures
19.0% Bank Credit Aggregate Deposits
Wholesale Price Index
The month of June saw fresh volatility due to US Federal Reserve’s comments on tapering down of bond buying programme. The global asset markets
reacted negatively with Gold, equity and emerging market currencies correcting against the dollar.
Ben Bernanke, US Federal Reserve (FED) Chairman, announced the exit plan for the Quantitative easing programme which began last year. He believes
that the downside risks to US growth have receded which should lower the need for quantitative easing. US economic growth forecast for CY13 has
been raised to 3.25% from 3.15% on the back of strong growth in last two quarters. Unemployment rate is also expected to improve through this year.
On the back of improving macroeconomics, Fed aims to start reducing the quantum of bond buying towards the end of this year with a complete stop
expected by middle of next year. But the timing of the "tapering" could change and it is contingent on incoming macroeconomic data. US interest rates
are expected to rise only in 2015 once unemployment rate falls below 6.5%. The markets have ignored the improvement in macro situations and
focused on tapering of QE which will lead to reduction in liquidity in asset markets. We believe that markets have over-reacted to this announcement
and will stabilize in the next few weeks.
RBI has kept rates unchanged in the June review despite WPI inflation coming in at a 40 month low.
RBI has acknowledged that ‘easing commodity prices at the global level and weaker pricing power of corporates at the domestic level are having a
softening influence.’ However, RBI is worried about the elevated food inflation as well as suppressed inflation in administered diesel prices and
minimum support prices (MSP) for food crops which can lead to uptick in WPI inflation in the months to come. We believe that the impacts of these
would be marginal. The downward trajectory of WPI inflation has paved the way for further monetary easing by RBI. We expect further 50-75bps cut in
repo rates this fiscal as inflation continues to cool-off.
Rupee has depreciated significantly in the last two months. With India being vulnerable to debt outflows and a large CAD, we believe that the
Government may act in a stronger way to stem the depreciation. We believe that the recent cool-off in gold and crude oil will also help Current account
situation stabilize and ease off the pressure on rupee. This cool off in crude oil prices and continuing decontrol of diesel prices will also be
incrementally positive for the fiscal account.
The first quarter results of Indian companies for FY14 will start this month. We expect Private sector banks, Pharma, IT & consumer staples continue to
do well. We believe the worst of the corporate earnings is now behind us and we expect a 12% growth in earnings this fiscal. We expect a cyclical
recovery in economy in second half of this year which will be positive for equity market. Investors should use the current dip in markets as a buying
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.
The reversal of the interest rate cycle will assist in managing asset quality better and would lead to
increase in credit growth. However, we like the private sector more than public sector due to
better management quality and higher balance sheet discipline
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 regulatory hurdles and competitive pressures seem to be reducing. Incumbents have started
to increase tariffs slowly and we believe that consolidation will happen sooner than expected.
Demand seems to be coming back in Europe. US volume growth has also remained resilient. With
pricing already bottomed out, we have turned constructive on the space.
Sector Stance Remarks
Raw material prices have started coming down which would boost margins. Auto loans are also
getting cheaper. We are more bullish on SUV’s and agricultural vehicles segment due to lesser
competition and higher pricing power.
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.
Power Utilities Neutral
We like the regulated return charteristic of this space. This space provides steady growth in
earnings and decent return on capital.
Commodity prices have corrected significantly over the last few months due to concerns about
growth in China and developed parts of the world.
Cement industry is facing over capacity issues and lackluster demand. With regulator taking a
strong view against pricing discipline, the profits of the sector are expected to stay muted.
The significant slowdown in order inflow activity combined with high interest rates has hurt the
sector. It will take some time before cap-ex activity revives
• The Gsec market started the last week of June on a bearish note after the Fed announcement of tapering of the QE3 previous
week. The G-Sec yields moved higher tracking hardening in US Treasury yields, weakening rupee and tightening of money
markets in China.
• The benchmark 10-year security 7.16% GOI 2023 touched a high of 7.58% on Wednesday (26th June). However, later lower CAD
numbers for FY13 supported yields. On Friday, the G-Sec market improved tracking softening in US Treasury yields, as the New
York Fed President William Dudley reportedly stated that the quantitative easing programme could be expanded if
macroeconomic indicators did not improve as expected.
• The spread on a 10 year AAA rated corporate bond rose to 108 Bps on 28th June 2013 from 70 Bps (as on 31st May 2013). AAA
Rated bond yields increased by 38 bps to 8.53% as compared to the yields a month earlier at 8.15%
10-yr G-sec yieldYield curve
Indian long term debt is likely to see capital appreciation owing to the expected
monetary easing. With the fourth policy rate cut that happened in March 2013,
with a 25 Bps cut in Repo rate and no CRR cut, 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. 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.
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 the fourth policy rate cut that happened in May 2013, with a 25 Bps cut
in Repo rate and no CRR along with lesser probability of future cuts in the
policy rates in the coming quarter, but as there is influence of global factors in
the market, a lot of uncertainty is coupled with it, hence, we would
recommend 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%–9.5%) providing interesting investment opportunities.
• INR depreciated against all four major currencies.
• The rupee touched an all-time low of 60.73 a dollar on Tuesday
(25th June), having lost more than 10% since May this year, on fund
• Foreign investors have pulled out over $5 billion from Indian debt
this month. This fund ouflow was triggered by Fed chairman Ben
Bernanke's comments that the Fed may go slow on bond
purchases or its quantitative easing programme, which has so far
fuelled the rush of capital flows into riskier assets from emerging
• The impact of the restrictions on gold import and steps taken by
the government to tackle policy issues in the power sector will all
help the sentiment in favour of a stronger rupee.
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 April, 2013 were valued at US $ 24.16 bn which
was 1.68% higher than the level of US $ 23.76 bn during April,
2012. Imports during April, 2013 were valued at US $ 41.95 Bn
representing a growth of 10.96% over the level of imports valued
at US $ 37.80 Bn in April 2012 translating into a trade deficit of
FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1) FY 13 (Q2) FY 13 (Q3)
Capital Account Balance
USD GBP EURO YEN
Export(%) Import Trade Balance (mn $)
Oil & Gas
While the expectation of steadier global growth is a good news for
the oil counter given the excess liquidity available, the growth
concerns in China will cap any upside. In the energy sufficient USA,
there is a structural shift towards Shale Gas production amid crude
oil inventories ruling at 30 year high. With no supply disruption in
sight amid feeble global growth, we expect lower energy prices.
Having risen consecutively for eleven years, dollar-gold price performance
is one of the best among other asset classes, generating an annualized
return of 18%. The global financial system was flood with central banks
liquidity that had risen risk asset in the year 2012 and this is expected to
further lift risk asset prices in the year 2013. Given this backdrop, one
could expect a decent profit booking on the precious metal counter as the
money flow shall now be diverted to equities that was under owned since
2008. We also expect liquidity to dry up significantly around end of 1QCY
following the ECB’s LTROs amid a sharp pull back in dollar index -following
the Fed’s signal to wind down the stimulus program this year - could
rattle global commodity prices. The controlled measures by the central
bankers to curb gold demand with a prime objective being to shore up
confidence in the monetary and banking system, bullion in all probability
will not be a free market. As bullion derivatives market is far larger than
the size of physical metal, a small trigger is sufficient enough to create a
big impact. Domestically, it now seems that gold has formed an
intermediate top and one could see considerable price pull back going
ahead in the year 2013.
Real Estate Outlook
Asset Classes Tier I Tier II
Due to a flurry of new launches in the first quarter of the year, most
markets witnessed an increase in the unsold inventory levels even with
relatively steady sales. Consequently, last quarter saw lesser new
With reduced new launches and steady absorption, the demand supply
gap is expected to reduce over the coming months.
Mid-income residential segment with Rs. 4,000 – 6,000 per sq. ft.
entry pricing with good developers in Pune, Bangalore, NCR and
Mumbai suburbs cane be expected to continue generating good
percentage returns with relatively lower risk.
Demand in Tier II cities is largely driven by the trend
towards nuclear families, increasing disposable
income, rising aspiration to own quality products and
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
and Cochin are expected to perform well.
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
Specific pre-leased properties with good tenant profile and larger lock-
in periods continue to be good investment opportunities over a long-
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.
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
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
Asset Classes Tier I Tier II
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.
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.
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.
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