Economic Update 4
Equity Outlook 8
Debt Outlook 13
Real Estate Outlook 16
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 18”
If May marked the beginning of what most experts called a secular bull
run, June was a month of the reality check that there are no one-way
streets. The enthusiasm about the new government continued through
the month. However, several concerns emerged on domestic and global
fronts. On the balance, the diagnostic is still positive. In the short term
though, several challenges remain.
Weak monsoon was widely expected. Actual rainfall (or the lack of it) in
June partially confirmed the expectation. July to September might have
their own deviations from average. It would be foolhardy to predict if
the overall monsoon will be well below the long term average or at par
with it. Nevertheless, the government seems to have got into action to
target food price stability in case the monsoon shortfall turns out to be
indeed significant. We will have to wait and watch how the food prices
react to the expectation of weak monsoon (as of now) and the actual
outcome (by September) and the initiatives of the government. What is
likely though is that RBI will not alter its present stance of caution on
monetary policy. Lower interest rates will have to wait for later – maybe
The progress on governance itself has been encouraging. While it is too
early to judge, the intent and activity level both paint a positive picture.
Some tough decisions on railway fare and fuel prices have been a good
sign. A lot of perception hinges on the Union Budget to be presented on
the 10th of July. However, this might not be necessarily a big-bang
reform budget – albeit a few major reforms may be announced.
Contrary to popular belief, the budgetary exercise does not in itself
require major reforms announcements to be a part of it. Budget is
simply an exercise of drawing up the overall income and expense
account of the government. Some policy measures are definitely a part
of this exercise. However, a lot of potential reforms have only limited
implications for immediate budgetary matters (for instance, labor
market reforms). Such reforms are probably best done through the
normal course of policy making.
Globally, the flare-up in Iraq with the potential disintegration of that
state and establishment of the Caliphate driven by ISIS has long term
implications for oil prices (and of course the geopolitics of the Middle
East!). Iraq is the second largest producer of crude oil after Saudi Arabia.
While majority of its oil is still in the southern (government-controlled)
parts of Iraq, one major oil-well is in northern Iraq. Also while the Iraqi
government of Nuri-Al-Maliki might continue to control the southern oil
producing region, it would constantly face the concerns of terrorism and
sabotage by ISIS. The only factor controlling the oil price for now despite
such worries is the increasing production of shale oil by US. In the recent
years the increase in US shale oil production has nearly balanced out the
entire disruption on account of Libyan civil war, Syrian civil war and the
turmoil in Iraq. Hopefully this would continue and thus limit oil price
spikes in the short term. The long term prognosis for crude oil however
is one of secular increase in prices – pace of increase being the only
The volatility in crude oil has brought some interest back in gold. We still
do not think it is a good idea to increase allocation to gold – especially
since the rupee price of gold varies far more than the dollar price. We
believe that the better diversification for Indian investors is dollar
denominated growth assets such as developed market equities. In times
of moderate turbulence these tend to have the dual benefit of lower
falls than emerging market equities and some benefits from Rupee
depreciation common to these periods.
• US Federal Reserve reduced its monthly bond buying program from $45 bn to $35 bn starting in July.
• Initial jobless claims for US state unemployment benefits rose by 4,000 to 317,000 in the week ended
• IMF cuts US growth outlook for 2014 to 2% from the 2.8% it predicted in April, due to a weak first
Economy Update - Global
• Japan’s unemployment rate hit a 16 year low in May, suggesting that the economy is rebounding. The
jobless rate in the world’s third largest economy fell to 3.5% , the lowest since 1997.
• Japan’s core machine orders spiked 17.6% in April on a yearly basis after surging 16.1% in the previous
• World Bank projects a 5.5% growth for India in 2014-15, 6.3% in 2015-16 and 6.6% in 2016-17.
• China's average home prices fell 0.2% in May for the first time in two years and price weakness spread
to more major cities, adding to signs of cooling in the property market.
• Government clears seven big-ticket investment projects worth Rs 21000 Cr.
• Annual inflation in the Euro zone fell to 0.5% in May from 0.7% in April.
• UK’s retail sales dropped 0.5% in May compared to a downwardly revised gain of 1% in April .
• Euro zone industrial production increased by 1.4% on an annualized basis in April after growing by an
upwardly revised 0.2% in March.
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.
• April ’14 IIP came in at a good 3.4% after registering a negative
growth for two consecutive months. The rebound in the numbers
was led by Manufacturing sector which grew by 2.6% the best
figure since July ‘13.
• Electricity grew nearly 12% on back of higher production and
mining kept it’s head above water at 1.2% versus a contraction of
3.4% in April ‘13. Capital Goods did well with a 15% growth against
a contraction of 0.3% in April ’13.
• The return of industrial growth to positive terrain is noteworthy
and has rekindled the hope of industrial recovery which is critical to
lift the economy.
4.8 4.7 4.6
5.6 GDP Growth
Economic Outlook - Domestic
As on May 2014 Bank credits grew by 13.8% on a Y-o-Y basis.
Aggregate deposits on a Y-o-Y basis grew at 15.3%, vis-a-vis 14%
in April 2014.
RBI met on 3rd June for it’s second bi-monthly policy review and
based on assessment of current and evolving macro economic
situation decided to keep the repo rate and CRR unchanged at
8% and 4% respectively. It decided to reduce the Statutory
Liquidity Ratio(SLR) by 50 bps from 23% to 22.5% , the RBI will
also reduce the liquidity provided under export credit finance
facility from 50% to 32% with immediate effect.
The Reserve Bank Governor also said that “the Central Bank is
committed to keeping the economy on a disinflationary course
and if the economy stays the course further policy tightening
will not be warranted.”
Inflation as measured by WPI for May ’14 came in at 6.01%- a 4
month high after witnessing easing since Dec’13 and touching a
9 month low of 4.68% in Feb’14. The main reason for the spurt
in inflation was food inflation which grew to 9.50% in May ‘14
as compared to 8.64% in the previous month. Prices of fruits
also saw a sharp increase from 16.46% in April ‘14 to 19.40% in
Inflation in Fuel and Power rose to 10.53% in May ‘14 from
8.93% a month earlier, manufacturing grew by a modest 3.55%
in May ‘14 against 3.15% in the month ago period.
Headline CPI for May ’14 came in at 8.28% as against 8.60% in
Apr ’14. The spike came in due to food articles like fruits,
vegetables, sugar and pulses.
Growth in credit & deposits of SCBs
* End of period figures
20.0% Bank Credit Aggregate Deposits
As a strong reform oriented government takes shape in New Delhi, Indian equity markets have continued to rally post the
election outcome. Markets have rallied almost 40% from the lows in August 2013.
Despite so many negatives plaguing the economy, corrective measures by the new government can quickly revive growth.
BSE SENSEX one year Returns
There are a number of measures that we expect the new government to take in 2014 to accelerate the economy – Goods
and Services Tax, Direct cash transfer of subsidies and boost to manufacturing sector.
Revival of large stalled projects will give a boost to capital formation activity and restart the investment cycle. We expect that
the new government will identify some large infrastructure projects and concerted push will be given to drive them to
completion. Dedicated Freight corridor between Mumbai and Delhi is one such project.
Environmental clearances, a big road-block for large projects, to be IT enabled thereby cutting lead times and expediting
Several financial sector reforms are expected which will give a boost to financial savings paving the way for larger domestic
participation in equity markets.
The Budget could see some announcements on excise duty realignments for consumer staples and durables space to boost
short term demand.
RBI Governor surprised the market by cutting SLR by 50 bps in the last policy statement. Despite the inflation data getting
comfortable, RBI has decided to hold rates at current levels. Governor believes and we agree that it is important to break the
back of inflation to ensure a sustainable growth trajectory.
The emphasis on core CPI as an inflation metric as compared to WPI is expected to continue. We expect CPI to average
around 8% level for next few months thus ruling out any monetary easing in the first half. However, core CPI should moderate
to 6% which is within the tolerance limit of RBI.
The second half of the year should see interest rates coming off which would be beneficial to interest rate sensitive sectors
like banking, automobiles and infrastructure.
Global Macro Outlook
Continued recovery in US & a stable Euro area are significant positives for Indian equity markets. Global growth outlook
remains supportive of equity investments.
US economy shrank at an annual rate of 1% during the first quarter due to a very harsh winter in some of the more populous
states. However, this de growth was largely due to run downs in inventory levels. We would expect consumer spending to
revive in the next few quarters.
European Central Bank has carried out a fresh monetary stimulus by bringing deposit rates into negative territory. This will
help stabilize European economy.
Japan is showing clear signs of coming out of a five year deflationary trend. Fresh monetary stimulus and labor reforms will
make the recovery stronger.
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 16 billion dollars.
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 would expect earnings growth to accelerate once investment activity is revived and average at 25% for the next six years.
We arrive at a year end Sensex target of 29,300 based on 15 times FY16 earnings, we 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.
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.
Cement industry is facing over capacity issues and lack luster demand. With regulator taking a
strong view against pricing discipline, the profits of the sector are expected to stay muted.
•The yields on 10 Yr G sec closed at 8.70% which is 4 bps higher than the last months close of 8.66%.
• The RBI infused Rs 61,000 Cr into the banking system through a 14 day term repo auction to prop up
•RBI announced the cut-off price of 91-Days Treasury Bills at Rs. 97.91 (YTM - 8.5619%). The entire
auction was fully subscribed.
•The spread on the 10 year AAA rated corporate bond decreased to 27 bps on 25th June, 2014 from 63 bps (as
on 26th May, 2014).
10-yr G-sec yield
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
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 depreciated against all the four major currencies in
the last month. It saw a depreciation of 2.61% against GBP,2.02%
against USD, 1.99% against Japanese Yen and 1.76% against the EURO.
• The currency depreciated on account of dollar demand by state run
banks on behalf of importers, mainly oil importers. Further, weak
domestic market sentiments exerted downside pressure on the
• Additionally, uncertainty over Iraq turmoil continued the downside
movement in the currency, however, sharp downside in the currency
was prevented due to inflow of foreign funds in equities and debt
markets. Foreign inflows stood around $2.3 billion in equities and $2.9
billion in debt for the month of June and total inflows for the current
year at $9.9 billion and $10.5 billion respectively.
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 May,2014were valued at US $ 27.99 bn which was
12.40% higher than the level of US $24.91 bn during May, 2013.
Imports during May,2014 were valued at US $ 39.23 bn
representing a negative growth of 11.41% over the level of imports
valued at US $ 44.28bn in May, 2013 translating into a trade deficit
of $11.24 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)
USD GBP EURO YEN
Export(%) Import Trade Balance (mn $)
Real Estate Outlook
Asset Classes Tier I Tier II
Sales in the last quarter were slow. Investors and end-users were
postponing the purchase decision at the backdrop of the impending
General elections as well as state level elections in some markets. With
a single party gaining majority at the Centre and the consequent
political stability, apartment sales could be expected to pick up over
the next few quarters.
Developers too have been facing delay in getting approvals on account
of elections. Again, with the new political stability, it is expected that
procuring approvals will be relatively faster and most markets may
witness a lot of new launches.
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 can 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.
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.
However, companies across industries such as IT, consultancy and e-
commerce could begin leasing and buying office space in expectations
of an economic boom under a stable central government.
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.
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 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 in 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.
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
The information and views presented here are prepared by Karvy Capital Ltd. The information contained herein is based on our analysis and upon
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