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”
Continued bleak picture on the domestic economic growth coupled with
falling inflation numbers led most debt market investors to assume a fairly
fast monetary loosening by RBI in the months to come. This has led to a
sharp fall in 10-year G-Sec yields in recent weeks. With this rally, we
believe that the long term debt tactical overweight allocation theme is
starting to conclude. Most investors have realized double digit returns in
long term debt in last 1-2 years. From here on, the returns expectations
from long term debt are not as strong. We would expect single digit
returns from now on. Hence we are recommending partial exit from the
tactical allocation to long term debt – in effect booking some profits. As
the expected rate cuts do happen over next few months, we will
recommend taking out the remaining tactical allocation to long term debt
as well. We continue to look at long term debt as an important part of the
portfolio for yield accrual still. It is only the rate-cut driven capital
appreciation that we are expecting to come down.
An additional factor guiding our recommendation is the likelihood of
increased volatility in long term yields – as debt market participants try to
second guess the speed and extent of monetary policy loosening. It is
quite possible that RBI temporarily disappoints the majority of the debt
market investors from time to time – thus leading to occasional spurts in
the yields. The risk to reward ratio of long term debt has turned higher
than what it was till recently.
Our outlook on economic growth continues to remain cautious. With
order book growth of infrastructure companies still below expectations,
the investment climate is far from healthy. Unless the government
expedites some public or PPP-driven infrastructure spending, investment
activity will remain subdued. A few large-ticket government-led
infrastructure projects are looking set for revival (e.g. the Mumbai-Delhi
corridor). Hopefully there is more to come.
Global investors’ love for and domestic investors’ aversion to Indian
equities continues. The FII inflows into equities continued while domestic
exits nearly balanced them through last few weeks. We are witnessing a
fatigue for equity markets amongst several investors that have stayed
invested for last few years and have lost patience to wait longer for the
“long term returns”. By their very nature, equity market returns are quite
volatile from one year to another. It is quite likely that a large proportion
of the 5-year returns are made in a single year or two one year periods.
The attitude to time the markets for an exit for an entry at a lower point
later is likely to be the victim of missing out on such make-or-break years.
We recommend staying invested with the advice that next one year can
be bumpy but next three are quite likely to be lucrative.
Our bearish outlook on gold continues. We believe that the market price
of gold in the recent years has been a product of multi-year trend-
following speculation, demand from newly rich Asian investors and the
general fiat-money-phobia of select developed market investors. As the
third of these factors starts to reduce in strength (western demand) and
thus put strain on the first factor as well (speculative long positions),
support for gold price will come primarily from Asian retail investors.
Considering the huge quantities of gold-as-investment holdings (through
financial instruments) looking to get out, the gold-as-consumption-cum-
investment demand is unlikely to be able to prop the price up.
As on 31st
BSE Sensex 19760 1.3% 21.8%
S&P Nifty 5986 0.9% 21.6%
S&P 500 1631 2.1% 24.5%
Nikkei 225 13775 (0.6%) 61.2%
10-yr G-Sec Yield 7.45% (28 Bps) (93 bps)
Call Markets 7.18% (37 Bps) (91 Bps)
Fixed Deposit* 8.75% 0 Bps (50 bps)
RICI Index 3513 (1.7%) 4.7%
Gold (`/10gm) 27197 0.2% (6.8%)
Crude Oil ($/bbl)
(As on 29th May)
102.1 (0.7%) (1.6%)
Rupee/Dollar 56.58 (4.17%) (0.28%)
Yen/Dollar 101.01 (3.1%) (21.5%)
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)
195 Sensex Nifty S&P 500 Nikkei 225
• Us consumer confidence index jumped to 76.2in May from an upwardly revised 69.0i n April
• Us initial jobless claims climbed to 354,000in the week ended May 25th, an increase of 10,000 from the
previous week's revised figure of 344,000.
• US gross domestic product(GDP) increased at an annual rate of 2.4% in the first quarter compared to the
previously reported 2.5% growth.
• Euro-zone unemployment rate rose to 12.2% in April from 12.1% a month ago
• Euro-zone annual inflation rose to 1.4% from 1.2% in April
• Euro-zone consumer confidence indicator came in at -21.9 in May, up from April's final score of -22.3.
• Euro zone composite output index, which measures the performance of the both manufacturing and
service sectors, rose to a three-month high of 47.7 in May from 46.9 in April.
Economy Update - Global
• Japan’s unemployment rate came in at 4.1% in April, unchanged from the previous month.
• Japan’s core consumer price index fell 0.4% in April from a year earlier, compared with the 0.5% decline
• Japan’s industrial production rose 1.7% in April from the previous month, faster than the 0.9% rise in
March; on an annualized basis it fell 2.3% in April from a year earlier
• Japan’s Markit/ JMMA Japan Manufacturing Purchasing Managers’ Index rose to a seasonally adjusted
51.5 in May, from 51.1 in April.
• IMF lowers China growth outlook and calls for decisive reforms; says the economy will grow 7.75% in
2013 and 2014 as compared with earlier projection of 8% in 2013 and 8.2% in 2012.
• India's fiscal deficit narrowed to Rs 4.899 lakh cr rupees or 4.9% of GDP in the year ended March, lower
than the revised Budget estimate of Rs 5.209 lakh cr or 5.2% of GDP.
Economy Outlook - Domestic
• Asia's third largest economy grew an expected 4.8 percent from
a year earlier in the January-March quarter, slightly faster than
an upwardly revised 4.7 percent growth in the previous three
months, which was the lowest in fifteen quarters.
• India's economic growth was at 6.2 per cent for the 2011-12
fiscal. It had grown by 5.4 per cent, 5.2 per cent and 4.7 per
cent 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% (our estimate of 4.6%) taking the full
year’s GDP to 5.0%
• The manufacturing sector of the economy grew at 2.6%. Public
spending growth slowed to an annual 0.6 percent during the
quarter from 2.2 percent a quarter ago
• IIP, in line with our expectations, rose to 2.5% YoY for the month of
March as compared 2.8% decline in Mar’12. Feb’13 IIP is revised
downwards by 11bps to 0.5% YoY, While Dec’12 IIP has been
revised downwards by 6bps to (0.6)%
• The manufacturing sector, which accounts for over 75% of the IIP,
grew by 3.2% in March as compared to a decline of 3.6% in the
same month last year
• Sharp acceleration was witnessed in capital goods production for
the month of March. This is mainly due to lower base in last March,
wherein the capital goods sector declined sharply by 20.1% YoY.
• Industrial output has grown by 1.0% in 2012-13, down from 2.9% in
2011-12; manufacturing output, with nearly three quarter weight in
the IIP, has grown by only 1.2% during the fiscal.
Economic Outlook - Domestic
As on May 2013 Bank credits grew by 14.7% on a Y-o-Y basis
which is about 3% lower than the growth witnessed in May
2012. Aggregate deposits on a Y-o-Y basis grew at 13.5%, viz-a
viz a growth of 13.8% in May 2012.
In keeping with the guidance and an increasingly benign stance,
RBI reduced the repo rate by 25 bps to 7.25% in its monetary
policy as of 3rd May 2013. While doing so, it also emphasized
that supporting growth is going to be a priority in days ahead. It
kept the others rates.
The key triggers favoring the rate cut seem to be lower
trajectory of WPI and core inflation, lower GDP data than
anticipated and of course the government’s intent to rein in the
WPI inflation hit a 41-month low of 4.89 per cent in April on the
back of meaningful decline across its main product groups,
especially food and fuel groups. core inflation (non-food
manufactured products) dipped to 39-month low of 2.80 per cent
in April. The RBI closely tracks core inflation for devising its
monetary policy and is thus likely to take a favorable view of this
WPI for the month of Feb’13 has been revised upwards sharply by
41 bps to 7.23% YoY. Divergence in CPI and WPI reading has
widened considerably over 400bps in last two months. Divergence
in Feb’13 reading was above 400bps, however after revision in the
Feb’13 numbers, the gap has narrowed down.
CPI for April has come in below 10.0 per cent due to the lagged
impact of fiscal tightening by the government and slower pace of
growth in rural wages. CPI drops by nearly 1.0% point to 9.39% YoY
from 10.39% in Mar’13; this is mainly due to favourable base and
sharp slowdown in food prices for the month of April.
Growth in credit & deposits of SCBs
* End of period figures
19.0% Bank Credit Aggregate Deposits
Wholesale Price Index
The month of May saw FII inflows continuing into India with fresh buying worth 3.5 billion dollars taking the YTD number past 15 billion.
Macroeconomic indicators continue to improve with WPI inflation coming in at a 40 month low. 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.
The cool off in crude oil prices and continuing decontrol of diesel prices will be incrementally positive for the fiscal account. The fiscal deficit
for FY13 has come in at 4.9% which shows that significant fiscal consolidation was achieved last fiscal. The government has continued with
politically difficult reform measures like monthly hike in diesel prices. If price hikes continue for auto fuels, it will lead to significant easing of
pressure on fiscal deficit front. We expect deficit for FY14 to be closer to 5%. RBI has taken cognizance of these fiscal consolidation measures
and carried out monetary easing in the last few reviews. We expect another 25bps cut in repo rates on 17th June, when RBi meets for mid-
Indian rupee has been under significant pressure last month due to strength in US dollar. Dollar moved about against most emerging market
currencies. We believe that as gold prices cool-off, Current account situation will stabilize and ease off the pressure on rupee. With US
economy bouncing back and improvement in unemployment number, Global situation remains benign and conducive to equity markets in
The fourth quarter results of Indian companies have been on expected lines. Private sector banks, Pharma & 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 continue to buy at every
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 lack-lustre 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 capex activity revives
• G-Sec yields harden during the last week of the month on the policy makers concern regarding inflation and Current account
deficit. The new benchmark 10-year security 7.16% GOI 2023 closed the week at 7.24% vs. previous close of 7.11%.
• In G-sec auction, RBI auctioned G-sec (Rs. 15000cr) in following G-sec- 7.16% GS 2023 (Rs. 6000cr), 8.97% GS 2030 (Rs.3000cr),
8.83% GS 2041 (Rs. 3000cr) and new 6 year GS 2019 (Rs. 3000cr) with cut-off of 7.28%, 7.50%, 7.54% and 7.28% respectively.
• The spread on a 10 year AAA rated corporate bond reduced to 70 Bps on 31st May 2013 from 79 Bps (as on 30th April 2013). AAA
Rated bond yields dipped by 37 bps to 8.15% as compared to the yields a month earlier at 8.52%
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. It saw a
depreciation of 4% against USD and 3.7% against Euro. Rupee has
depreciated against dollar since the beginning of the calendar year
• The rupee has been vacillating in a range between 53 and 57 since
the start of this calendar year. The Indian Rupee exchange rate for
May, 2013 averaged 55.00 INR to USD & that is 62 basis points
higher than the April, 2013 rate of 54.38
• Volatility as last year is expected to continue as the rupee would
track cues from the domestic markets as well as global shores. If
US economy recovers, the dollar will rally, putting the rupee under
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
USD GBP EURO YEN
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
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
A lot of new supply has been seen in the Tier I markets across all price
segments, especially in NCR-Delhi and Mumbai, owing to faster approvals and
expectations of a sales recovery due to the reduction in the home loan
While some of the new launches have selectively seen a good response,
overall sales have still been slow and prices continued to be stagnant in most
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
are expected to see good percentage returns with relatively low risk.
Implications of Budget 2013: The additional one-time tax exemption of Rs.
1,00,000 for home loans below Rs. 25 Lacs is expected to give a slight push in
the affordable housing segment. TDS of 1% on all properties above Rs. 50 lacs
after May 2013 and increase in service tax from 3.09% to 3.71% for flats above
2,000 sq. ft. in size or Rs. 1 Cr. in value may act as dampeners for sale of mid
to high end residential space.
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.
Prices for the commercial asset class continue to be dampened due to the
historic oversupply. In terms of absorption, Bangalore, Hyderabad and Pune
markets are doing better than the national average.
Rentals in commercial asset class are seen to be rising slowly but they are still
below the peal values achieved in the past. In relative terms, Bangalore
market has outperformed other markets owing primarily to the demand from
the IT industry.
Specific pre-leased properties with good tenant profile and larger lock-in
periods continue to be good investment opportunities over a long-term
Relatively low unsold inventory and smaller unit sizes have
led to stable lease rentals in Tier II cities. Not much
movement in the capital values has been seen in the Tier II
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
In HY2 2012, Government approved 51% foreign
ownership in multi-brand retail and 100% in single-brand
retail. While this move is expected to infuse new
enthusiasm in the sector, it will take a gestation period of
at least an year for this to translate into actual off-take of
space. In fact, completion of a number of malls has been
delayed to defer the construction costs and capitalize on
the expected future demand from FDI.
Currently, unsold inventory levels continue to be high
levels and lease rentals stagnant.
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
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 in Tier II and III cities along upcoming / established
growth corridors have seen good percentage appreciation
due to low investment base in such areas.
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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