From the Desk of CIO
The global investment climate became moderately positive in
gainst the backdrop of deteriorating macro scenario, the
February. In particular the outlook on India improved
quarterly results of the companies surprised positively. It
considerably. This was less to do with the improvement in
remains to be seen if this is the beginning of a long awaited
Indian macro fundamentals and more to do with the
turnaround or a short term reaction to productivity
deterioration of those of other emerging markets. Risks of
improvement measures undertaken by most companies.
investing in India, for a change, it seems, we're lesser of all
Going into March, the pre-election rally in equities might
build on the back of expectations of a pro-reforms
The budget was presented in the parliament with very little
government after the elections. However, it is likely to be
to react to. Presented by a government which is increasingly
highly prone to the results of the elections. Any significant
getting certain about not returning to power, the budget did
changes to asset allocation hence should ideally await the
very little other than reduce excise duties for cars. The fiscal
deficit for the year seems partially 'managed' with financial
jugglery. The target for next year seems overambitious. But
considering the likely change of guard at the centre, this
target has limited relevance.
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Economic Update - Snapshot of
S & P BSE Sensex
10 yr Gsec
10-yr G-Sec Yield
Crude Oil ($/bbl)
(As on 24th February)
• 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
• U.S. manufacturing activity slowed sharply in January on the back of the biggest drop in new orders in 33
• The U.S. unemployment rate fell to 6.6%, its lowest level in last 5 years .
• The U.S. economy is expected to grow at a rate of 2.8% for all of 2014 versus a previous estimate of
• Greece's primary budget surplus which has come in at over 1.5 billion euros ($2.1 billion), has exceeded
expectations and will allow the government to boost social spending on austerity-hit citizens.
• The 9.5 trillion euro economy contracted 0.4% overall in 2013.
• France Markit’s Purchasing Managers Index fell in February to 47.6 from 48.9 in January drifting further
away from the 50 point threshold.
• Japan’s GDP data showed that private consumption grew weaker than expected 0.5% in the fourth
quarter of last year.
• Japanese companies increased their spending on plant & equipment by 4% in Oct-Dec quarter on back of
gradual pick up in business and earnings.
• Japan's public pension’s fund- the world’s largest saw assets rise to record $1.26 trillion.
• IMF projects India’s FY 14 GDP growth @ 4.6%.
• India’s IIP shrank 0.6% in December,it’s third contraction in a row.
• China’s Flash Markit/HSBC Purchasing Manager’s Index fell to a seventh month low of 48.3 in February
from January’s reading of 49.5.
Economy Outlook - Domestic
• Q3FY14 GDP growth slowed down to 4.7% YoY as against
expectations of 4.8% YoY & as compared to 4.8% in the previous
quarter leading to Apr-Dec’13 growth of 4.6%. Strong growth in
Services sector contributed significantly to the growth in the
economy in the third quarter. While manufacturing growth
slumped by 1.9% in Q3FY14 .
• Agriculture sector in Nominal term has recorded a growth of
18.5% YoY while in real terms it has grown by 3.6%. Record high
production in food grains in FY14 is likely to reflect in Agriculture
sector’s growth in the next quarter.
Dec Jan Feb Mar Apr May Jun
12 13 13 13 13 13 13
Jul Aug Sep Oct Nov Dec
13 13 13 13 13 13
• Sharp cut down in government planned expenditure in order to
achieve the fiscal deficit target is likely to further hamper the
investment activity as well as slow down community & social
services spending. This is also likely to show its effect on growth
in the next year.
• Dec’13 IIP decelerated by 0.6%, consecutive third month of
contraction, as compared to 1.3% decline in Nov’13 and 1.6%
de‐growth in Oct’13. Contraction is mainly led by continued slack in
• Nearly 90% of the GDP growth contribution was due to surge in
Services sector performance. Services sector growth sharply
augmented to 5 month high of 7.6% YoY as compared to 6.0% in
the previous quarter & 6.9% in corresponding quarter in last year.
Consumer Durables production.
• Consumption activity as well as investment activity slumped
further in Q3FY14 as compared to the previous quarter.
Manufacturing, mining activity as well as electricity generation
weakened further in this quarter.
• Headline figure for Nov’13 is revised upwards by 74bps to (1.3)%
YoY while Sep’13 is also revised upwards by 73bps primarily driven
by upward revision in Basic metals index.
FY12(Q3) FY12(Q4) FY13(Q1) FY13(Q2) FY13(Q3) FY13(Q4) FY14(Q1) FY14(Q2) FY13(Q3)
Economic Outlook - Domestic
Growth in credit & deposits of SCBs
Sharp correction in food prices led to downtrend in inflation as
the WPI touched 5.05% YoY in Jan’14 after slowing down to
6.16% in Dec’13. WPI Index has been corrected by 143bps in
last two months primarily driven by sharp plunge in vegetables
price index by 51.9%.
There has been no revision in headline WPI for Nov’13;
however, the prices of petrochemical building blocks and gold
were revised upwards by 6.14% and 3.61%, respectively. The
average WPI for Apr‐Jan’14 remains elevated at 6.04% YoY,
compared to 7.54% in the year‐ago period. Core inflation edged
up for month in a row to 3.04% YoY in Jan’14, compared to
2.75% in Dec’13.
* End of period figures
On 17th Feb, Finance Minister presented the interim budget –
sans the big bang announcements either on social or
infrastructure framework of the economy. The only positive that
came was in the form of excise duty cut for capital goods &
consumer durables sector from 12% to 10% , from 12% to 8% for
auto sector and for SUV’s from 30% to 24%. In short, the budget
did nothing to improve the investment cycle in the economy or
to increase consumer spending, given the fact that elections are
round the corner this was the best that the Finance Minister
Headline CPI dropped to two year low of 8.79% YoY in Jan’14 as
compared to 9.87% in Dec’13 and 11.16% in Nov’13Rural CPI
remained higher than Urban Inflation as it slowed down to
9.43% YoY as compared to 8.09% at urban level. Core inflation
CPI slightly increased to 8.11% YoY from 8.09% in Dec’13 and
7.97% in Nov’13.
As on Jan 2014 Bank credits grew by 14.7% on a Y-o-Y basis
which is about 1.4% lower than the growth witnessed in Jan
2013. Aggregate deposits on a Y-o-Y basis grew at 15.7%, viz-a
viz a growth of 13.2% in Jan 2013.
Elections play a big role in determining the political economy of a Nation. India is eagerly awaiting the Lok sabha elections expected to take
place in April-May this yea. These elections are being observed very keenly by the equity market participants. 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.
Indian equity markets have tended to move up going into the general elections in the post liberalization era. The average return in the three
and six month period going into the general elections has been 8.5% &17.6% respectively in the last six general elections. We expect this time
to be no different and would expect a bigger rally building up going into the election.
Recently, GDP growth forecast for FY14 has been announced by the CSO. It shows that GDP growth this year is likely to be around 4.9%,
showing no significant upturn over last year’s disappointingly low number of 4.5%. India has been growing far below its potential for last
three years demonstrating that there are significant stresses in the underlying economy.
The new government will have to put economic growth revival at the top of the agenda and take proactive steps to revive the economy. Here
are the five key things we expect the new government to undertake to revive growth:
A New Manufacturing Policy
India is sitting on a demographic time bomb. More than 25 crore people are expected to enter the workforce in the next 10 years. This means on an average, 2.5
crore new jobs need to be created every year to absorb these people into the workforce. The new jobs that are being created in the country are low-productivity
jobs in the unorganized sector, offering low incomes, little protection or benefits. Services jobs are relatively high productivity, but services alone can’t provide
jobs to such a large number of people. India’s challenge is to create the conditions for faster growth of productive jobs outside of agriculture, especially in
organized manufacturing. India’s share of manufacturing as a percentage of GDP is extremely low & there is significant scope to improve this further. It is
impossible to provide so many new jobs without increasing the share of manufacturing in the overall GDP. Indian manufacturing has been hit hard by the recent
slowdown. Manufacturing sector has continued to show negative growth in the last two years
The recent rupee depreciation can make Indian manufacturing competitive globally. With clever resource allocation, India can become a global manufacturing hub
in sectors like Automobiles & auto components, pharmaceutical, textiles, gems & jewellery, leather goods, IT hardware & solar power. The SEZ policy was launched
with this very intention. However, policy muddle & l& acquisition issues brought this to a complete halt. SEZ policy will need to be revived & several incentives will
need to be given to the industry to exp& in these sectors. Land acquisition bill has already been passed by Lok Sabha. Labour laws also need a complete overhaul so
that producers are encouraged to hire more employees. Once labour and land issues are streamlines and cheap finance is available to industry, Indian
manufacturing will blossom and will lay the foundation of a virtuos cycle of productivity gains, high salaries and high growth.
Push for Large Infrastructure Projects
In the last two years, capex cycle almost came to a standstill. The saving investment gap has increased sharply in the last five years.
India will need to reorient the economy from being consumption led to investment led to remove various inefficiencies that plague the Indian economy today.
Good infrastructure goes a long way in increasing economic productivity, creating new employment opportunities and removing supply bottle-necks. Big
infrastructure projects need to be provided quick access to capital, speedy environmental and forest clearances and policy support. Several large projects have
got stalled in last few years.
Some large infrastructure projects will need to be identified and concerted push will be needed to drive them to completion. Dedicated Freight corridor
between Mumbai & Delhi is one such project. Quick execution of such projects will provide massive employment, provide quick transportation for goods, lead
to productivity gains and will have large trickle down effects on the adjoining towns and villages leading to revival in consumption demand. Several ‘shovelready’ projects should be provided viability gap funding wherever needed.
Streamlining Government Finances
High Current account and fiscal account deficits have caused tremendous strain in the economy. The new government will need to address these issues on a
priority basis. As growth slowed and government revenues did not keep pace with spending, the fiscal deficit ballooned to unsustainable levels. The current level of
5% cannot be sustained. The large government borrowing to finance fiscal deficit crowds out private investment and slows down capex cycle. It is important to
streamlines various government subsidies to reduce government deficit. Fiscal deficit can be significantly reduced by eliminating fuel subsidies for diesel and LPG,
revising urea price and linking food subsidy to aadhar. Ideally, total subsidies should be limited to between 1.5 per cent and 1 per cent of GDP in the years to come
from 2.5% currently taking the fiscal deficit to 3% of GDP by FY17.
Addressing current account deficit sustainably: With government savings falling and private savings also shrinking, the current account deficit widened in last two
years. While CAD for this fiscal is now expected to be below 2.5%, this reduction has been brought by artificial controls on gold imports. Gold demand will come
back as soon as these curbs are removed. The underlying factors behind this gold surge need to be addressed. Gold imports have increased dramatically in India as
inflation has made real interest rates in the economy negative. This reduced returns on all financial assets and forced people to move into gold to protect their
Hence, inflation cool-off is necessary for a sustainable control on CAD. Removing supply bottle-necks are must to control consumer price inflation. The new
government should take quick actions to repeal APMC act that can lead to cool-off in food inflation.
Restarting the disinvestment programme:
Disinvestment programme has come to a standstill since the time UPA come to power. Although there have been minority stake sales, no change in management
control of public enterprises has happened in the last 10 years. As a result, several large government entities have become inefficient and sick & have lost out to
competitors in the last few years. Public sector companies have massively underperformed their private sector peers on financial parameters in the last five years.
The best example is BSNL, once a telecom giant with valuation of 100 billion dollars, is now sick and dependent on government aid to pay its employee salaries.
Whereas Maruti Suzuki which was disinvested during NDA time, remains India’s biggest car manufacturer with a 50% market share and remains extremely
profitable. Disinvestment can lead to better utilization of national resources, better delivery of goods and services to customers and increased productivity.
Despite so many negatives, plaguing the economy, all is not lost. If the new government takes these measures growth can revive. The potential growth rate of
economy is running around 6%. The growth rebound to those levels can take place quickly. Once that has been achieved, the more arduous path of reclaiming the
8% growth can start.
From a equity market stand-point, macro-economic revival in India will open opportunities to make high double digit returns in the next few years.
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.
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.
The regulatory hurdles and competitive pressures seem to be reducing. Incumbents have started
to increase tariffs slowly and pricing power is returning. However,wireless technologies and social
media present a formidable business risk.
Interet rates are expected to stay high for the next few quarters. We expect public sector to
significantly outperform due to cheap valuations and stabilization in asset quality
We like the regulated return characteristic 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 yields on 10 Yr G sec rose to 8.94%, highest since Jan 2014. Weakness in Rupee is one of the reasons to push the bond
yield higher. During the month the 10 year G sec yields had eased to 8.75% as traders as well as investors trimmed
positions post the interim budget announcement.
• The government surprised the market as it revised the fiscal deficit target for FY13-14 at 4.6% (better than budgeted 4.8%).
In the last week of the month G sec market saw a lot of volatility,where eventually yields ended flat on account of lack of
clarity on how the optimistic fiscal deficit target and revenue target will be met in FY 15.
• The spread on the 10 year AAA rated corporate bond increased to 76 Bps on 28th Feb,2014 from 69 Bps(as of 31st Jan,2014).
• The SDL auction for all eleven states could garner only Rs 7 600 Cr against a schedule to raise Rs 8 500 Cr & cut off yields
came higher between 9.68% and 9.85%.
With the current 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
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
Rupee movement vis-à-vis other currencies (M-o-M)
Trade balance and export-import data
Trade Balance (mn $)
• The Indian Rupee appreciated against USD & GBP while depreciating
against Euro & Yen in the last month. It saw an appreciation of 0.32%
against USD,0.07% against GBP and 0.61% depreciation against
Exports during January, 2014 were valued at US $ 26.75bn which
was 3.79% higher than the level of US $ 25.77 bn during January,
2013. Imports duringJanuary,2014 were valued at US $ 36.66 Bn
representing a negative growth of 18.07% over the level of imports
valued at US $ 444.75 Bn in January 2013 translating into a trade
deficit of $9.9 Bn.
Capital Account Balance
• The Indian Rupee strengthened to it’s highest in more than a month
boosted by bunched-up dollar inflows & selling by exporters,aided by
gains in Euro which improved risk appetite.
• Rupee rose 1.5% in the month ,it’s biggest monthly gain since
October 2013 after foreign investors bought a net $2.05 bn in debt &
stocks in February. However, worries in emerging markets are
croping up again after a tumblinh Chinese Yuan cast a shadow in the
region , while political tensions in Ukraine also raised concerns.
• The exchange rate for Rupee in Feb 2014 averaged 62.25 to USD
which is 18 Bps higher than Jan 2014 rate of 62.07.
FY 11 (Q4)
FY 12 (Q1)
FY 12 (Q2)
FY 12 (Q3)
FY 12 (Q4)
FY 13 (Q1)
FY 13 (Q2)
FY 13 (Q3)
• 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.
Oil & Gas
Given the sharp sell off last year, the global commodity
indices increased their 2014 weightage to the bullions
given the attractive risk reward ratio. It seems that gold has
moved past the tapering concerns given the macro
uncertainties surrounding the world and safe haven is back.
The sharp fell off in emerging market currencies and slew
of central bankers surprising with rate hikes supports a
bullish argument for the metal. The talks of India relaxing
the import norms and reducing the custom duty further
kept prices elevated in anticipation of demand spike that
was largely absent last year. Expect prices to remain. Gold
appreciated by 4% in Feb 2014 as compared to last year&
closed at Rs.30538 on 25th Feb,2014.
WTI crude rose trimming the biggest monthly decline for
January since 2010, as demand for distillate fuel countered
a second weekly increase in U.S. crude stockpiles. The
record US cold keep energy prices firmer as the distillate
demand rose 20% to 4.52 million barrels a day, the highest
level since February 2008, the EIA said. Cold weather will
dominate the central U.S. and Canada through midFebruary that would support higher prices going forward.
Expect prices to remain firm. Crude Oil as on 24th Feb,2014
closed at $ 109.76 an appreciation of 0.6% over it’s Jan
2014 closing price.
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
and we are not responsible for any loss incurred based upon it. This document is solely for the personal information of the recipient, and must not be
singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. The
investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisions based on their
specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information
or analysis mentioned here, investors may please note that neither Karvy Capital Ltd nor any person connected with any associated companies of Karvy
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