ADVICE for the WISE
Newsletter –NOVEMBER 2013
From the Desk of CIO
October marked the equity markets reaching new highs. Rupee
At present, we are probably experiencing the prices catching up with
remained stable and at relatively higher levels while debt markets
fundamentals. Owing largely to price inflation, the nominal incomes
largely maintained long term yields at the earlier levels. The
and even profits of many listed companies were going up even if
sentiment is clearly positive amongst the majority, even if cautiously
volumes did not keep pace in most cases. This earnings growth was
so. As in earlier rallies, within equity markets domestic retail
not fully factored into the prices. Part of the current catch-up reflects
investors have largely continued selling even as FIIs have been large
that. Also the postponement of tapering in the US also meant
net buyers for several days. There is a lot of speculation on whether
continuation of loose liquidity conditions around the globe –
this is a beginning of a new rally or a short term over-optimism
propping up risk assets including emerging market equities. Part of
that liquidity also made its way into India.
One of the commonest concerns being raised is – where is the
There is also the additional element of speculation. The elections
change in fundamentals? This question misses an important point.
next year will have very important implications for the long term
Capital markets do not necessarily price assets without lead or lag.
growth dynamics of Indian economy. Some market participants have
The change in prices is often way ahead of or way behind the change
probably started building in an expectation of a given coalition
in fundamentals. That can happen for various reasons. The most
coming to power vs another.
common one is liquidity. A sharp increase or decrease in liquidity can
change prices of assets without an immediate change in
This build-up of positive sentiments while most probably not over-
fundamentals. Conversely, liquidity movements can also keep the
optimistic or too-soon, is nevertheless prone to accidents. An
asset prices from catching up with fundamentals in some cases.
announcement of further monetary tightening within India or any
Other reasons for the lead or lag between fundamentals and prices
trouble on US debt ceiling or a speculation regarding QE tapering can
include sentiments and specific events (such as elections). Lastly
easily make investors jittery. By their very definition accidents are
there is the matter of diverse beliefs about the future – starting from
unpredictable. However, being aware of their possibility helps one
the same data.
prepare mentally for some volatility.
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Economic Update - Snapshot of
10 yr Gsec
10-yr G-Sec Yield
Crude Oil ($/bbl)
(As on 28th October)
• 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. factory output contracted in October for the first time since late 2009 and the overall pace of
growth was the slowest in a year.
• Moody's, would maintain its AAA rating while Fitch warned that it may cut its assessment.
• The United States has been picking up, with the economy having grown 2.5 % in the Q2. Manufacturing,
appears to be gaining momentum after having contracted as recently as May.
• The economy grew 1.1% in the Q2, and the economy minister predicted rising exports would compensate
for a leveling off in domestic consumption, sustaining a recovery in Euro zone.
• Markit's PMI fell to 51.5 from September's two-year high of 52.2
• Consumer spending in Japan jumped in September as shoppers frontloaded purchases before a sales tax
increase next year, a boost to government efforts to spark demand and end 15 years of deflation.
• Japanese household spending rose 3.7 % in September from a year earlier, a sign that consumer spending
may have recovered from a slight dip.
• Japan’s adjusted unemployment rate fell to 4.0 % from August's 4.1 %,matching economists' median
forecast of 4.0 %.
• Gross domestic product in China rose 7.8% from a year earlier, marking only the second quarter in the last
10 in which growth has accelerated.
• India’s central bank lifted its policy repo rate by 25 basis points (bps) to 7.75%, and cut the MSF by 25 bps
• India's foreign exchange reserves rose to $279.24 billion as of October 11, compared with $277.73 billion
in the earlier week.
Economy Outlook - Domestic
• The Indian economy grew at its slowest pace in four years at 4.4%
in the first quarter (Q1, or April-June) of the current fiscal year
2013-14, compared with 4.8% during the preceding quarter
(January-March) of the last fiscal. The country’s economy had
grown by 5.4 % in same period of the previous fiscal.
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
12 12 12 12 12 13 13 13 13 13 13
• IIP unexpectedly slowed down to 0.6% YoY in Aug’13 as against our
estimate of 2.0% and 2.8% in Jul’13. Continued slowdown was
witnessed in capital and consumer durables sector which
• India’s economy grew declined to 5 percent in 2012-13 from 6.2
percent in 2011-12. The economy had grown by 8 percent for two
consecutive years prior to that.
• While manufacturing and mining sectors have been one of the
reasons behind the fall in the GDP, the fall in rupee, which hit a
record low of 68.85 earlier this week, is seen as one of the major
factors too. Agriculture grew 2.7% in the first quarter, mining and
manufacturing contracted 2.8% and 1.2%, respectively..
contributed significantly to the sluggish growth.
• IIP ex- capital goods grew by 1.0% YoY as against the 0.6% headline
growth. Consumer Durables sector plunged by 7.6% YoY; this
pushed down the headline growth in Industrial Production for the
month of August.
• Jul’13 IIP is revised upwards by 12bps to 2.8%YoY primarily driven
by 1.2% upward revision in textile products which now stand at
0.9% YoY. May’13 IIP has also been revised upwards by 30bps to
• The lower GDP at market price compared to GDP at factor cost is
because the subsidy component is growing extremely fast and the
government is borrowing to fund subsidy.
1.5% due to upward revision in Basic metals sector.
Economic Outlook - Domestic
Growth in credit & deposits of SCBs
As on September 2013 Bank credits grew by 16.5% on a Y-o-Y
basis which is about 3.5% higher than the growth witnessed in
september 2012. Aggregate deposits on a Y-o-Y basis grew at
12.2%, viz-a viz a growth of 10.2% in Sept 2012.
On 29th October 2013, RBI carried out a 25bps increase in repo
rate along with a 25 bps cut in MSF. The corridor between repo
and MSF has been restored to 100 basis points. The liquidity
provided through term repos of 7-day and 14-day tenor has
been increased from 0.25% of net demand and time liabilities
(NDTL) of the banking system to 0.5% further easing short term
liquidity. With these latest steps, the extraordinary measures
taken by RBI in September to defend the rupee have been
Headline WPI spiked unexpectedly to 6.46% YoY in Sept’13. The
prices have risen across the segments in the month, while food
inflation in particular contributed to the headline figure
significantly. Vegetable prices continued to surge, and the
vegetable prices have more than doubled so far this fiscal.
Jul’13 WPI has been meagerly revised upwards by 6 bps to
The average WPI recorded at 5.49% YoY in Apr-Sept’13,
compared to 7.70% in the year-ago period. core inflation
remained low at 2.06% YoY in Sept’13 vs. 1.96% in Aug’13
RBI governor Raghuram Rajan’s focus is moving towards CPI
along with WPI which is on the rise nearing double-digit levels
which he describes as worrisome and intends to bring CPI
within the boundary.
India's annual consumer price inflation quickened more than
expected to 9.84 percent in September from 9.52 percent in
Wholesale Price Index
* End of period figures
Indian equity markets made fresh life time highs on the back of improving domestic macros, supporting global equity and expected
governance improvement in India after next general elections. Sensex crossed the level of 21,200 after a gap of almost six years. FII
have been looking at Indian equities again with a lot of enthusiasm with more than 2.5 billion dollars invested in the month of
Global markets have turned supportive of equity. In their recent meeting, US Federal Reserve has expressed concern about the quality
of macroeconomic recovery in US and has decided to maintain the current pace of bond buying program. This dovish stance from the
Federal Reserve will help sustain upwards bias in Emerging market equities, currencies and bonds. 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 when Federal Reserve first announced the postponement of tapering
Global Equity Market Performance
All Ordinaries (Australia)
All Share (Sri Lanka)
Dow Jones Ind. Avg.
SSE Composite Index (Shanghai)
Rise in Global Equities since 18th September, 2013
The tough measures to ensure financial discipline in the peripheral eurozone area in the last few years have began to show results.
European economies have seen rebound in growth with Spain recently coming out of recession. We expect this macroeconomic
recovery in the Euro area to get stronger in the next few quarters.
RBI carried out the review of Indian monetary policy last week. As expected, it carried out a 25bps increase in repo rate along with a 25
bps cut in MSF. The corridor between repo and MSF has been restored to 100 basis points. The liquidity provided through term repos of
7-day and 14-day tenor has been increased from 0.25% of net demand and time liabilities (NDTL) of the banking system to 0.5% further
easing short term liquidity. With these latest steps, the extraordinary measures taken by RBI in September to defend the rupee have
been largely reversed. The trade data also reflects significant reduction in CAD and we believe that the worst is behind us on that front.
GDP growth in the last two quarters has remained below 5%. Capital formation growth in the country has further with no sign of pickup as yet. The forecast for FY14 GDP growth has been cut from 5.5% to 5% by RBI We believe that growth in the next two quarters will
improve due to strengthening export growth and expected pick-up in agriculture. Also, revival of large stalled projects cleared by the
Cabinet Committee on Investment will give a boost to capital formation activity. The worst seems to be behind us from a growth
perspective and we believe we will see a multi-year revival of the growth and earnings cycle in next few quarters.
The political activity in the country is going to get more and more interesting as we approach the General elections scheduled in May.
The recent opinion polls indicate support building up for Gujarat Chief Minister Narendra Modi led National Democratic Alliance (NDA).
There have been several concerns about governance and populist schemes in the last few years and markets are getting excited about
prospects of a better government emerging from the next election. We would expect a bigger rally building up going into the election.
While Sensex has made fresh life time highs, the performance of various sectors have been quite divergent. Pharma, IT and Auto have
been best performers in the last six years, while Banking, Oil & Gas, Capital Goods and Metals have been worst performers. We expect
this trend to start to reverse going forward. With the normalization of Repo MSF corridor, we believe RBI might pause in the immediate
future. With monetary policy risk out of the way, we have turned positive on interest rate sensitive sectors like banks and automobiles.
We expect export oriented sectors like IT to continue to benefit from the significant rupee depreciation seen this year. Telecom is
another sector which might deliver strong earnings due to return of pricing power & reduction in competitive intensity.
We maintain our year-end Sensex target of 22,400. A good monsoon, strong export sector, continued monetary stimulus in US & a
stable Euro area are significant positives for equity markets. With domestic macro-economic data also on the mend, we are aggressive
buyers of Indian equity.
The measures taken to stabilize the rupee have largely been reversed and we expect RBI to pause
in the short term. 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 pricing power is returning. We believe that consolidation will happen
sooner than expected.
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.
We are more bullish on SUV’s and agricultural vehicles segment due to lesser competition and
higher pricing power.
We like the regulated return charteristic of this space. This space provides steady growth in
earnings and decent return on capital.
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
Commodity prices have corrected significantly over the last few months due to concerns about
growth in China and developed parts of the world. Steel companies will benefit because of rupee
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.
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
10-yr G-sec yield
• The 10 yr g-sec closed the month at 8.59% which is 10 bps lower than the last month.
• RBI had announced changes to benchmark policy rates and unveiled measures for market development and regulation on 29th
• Repo rate hiked to 7.75% from 7.50%.
• MSF rate has been reduced by 25 bps to 8.75%.
• Accordingly, the bank rate stands revised down to 8.75% and the rate corridor is normalized to 100 bps.
• Cash Reserve Ratio (CRR) is unchanged at 4.00%
• The policy outcome was along expected lines, reflecting the continued shift in central bank’s focus from managing rupee
volatility to containing inflationary pressures, while being mindful of growth trends.
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 opportunities.
Some AA and select A rated securities are very attractive at the current
yields. A similar trend can be seen in the Fixed Deposits also. Tight liquidity
in the system has also contributed to widening of the spreads making entry
at current levels attractive.
Our recommendations regarding long term debt is that currently either buying nor selling
for now. And after the volatility settles Investors could look to add to dynamic and medium
to long term income funds over the next few months. Long term debt is likely to see capital
appreciation owing to the expected monetary easing. There is lesser probability of rate
cuts in the near future and there could be a lot of volatility in the g-sec yields as well. An
important point to note is that as commodity prices are cooling down, current account
deficit may reduce to some extent. But all this is coupled with uncertainty. We suggest
matching risk appetite and investment horizon to fund selection. Hence we recommend
that if investing for a period of 2 years or above then long term can be looked upon or else
holding/profit booking could be a good idea. Investors who may want to stay invested for
the medium term (exiting when prices appreciate) and those who would want to lock in
high yields for the longer term can also invest in longer tenure papers/Funds.
Rupee movement vis-à-vis other currencies (M-o-M)
Trade balance and export-import data
Trade Balance (mn $)
• The Indian Rupee appreciated against all the four major currencies in
the last month. It strengthened by 1.52% against the US Dollar, 0.49
against the EURO and 1.69% against Japanese Yen. The major
appreciation out of the four currencies was seen in GBP against which
the Indian Rupee appreciated by 2.88% in last one month.
• Strength in Rupee against all the 4 major currencies came in on the
back of strong data released for the Current Account Deficit for Q2 FY
2014 and the Trade Deficit data released during the month. Rupee in
the last month traded in the range of 60.50 and 63.46 against USD
and was trading at two month high levels in the first half of the
• Poor Inflation and Industrial Output numbers put some weight on the
Rupee during the later part of the month but that was compensated
by the pressure which was on US Dollar due to US Budget deal as it
gave way to worries over economic impact of the government
shutdown and prospects of a re-run early next year.
Exports during September, 2013 were valued at US $ 27.68 bn
which was 11.15 % higher than the level of US $ 24.90 bn during
September, 2012. Imports during September, 2013 were valued at
US $ 34.44 Bn representing a negative growth of 18.10% over the
level of imports valued at US $ 42.05 Bn in September 2012
translating into a trade deficit of $6.76 Bn.
Capital Account Balance
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.
Gold tested $1900 during the last debt ceiling issue when S&P
downgraded US in 2011. With the debt ceiling now postponed to
mid of January amid no meaningful resolution visible, gold prices
are likely to remain firm in the near term. The 4QCY is seasonally
strong for the metal further support the price levels. The pattern
that is unfolding during the last few years increasingly now
seems to be nearing an end or rather ended on how one looks at
it technically. In either case, it’s time to bet on the metal.
Further, the sentiment today is largely bearish - both
internationally and domestically - and for a gold feverish nation
like India, this is something unusual and such extremes are a
perfect indication of major turning points. Expect gold prices to
Oil & Gas
The WTI crude dropped to the lowest level in four months as US
stockpiles increased and a dollar strength further capping any
potential upside. The crude output by OPEC increased to an
average 30.621 million barrels and with no fresh triggers to keep oil
prices boiling amid ample supplies and increasing inventories,
crude oil prices are likely to be stay weaker.
Real Estate Outlook
Due to a flurry of new launches in the first quarter of the year, most
markets witnessed an increase in the unsold inventory levels even with
relatively steady sales. Consequently, last quarter saw lesser new Demand in Tier II cities is largely driven by the trend
towards nuclear families, increasing disposable
income, rising aspiration to own quality products and
With reduced new launches and steady absorption, the demand supply the growth in infrastructure facilities in these cities.
Price appreciation is more concentrated to specific
gap is expected to reduce over the coming months.
micro-markets in these cities. Cities like Chandigarh,
Mid-income residential segment with Rs. 4,000 – 6,000 per sq. ft. Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur, Patna
entry pricing with good developers in Pune, Bangalore, NCR and and Cochin are expected to perform well.
Mumbai suburbs cane be expected to continue generating good
percentage returns with relatively lower risk.
The over-supply in commercial asset class still continues, thereby
dampening the capital values.
While rentals have been seen increasing at a slow pace over the last
couple of months, they still remain lower than the peal values achieved
in the past. In relative terms, Bangalore market continues to
outperform other markets owing primarily to the demand from the IT
Lease rentals as well as capital values continue to be
stable at their current levels in the commercial asset
class. Low unit sizes have played an important role in
maintaining the absorption levels in these markets.
Specific pre-leased properties with good tenant profile and larger lockin periods continue to be good investment opportunities over a longterm horizon.
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I markets
Real Estate Outlook
Capital values as well as lease rentals continue to be stagnant.
The effects of the change in FDI policy to allow 51% foreign
ownership in multi-brand retail and 100% in single-brand retail
are yet to have any effect of the market for retails assets.
Developers continue to defer the construction costs as
absorption continues to be low unsold inventory levels high.
Agricultural / non-agricultural lands with connectivity to Tier I
cities and in proximity to upcoming industrial and other Land in Tier II and III cities along upcoming / established growth
infrastructure developments present good investment corridors have seen good percentage appreciation due to low
opportunities. Caution should however be exercised due to the investment base in such areas.
complexities typically involved in land investments.
Tier II cities see a preference of hi-street retail as compared to
mall space in Tier I cities. While not much data on these rentals
gets reported, these are expected to have been stagnant.
The mall culture has repeatedly failed in the past n the Tier-2
cities. Whether the FDI in retail can change this phenomenon
can be known with more certainty once the effect of FDI is more
visible in Tier I cities.
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I markets
The information and views presented here are prepared by Karvy Capital Ltd. The information contained herein is based on our analysis and upon
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