Advice for the Wise (September 2010)
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Advice for the Wise (September 2010) Presentation Transcript

  • 1. ADVICE for the WISE Newsletter – September’10
  • 2. Index Page No. Economic Update 4 Equity Outlook 8 Debt Outlook 14 Forex 16 Commodities 17 Alternative Assets 18 2
  • 3. Dear Investor, The present investment climate for an Indian investor, while being In the months to come, Index investing itself is unlikely to be positive, can still be quite confusing. Equity markets have significantly rewarding. To stay invested in the long term India remained range-bound for an extended period of time and are story though, a diversified managed portfolio would be a likely to remain so. Interest rates are still on the rise. Real estate good idea. This can be through mutual funds with stable market has revived from its nadir. To sum up, the going is good but returns and proven track record. To build further on the there are no quick wins anywhere. The opportunity to benefit by equity returns in the medium term, investing in specific being greedy while others were panicking seems more or less sectors or managers with stock picking skills would help. closed now in the Indian context. Where do we go from here? Sectors such as consumer goods, banking and power are likely It is time to move beyond the shadow of the crisis in making to be outperformers in this horizon. investment decisions. Through the crisis, we went through repeated bouts of panic. Subsequently as the financial storm in On the debt front, investing in medium term quasi- the developed economies subsided there were opportunistic government debt (e.g. PSU bonds) is likely to be remunerative. investments and a gradual return to normalcy for Indian investors. Also high yield corporate paper with relatively low credit risk Through the recovery period, simply showing faith in the can further boost debt returns. As interest rates start to robustness of Indian economy paid off in getting good returns. plateau in the months to come, building a good long tenor Now onwards, however, returns would be closer to long term bonds portfolio can help generate superior debt returns in averages in most asset classes. Hence investments should be the next year. looked at in two parts – one part being the simple strategies that Investors would also do well to redefine the conventional will pay off in a relatively longer term and the other part being approach in classifying assets and selecting managers. For more nuanced strategies that will generate superior returns in the example, high yield debt would fall between the conventional medium term as well. The trick of course is to control the risk in debt and index investing. Also quantitative strategies can be the latter since often enough a risky strategy comes disguised as looked at as alternatives to human fund managers and thus ‘the rare opportunity’. can form part of the universe of ‘managers’. This will prepare us for the investment strategies of the future. “Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.20” 3
  • 4. As on Change over Change over Aug 31st 2010 last month last year 120 100 BSE Sensex 17,971 0.6% 14.7% Equity S&P Nifty 5,402 0.6% 15.9% 80 Dec-09 Mar-10 Apr-10 May-10 Jul-10 Jan-10 Jun-10 Oct-09 Aug-09 Sep-09 Nov-09 Feb-10 markets S&P 500 1,049 (4.7%) 2.8% Sensex Nifty Nikkei 225 8,824 (7.5%) (15.9%) S&P 500 Nikkei 225 8.3 10 Yr. Gsec… 7.8 10-yr G-Sec Yield 7.97% 17 bps 53 bps 7.3 Debt markets Call Markets 5.09% (21 bps) 209 bps 6.8 Fixed Deposit* 6.75% 75 bps (25)bps May-10 Sep-09 Feb-10 Jan-10 Mar-10 Jun-10 Aug-09 Dec-09 Apr-10 Aug-10 Oct-09 Nov-09 Jul-10 20000 Gold… 18000 Commodity RICI Index 3,147 (1.2%) 7.3% markets Gold (`/10gm) 18,915 6.5% 24.8% 16000 Crude Oil ($/bbl) 75.5 0.0% 9.4% 14000 50 49 `/$ Forex Rupee/Dollar 47.1 1.3% (3.4%) 48 47 46 markets Yen/Dollar 84.8 (1.8%) (9.4%) 45 44 Aug-09 Aug-10 Jan-10 Jun-10 Sep-09 Nov-09 Feb-10 Mar-10 May-10 Apr-10 Jul-10 Oct-09 Dec-09 * Indicates SBI one-year FD 4
  • 5. • The Conference Board Consumer Confidence Index which had declined sharply in the last two months, increased by 2.5 points to 53.5 in August. This US indicates positive expectations about future economic activity, though overall evaluation still shows apprehensions of the consumers about the future. • US m-o-m unemployment rate remained unchanged at 9.5 per cent in July 10. • Euro-zone purchasing managers index slid to 55.1 from 56.7 in July indicating a cooling of the sector after the buoyant growth rates seen earlier this year. Europe • Unemployment in the Euro zone remained stable at 10% in August but Germany saw significant improvement with unemployment falling at 7.6% and returning to pre crisis levels. The unemployment in Spain reached a staggering 20.3%. • Japan’s industrial production rose by 0.3% in July from the previous month but manufacturing PMI hit a fourteen-month low of 50.1 in August, as new orders Japan fell and output growth slowed. • Japan’s unemployment rate decreased in July 10 (m-o-m) to 5.2% from 5.3% in June 10 . • The HSBC China Manufacturing Purchasing Managers Index, increased to 51.9 in August from 49.4 in July due to surging domestic demand. Last month, Emerging after its weakest performance in 16 months, the increase indicates economies stabilization of the economy. • China’s exports may be hurt by moderation in growth of Europe’s services and manufacturing industries last month and may slow down. 5
  • 6. 19.0% IIP monthly data • The GDP growth rate for Q1 FY11 came in at 8.8% 14.0% backed by a strong growth in manufacturing and agricultural output. 9.0% • The Manufacturing sector grew by 12.4 per cent 4.0% during April-June, 2010, against 3.8 per cent in the 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec 1-Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun same period last fiscal while agricultural output witnessed a growth of 2.8 percent (y-o-y) due to improved harvests. The services sector saw a • Breaking an eight month trend of double digit moderated growth over last year with business growth, Industrial output as measured by the services growing at a rate of 8% against 11.8% last Index of Industrial Production (IIP) grew by 7.3% year. (y-o-y) in June 10. • The Finance ministry is targeting FY11 growth at • Growth in manufacturing, which constitutes ~8.50% - 8.75%. We believe the current target is sustainable as we expect manufacturing and around 80 per cent of the IIP fell to 7.3 per cent service sectors to continue to drive growth in the from 8 a year ago as the pace of new orders next few quarters, even as farm output stages a cooled following a slowdown in exports. turnaround. • The manufacturing PMI fell to 57.25 in August 10 GDP growth 9 from 57.6 in July indicating a strong growth but 8 at a weakening pace. 7 6 • We believe the growth in IIP will remain robust 5 4 but will eventually moderate out and may end FY09 (Q1) FY09 (Q2) FY09 (Q3) FY09 (Q4) FY10 (Q1) FY10(Q2) FY10(Q3) FY10(Q4) FY11(Q1) lower than that seen in the first part of the fiscal. 6
  • 7. Growth in credit & deposits of SCBs Bank Credit Aggregate Deposits 25.0% 23.0% • Inflation as measured by WPI stood at 9.97% 21.0% (y-o-y) for the month of July-10 as compared to 19.0% 17.0% 10.55% during June 10 driven by expectations of 15.0% a good harvesting season. 13.0% 11.0% 9.0% • We expect WPI inflation numbers to moderate 7.0% in m-o-m inflation numbers due to the expected 5.0% Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 decrease in food inflation and the monetary tightening stance by RBI. This will also happen due to the base effect coming into play. • Bank credit growth further improved in the month of July as it increased by 19.7% as compared to 19.6% in the month of June 2010 12.0% • We expect credit growth to further improve in the 10.0% Inflation next few quarters and settle at ~20% levels on the 8.0% back of improving business confidence and decline 6.0% in risk aversion on the part of banks. 4.0% 2.0% 0.0% Jun-09 Oct-09 Jan-10 Mar-10 Jun-10 May-10 Aug-09 Apr-10 Jul-09 Sep-09 Nov-09 Feb-10 Jul-10 Dec-09 -2.0% -4.0% 7
  • 8. Indian equity - tapping to the global tune The markets remained flat in the month of August, groping for a direction amidst a volley of global and domestic news flow. It is apparent that the global developments hold the key to near term market movements. After hitting a 30 months high during the month, Sensex reacted to a global risk aversion caused by the fears of a double-dip US recession. The downward pressure on the markets was mostly due to a steady offloading from the “domestic” investors. Domestic risk capital allocation pattern is showing a high correlation to global market movements. It may be recalled that during the global credit crisis in 2008-2009, the domestic financial system also suffered from risk aversion. Cost of capital soared and capital market funding almost came to a grinding halt. Companies, particularly small and medium sized entities lost access to capital irrespective of fundamentals. Valuations – How expensive? According to the Reserve Bank of India, a combination of strong growth outlook for India and the probability of monetary exit being delayed by the advanced economies, could lead to acceleration of capital inflows. On the flip side, in the event of a global risk aversion, FIIs may dump Indian stocks. The selling could be aggravated by redemption pressure at their home countries – the US or Europe. It may be noted that all this has to do with market movements and not economic performance of India. The fundamentals of Indian economy have gotten better with a resilient domestic demand, strong capital inflows and some game changing reforms on the anvil. The GDP growth for Q1FY11 was a strong 8.8% yoy – robust, and in line with the expectations. promising attention to quality. Given the sustained capital efficiency, growth prospects and strong balance sheets of the corporate sector we subscribe to the “India premium thesis”. We maintain our stance that Indian equity is not too dear at the current levels. Despite the overall flat performance, markets have demonstrated a preference towards safety and predictability. We do believe that this is likely to continue in the near future. 8
  • 9. FII & MF data Sales growth FII MF 20000 10000 • Substantial improvement in sales was witnessed in Q2 & Q3 Rs. (Cr) mainly in consumption oriented sectors of the economy. 0 Current Results by corporates show a strong Sales growth Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-1 Aug- for the current quarter while consolidated figures are yet to -10000 09 09 09 09 09 10 10 10 10 10 10 0 10 come. • We expect improvement in sales in upcoming quarters; -20000 especially in the manufacturing space as domestic demand picks up. 80 • FIIs invested ` 11,687 Cr. in equities in the month of August 60 Profit growth 40 alone as the markets remained relatively stable throughout 20 (% ) the month on cues of stable macroeconomic indicators. 0 -20 FY07 (Q1) FY07 (Q2) FY07 (Q3) FY07 (Q4) FY08 (Q1) FY08 (Q2) FY08 (Q3) FY08 (Q4) FY09 (Q1) FY09 (Q2) FY09 (Q3) FY09 (Q4) -40 • Mutual Funds sold around ` 2,996 Cr in the month of -60 August as Corporates and Banks exited the markets. Banks are currently gaining a higher rate of ~5.1% (Call rate) as • Recent Q3 & Q4 numbers have beaten estimates with compared to returns given by Liquid funds. higher sales and better operational efficiency aiding profit growth. • Margins are expected to remain stable in the following quarters as lower interest costs are offset by higher raw material costs 9
  • 10. Recommendation Sector Rationale Higher credit growth, well managed NPAs, improved capital market BFSI activities and expectations of reforms Industrials Focus on infrastructure spend intact Overweight Discretionary Robust domestic demand, income growth, favorable demographics, Consumption rapid urbanization Resilient demand in CRAMS, generics opportunity getting better and Healthcare strong pressure on governments to reduce public healthcare costs Lower volumes, affordability issues and the leverage on the balance Real Estate sheets of the companies Positive steps in the direction of fuel price deregulations, increased E&P Oil & Gas activities but under recoveries still loom large Neutral Cement Significant overcapacity build up and slow down in North, West and South India markets. Despite the macroeconomic opportunity, we are concerned about the Telecom ongoing price war and significant leverage post 3G & BWA auctions 10
  • 11. Tenets of our investment philosophy Efficient diversification • Economic themes • Sectors • Capital efficiency • Companies & groups • Size of opportunity • Volatility factor • Reasonable gearing • Quality management • Capital allocation Quality Active risk Focus mitigation • Fundamental research Research • Analytical rigor Intensity • Margin of safety • Low churn • Management meetings • Long only approach • No cash calls • High conviction driven Long term Superior compounding 11
  • 12. Stock Selection Portfolio Portfolio Review Construction Investment Investment Deviation Tolerance Universe Objective Risk quotient band Degree of diversification Portfolio Valuations Attribution Analysis Psychographics Macroeconomic Performance Quality filters View Appraisal Management Grading Buy / sell note Documentation Independent Audit 12
  • 13. Basic Theme A diversified portfolio of stocks that seeks Alpha through superior stock selection. The Portfolio Management adopts a comprehensive approach and invests across sectors, investment themes and market capitalization categories. Portfolio Details Absolute Returns (%) Entry Load Nil Comparatives 3 Month Since Inception Exit Load Nil (Full management fee to be levied if redeemed before 1 yr) Management Fee 1.5% p.a. Alpha Portfolio 7.04% 13.70% Profit Share 20% of Outperformance over 12% 6.21% 7.35% S&P CNX Nifty Top 10 Holdings Sector Allocation Performance Reliance Industries 11.3% State Bank of India 6.1% HDFC 6.0% ICICI Bank 6.0% Infosys 6.0% BHEL 5.9% Larsen & Toubro 5.9% Bharti Airtel 4.3% Nestle 4.3% Opto Circuits 4.2% Top 10 Stock Concentration 60.0% 13
  • 14. 10.00 Yield curve 9.00 • The benchmark 10 yr G-sec yield increased from 8.00 7.8% in July to settle around 7.97% in the month 7.00 of August. This was due to the RBI tightening its monetary stance in the July Review. 6.00 5.00 • We believe that future monetary tightening measures are unlikely to have a major impact on (%) Maturity (years) the longer end of the yield curve and once the inflation drops, the yields may peak out around • We expect yields at the longer end of the yield 8% levels. We expect the 10 yr G-sec yields to curve to remain stable. High inflation, monetary remain in the broad range of 7.5 – 8.5% in the tightening and rising credit growth will keep the next few quarters. yields at the longer end range bound. 8.2 10-yr G-sec yield 8 • Short term liquidity concerns arising from 3G 7.8 auctions and advance tax payments will keep 7.6 yields at the shorter end at elevated levels. 7.4 7.2 • Due to rising inflationary expectations, there may 7 be further interest rate hike by RBI but will 6.8 stabilize around 7.5 – 8.5% levels by year end. 14
  • 15. Category Outlook Details We recommend short term bond funds with a 6-12 month investment horizon as we expect them to deliver superior Short Tenure returns due to high YTM and concerns over credit quality ease Debt as the economy recovers, thereby prompting ratings upgrade. Positive economic climate has reduced credit risks without a commensurate decrease in credit spreads. Some AA and select Credit A rated securities are very attractive at the current yields. A similar trend can be seen in the Fixed Deposits also. We expect yields at the longer end of the yield curve to top out Long Tenure soon. Yields may move to the broad range of 7.5– 8.5% in the Debt next few quarters. As the inflationary pressure settles down towards the end of the fiscal, these may be an attractive investment. 15
  • 16. Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data Singapore Dollar Export Import Trade Deficit 0 (Mn) 100 Euro 50 Japanese Yen -10000 0 (%) British Pound -50 Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr-1 May- Jun- Jul-1 -20000 US Dollar 09 09 09 09 09 09 10 10 10 0 10 10 0 -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% (%) • Exports for the month of June increased by 13.2% y-o-y while imports increased by 34.3% increasing the trade deficit to USD 12,930 Mn. •The Rupee depreciated v/s the US dollar in the month of August due to uncertainty in the global markets. Capital account balance $ (Mn) 40000 • Our medium term view is that the rupee is likely to 30000 20000 strengthen further in 2010. Higher interest rates in India 10000 0 would attract large capital flows. Moreover the government is -10000 FY08 (Q2)FY08 (Q3)FY08 (Q4) FY09 (Q1) FY09 (Q2)FY09 (Q3)FY09 (Q4) FY10 (Q1) FY10 (Q2)FY10 (Q3) expected to simplify the rules on foreign inflows to facilitate larger foreign capital inflows in the form of FDI • Capital account balance was positive in the first nine months for FY10 • We expect the capital account balance to remain positive as higher interest rates would make investment in the Indian markets attractive hence drawing investments into the market. 16
  • 17. • India and China will continue to provide the main thrust of 20000 overall growth in demand, particularly for gold jewellery, for the 19000 Gold spot remainder of 2010. Retail investment will continue to be a 18000 Precious substantial source of gold demand in Europe. Added to this the 17000 16000 forthcoming festive season in India is expected to keep the Metals demand strong during the seasonally strong 4Q. The ongoing 15000 14000 nervousness in the global financial market would further aid the May-… Sep-09 Jan-10 Feb-10 Mar-10 Aug-09 Dec-09 Apr-10 Jun-10 Aug-10 Oct-09 Nov-09 Jul-10 safe haven buying. Any correction thus should be treated as an opportunity to hold this metal. 90 Crude • The crude prices remained stable in August and there was no 85 80 change from July prices though during the month, prices moved 75 between $70-$83 per barrel. These are expected to be steady in Oil & Gas 70 Q2 due to no significant seasonal demand (Q2 is the 65 60 maintenance season for refineries) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug • Natural gas prices to trade lower in Q2 owing to speculation over 09 09 09 09 09 10 10 10 10 10 10 10 10 weak demand. 1,050 RICI Agri • Prices of primary food articles saw an increase of 0.9% in the last 1,000 950 month. But, due to expectations of higher production output, 900 Agri we see the prices declining in the coming months 850 • A favorable Kharif output to further cool prices in the medium 800 Aug-09 Oct-09 Dec-09 Aug-10 Nov-09 May-10 Jan-10 Mar-10 Jul-10 Sep-09 Feb-10 Apr-10 Jun-10 term 17
  • 18. Karvy Principal Protected Note Linked to MCX Gold price Issuer Karvy Financial Services Limited Tenor 36 / 40 months Index MCX Gold price Minimum Investment Rs. 5,00,000 Principal Protection 100% Upside Participation Rate 115% of gold appreciation Upper Cap Level 150% of initial gold level Payoff Max { 0%, PR* Min( Cap, (Final Level/Initial Level -1))} Outcomes at Maturity Note Return 65% 50% return x 115% participation rate 57.50% 35% 35% return x 115% participation rate 40.25% -40% Full principal protection below zero 0% This example is for illustrative purpose only and does not constitute a guaranteed return or performance. 18
  • 19. Leveraging breadth of related businesses that KARVY is in KARVY is an integrated financial services group, with Karvy Private Wealth being one of its arms. The entire group’s strengths are leveraged to provide end-to-end wealth advice to Karvy Private Wealth clients. For example, SME clients can receive advice on their personal wealth while also getting investment banking advice from the I-banking arm of Karvy. Maximum choice of products & services KARVY Private Wealth offers the widest breadth of products and services, providing clients a variety of options through a single contact. Products and services include equities, debt instruments, commodities, Mutual Funds, Insurance, Structured Products, Financial Planning, real estate advice, etc. Product-neutral advice We ensure that our recommendations are 100% product-neutral and unbiased because unlike other players, we are neither tied up with any one particular insurance company nor do we have our own mutual funds. All-India presence Set to have business in 20 - 25 cities we are poised to cater to families and businesses spread across multiple cities in India providing them with combined and integrated advice. For one-off services, if required, we can also leverage KARVY Group’s presence in 400 cities. 19
  • 20. The information and views presented here are prepared by Karvy Private Wealth or other Karvy Group companies. 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. 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 nor any person connected with any associated companies of Karvy accepts any liability arising from the use of this information and views mentioned here. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned companies from time to time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws once the new Direct Tax Code is in force – this could change the applicability and incidence of tax on investments 20
  • 21. Bangalore 080-26606126 Chennai 044-45925925 Delhi 011-43533941 Hyderabad 040-44507282 Kolkata 033-40515100 Mumbai 022-33055000 Pune 020-66048791 Email: SMS: ‘HNI’ to 56767 Website: Corporate Office : 702, Hallmark Business Plaza, Off Bandra Kurla Complex, Bandra (East), Mumbai – 400 051 21