The world this week april 16 - april 20 2012Document Transcript
The World This WeekApr 16 – Apr 20, 2012
Equity View:Last Tuesday, RBI cut the repo rate by 50 basis points, signaling a change in its tight monetary policy stance. Hence, the reporate is at 8.0% (earlier it was 8.5%) and simultaneously reverse repo rate is at 7% down from 7.5%. RBI governor DuvvuriSubbarao has also cautioned against expectations of any immediate rate cut unless inflation expectation cools downsignificantly. From a broader market view, this rate cut is definitely positive as it reduces the cost of capital for mostcompanies. it will also provide momentum to growth. Interest rate sensitive sectors like Banks, Infrastructure and Automobilesshould benefit the most. Banks should see a higher credit growth than last year, asset quality should improve and bondportfolios would rally. Apart from tier I private sector banks, even large cap public sector banks are expected to do well.Several banks have already announced a cut in their base rate. Many private sector banks like ICICI, Axis and Public sectorbanks like SBI have already cut the base rates by 25 basis points.Last week, the markets closed flattish (down 1%) and on Friday a freak trade was recorded in Nifty. In this trade almost 35 lakhlots of Nifty futures were sold at a 7% discount to the market price as a result of which market fell very sharply but recoveredtowards the day’s end. We had the results of HDFC bank and RIL last week. HDFC Bank results were in line with marketexpectations. RIL posted a 21% decline in its net profit at Rs 4,236crs for the fourth quarter ended March 31, 2012. The oilmajor had a net profit of Rs 5,376crs in the same period last fiscal. The refining margin came in at $8.6 per barrel which wasslightly higher than market expectations. The EBIT margins were also slightly higher than market expectations. Revenues fromoil and gas fell 36.5%, with natural gas production from KG-D6 falling 23.5% y-o-y and crude oil production falling 37.9% y-o-y.RIL reported a further drop in natural gas production at its eastern offshore KG-D6 block to about 34 million standard cubicmeters per day. We believe the next year’s production numbers to be lower from these levels.US earnings season is progressing well, more than 80% of S&P 500 companies have surprised on the positive. This week too wehave quite a few companies declaring their results which could lead to a market rally on the back of positive expectations. Thisweek, the most important event in the US will be the policy meeting of US central bank’s FOMC (Federal Open MarketCommittee). The markets will look for any sign of Quantitative Easing 3(quantitative easing) which is being speculated tocommence for almost a year now. Any news on this will give a boost to risk on trade which we are seeing from beginning of CY2012.In Europe, Spanish yields moved up to more than 6% last week after a disappointing debt auction. ECB has alreadycommenced its bond market buying program and it remains to see how this picture pans out. We would highlight that theuncertainty in Europe still remains one of the biggest issues for the equity market outlook across the world.Long Term Debt Outlook:After the 50 basis point cut by RBI, most of the debt funds and bonds have appreciated fairly. The prices of these long termdebt funds and bonds are expected to remain static for the next few months as it would be difficult to gauge RBI’s real intenton further rate cuts. Unless the crude price comes down significantly, bringing the inflation lower, we would not see a rate cutin the near term.We are expecting a cumulative rate cut of about 1-1.5% in CY 2012, of which 0.5% has happened in last week itself andanother 1% is expected in the coming year but we may see yields stagnant for the next 6 months.Investors who have invested in long term debt for gains purely through capital appreciation and with a time horizon of lessthan a year, should book profits now. But, if the time horizon is more than 1-1.5 years, the investor can stay invested andbenefit in form of appreciation from further rate cuts.After the recent rate cut, long term yields in Government securities have come down immediately, but Corporate credit is stillcostly and many AA bonds are trading at higher yields. It is a good time to invest into these bonds as the yields of these bondsare expected to follow the downward trend as seen in the G-Secs.
Indian Fiscal Deficit:Unlike the western countries, Indian Fiscal deficit is fully funded domestically. Despite all worries about the macro-economicinstability due to the fiscal deficit, our view is that as long as India remains a high growth & high savings economy, it would notlead to any major problems.If the deficit continues to remain high, it would lead to current account deficit problems too which might push the rupeedown. Moreover, if imports remain relatively price inelastic, the Government would have to spend more on the imports andgovernments subsidies would balloon as the crude oil prices will go up in rupee terms. But, when this is tested out with realnumbers, the sensitivity of such event happening is not high.News:DOMESTIC MACRO: The wholesale price index (WPI), Indias main inflation indicator, rose an annual 6.89% in March, higher than the 6.70% rise estimated by analysts, as manufacturing inflation eased even as food inflation shot up. But it was still below Februarys 6.95% reading. The Reserve Bank of India (RBI) cut rates on Tuesday by an unexpectedly sharp 50 basis points to boost the sagging economy, but warned there was limited scope for more cuts, with inflation likely to remain elevated and growth on track to pick up, albeit modestly. Indian consumer prices rose 9.47% in the year to March, faster than the previous months reading of 8.83%, government data showed on Wednesday. Indian banks deposits grew 3.2% in the two weeks to April 6, while advances grew at a slower 1.8%, data from the Reserve Bank of India showed on Wednesday.GLOBAL MACROEuro: France and Spain sold all the bonds they wanted at auction on Thursday, though for Spain the cost was rising yields, indicating growing concerns the government will not be able to tame its deficit. As the advanced and emerging countries agreed to double the firepower of the International Monetary Fund to help contain Europes debt crisis, the IMFs governing panel said the 17-nation euro area must make more cuts to government debt burdens, push bold economic reforms and stabilize financial systems.US: Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 386,000 suggesting that job growth in April will not improve much after Marchs disappointing performance. For the first quarter industrial production rose at an annual rate of 5.4%, with manufacturing advancing at a 10.4% pace - the largest gain since the second quarter of 2010.China: China bagged foreign direct investment inflow of $29.8 bn a record-setting pace in the first three months of 2012, but an easing in its monthly momentum and a difficult trade outlook will keep monetary policy poised to compensate for any dip in capital inflows.
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