The World This Week - August 12 - August 16, 2013


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The World This Week - August 12 - August 16, 2013

  1. 1. The World This Week August 12 – August 16, 2013
  2. 2. Macro Economics and Debt View: It is expected that Fed will start tapering its QE III bond purchase by the end of the year. There is clearly a reduced risk appetite amongst developed market investors which also means they might not invest in India or other emerging markets at all. Our worry is that FIIs pull out has not begun yet in equities (and we are hoping that it doesn’t begin); the additional inflows have stopped. Reduction of risk capital because of QE would necessarily pull down all risk assets globally, some of which we’ve already seen - emerging market debts, emerging market equity which is what India gets classified under. Unless US markets deteriorate extensively, only then Fed will be compelled to put QE back on track because of which again there might be a surge, but barring that there are no possibilities of redemption of QE, we do not expect the flood of capital to restart. The falling rupee is the main topic which is being talked about. We are a country with a Current Account deficit (CAD) and till we have capital account surplus to pay for it, we are fine in terms of exchange rate. The moment the capital account surplus stops, we are always going to face a downward pressure for the currency. In the past it has happened through devaluations, like 1991 and 1976, when we had devaluations of 60% and 40%, this time we are facing a slow depreciation. This fall is still not speculative but it is fundamental in our view. We do have a CAD and it is growing and hence the rupee fall is not likely to be arrested anytime soon. The clearest way to address this fall of rupee is to improve CAD by taking some long term measures like export promotion which is very laborious and hard to pull off in an election year. Simpler measure is to cut down on gold imports and other luxury item imports. With the increase in the value of dollar, some of the discretionary imports are already starting to come down which will hopefully reduce CAD, but gold imports are a little bit of a peculiarity as rise in value of gold is not deterrent to buy gold, infact it is a trigger to buy gold whereas investors do not realize it is - because rupee has depreciated. Gold has not come back to its original level. By imposing import duty the GOI is trying to convey that it does not want more gold to be imported but that is not clearly reflecting in the gold demand. The other measure the government is taking is the capital account side which is essentially trying to get more capital in from abroad. There is a draconian measure which the government is not taking and we hope it does not happen is to impose capital controls. Finance Ministry has stated they will not take this measure. We might see some measures like NRI bond issuance or dollar denominated bond issuance by the Indian banks, state sponsored or a combination or something like infrastructure bonds and liberalized norms which are already starting to come for NRE deposits. With that the government is trying to improve the capital account. With the current account measures and capital account measures and also the money market interventions the RBI is probably going to defend rupee at current levels or arrest the fall to make it more gradual but our expectation is the rupee will continue to depreciate at a slower pace maybe, but certainly so. On the back of that the bond yields have spiked. We have still not fully understood the linkages between the money market - which is why the bond yields have been rising - and the currency markets, which is where RBI expects the rupee fall to be arrested. We are in a tight monetary scenario and will remain so for foreseeable future. We don't expect the short term rates to fall by a big way anytime soon, nor do we expect long term debt yields to fall in a big way anytime soon.
  3. 3. We expect the rates to be cut early next year, till then indirect tightening like CRR might be applied if there is further depreciation of rupee. If rupee fall stops we might actually see some relaxation on the CRR front or MSF front but nothing on the repo side. With that the growth climate continues to suffer. Any promotion of investments through door interest rates will lead to inflation and further slide of rupee potentially, and in terms of priority, the Government as well as RBI have clearly put rupee fall arresting as the first priority followed by inflation followed by growth. We do expect that the Indian growth potential is above 5% and it's really a question of priorities due to which RBI is focusing on inflation control and eventually the growth rate will return. It is a short term firefight. We maintain our stance on bonds - Neutral (Don't buy and don't sell) and stick to short term debt and any specialized terms which target credit. Equity View: The Indian equity markets collapsed by 4% largely due to the dramatic decline in the rupee. As we have been seeing for the last couple of months, rupee has been under a significant depreciating bias because of which RBI has been forced to tighten interest rates in the short term. Because of the QE tapering concerns, it is unlikely that we would see a very dramatic reversal of this trend anytime soon. However there are ways for equity market participants to benefit out of this. Overall, if we look at how the equity markets have been behaving, we’ve seen a significant fall in Nifty from the levels that it topped out. We had Nifty at 6100 levels last month from where it has collapsed almost 10%. There have been sectors which have done extremely well largely on the back of rupee depreciation. The strategy for equity is to avoid aggressive sectors i.e. banking sectors and go ahead with sectors like Pharma and IT sector. If we look at the IT sector, the IT index has delivered a 20% absolute positive returns. There are clearly ways of monetizing what is happening and it is more difficult as one has to go down the chain in terms of identifying ideas involved. We believe that like every few years we see some kind of a negative event which pans out both from the global and domestic perspective, in which they go back the equity markets. However we do not think this shall continue for a very long time. In September – October, we may see first signs of tapering of QE III and once the event actually happens we are going to see some serenity reverting back to the markets. In the meantime, we believe that it is good to have a defensive portfolio. There is a lot of volatility and we have to live through it for some time and once that dust settles on this, aggressive portfolios can be built post that. Currently we maintain a cautious outlook; we have debt yields at around 8.9%, Nifty at 5500, Rupee at 62 levels against the Dollar, where a lot of negatives have come together, with this it is very difficult for things to worsen from this stage as the worse has already been witnessed.
  4. 4. News: DOMESTIC MACRO: India  India's inflation accelerated to 5.79 percent in July, the fastest pace in five months, mainly driven by higher food prices and costlier imports as the rupee fell to a record low. The WPI - India's main inflation measure - rose to an annual of 4.86% in June.  To protect the falling value of the rupee, the Reserve Bank of India on Wednesday announced measures aimed at moderating capital outflows, following which individuals cannot buy properties abroad under the Liberalised Remittance Scheme. Moreover, the limit for remittances by resident individuals under LRS has been lowered from $200,000 to $75,000 in a fiscal year and it also further curbed gold imports.  A triple blow stunned the financial markets: the rupee dropped to a lifetime low of 62.03, the Sensex plunged by over 4 per cent, its biggest one-day drop in two years, bond markets went haywire and gold surged to a two-year high. GLOBAL MACRO EURO  Europe’s ailing car market grew in annual terms for the second time this year in July, supporting hopes of a much-needed stabilization for battered producers in the second half of 2013. Registrations of new cars in Europe rose 4.8 percent compared to the same month a year ago to 1.02 million vehicles, according to data published by the German auto industry association VDA. The Ten-year German yields were holding at 1.81 per cent, heading back towards levels not seen since April 2012 US  U.S. bond yields rose to two-year highs on Friday as investors worried the Federal Reserve will start scaling back stimulus next month, while world share indexes registered their biggest weekly fall in almost two months. The 10-year yield touched 2.8 percent. Treasuries drove the dollar up against major currencies. The bond market has undergone a sharp sell-off since the Fed started talking about paring back its bond purchases.  The number of Americans seeking unemployment benefits dropped 15,000 last week to a seasonally adjusted 320,000, the fewest since October 2007, a sign of dwindling layoffs and steady if modest job growth continues. China  Average new home prices in China’s 70 major cities in July rose 7.5 percent from a year earlier, marking the seventh straight month of year-on-year increase. China's monthly property inflation moderated for a fourth straight month in July, although annual gains were the strongest this year, complicating policymakers' task of trying to cool the sector without stifling growth elsewhere.  China attracted $38.3 billion in foreign direct investment in the first four months of 2013, up 1.2 percent from the same period in 2012.
  5. 5. Commodities and Currency: Date USD GBP EURO YEN Crude (Rs. per BBL) Gold (Rs. Per 10gms) 12-08-2013 60.80 94.20 81.03 63.07 6476 28919 13-08-2013 61.43 95.07 81.77 63.09 6452 29441 14-08-2013 61.51 94.98 81.62 62.56 6563 29451 15-08-2013 - - - - - - 16-08-2013 61.81 96.56 82.45 63.29 6603 30644 - 1.65% Rupee Depreciated - 2.44% Rupee Depreciated - 1.72% Rupee Depreciated - 0.35% Rupee Depreciated 1.92% 5.63% Debt: Tenor Gilt Yield in % (Closing) Change in bps (Week) 1-Year 9.96 67.5 5-Year 8.94 19.6 10-Year 8.9 77.4
  6. 6. Satadru Mitra Varun Goel Jharna Agarwal Abbas Naheed Kinjal Mehta Disclaimer The information and views presented here are prepared by Karvy Private Wealth (a division of Karvy Stock Broking Limited) 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 Karvy Private Wealth (A division of Karvy Stock Broking Limited) operates from within India and is subject to Indian regulations. Karvy Stock Broking Ltd. is a SEBI registered stock broker, depository participant having its offices at: 702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051 . (Registered office Address: Karvy Stock Broking Limited, “KARVY HOUSE”, 46, Avenue 4, Street No.1, Banjara Hills, Hyderabad 500 034) SEBI registration No’s:”NSE(CM):INB230770138, NSE(F&O): INF230770138, BSE: INB010770130, BSE(F&O): INF010770131,NCDEX(00236, NSE(CDS):INE230770138, NSDL – SEBI Registration No: IN-DP-NSDL-247-2005, CSDL-SEBI Registration No:IN-DP-CSDL-305-2005, PMS Registration No.: INP000001512”