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The World This Week - August 26 - August 30, 2013
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The World This Week - August 26 - August 30, 2013


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  • 1. 11 The World This Week August 26 – August 30, 2013
  • 2. 2 Equity View: The expectation of tapering of the ongoing Quantitative easing (QE III) by the U.S. Fed which is expected to start sometime in September has caused a lot of volatility in emerging markets across the world. Emerging market bonds, currencies and equities – all have witnessed selling pressures. In India, the situation gets compounded because of very high Current Account Deficit (CAD) and Fiscal Account Deficit (FAD) that we are running, because of which we have seen a disproportionate impact on Indian equities. If we were to do a comparison from 22nd May 2013 onwards when for the first time we heard about prospective tapering of QE III, since then the Indian currency has weakened to the extent of around 23% - and it is the highest amongst the emerging markets. Compared to Brazil and Indonesia where most of the markets have weakened from 13% - 15%, India has been the worst performer. This significant weakening of Rupee against the U.S. Dollar is also going to have an impact on us from fiscal perspective. The oil import bill is going to get ballooned up further, we are going to see a potential impact of 0.5% to 0.7% on Fiscal Deficit if Rupee were to stabilize around these levels and Crude Oil was to stay around $110/barrel. From the full year Fiscal Deficit target of around 4.8% that the Government of India (GOI) had given its budget, we would expect the Fiscal Deficit anywhere between 5.5% – 6% of the Gross Domestic Product (GDP). This would also raise some concerns about the sovereign rating that India has had and we’ve already seen warnings by some of the rating agencies and they have already cautioned India in terms of how the fiscal side needs to be balanced. The new Food Subsidy bill is also going to cause further pressure, but not this fiscal, as we’ve already seen the first half pass by. But from FY 15 onwards that’s going to cause incremental amount of pressure. We’ve also seen significant amount of monetary tightening by RBI in terms of the effective interest rates being changed from 7.25% to 10.25% - a good 300 bps increase - without RBI really touching the Repo rates. This is definitely going to have an impact as far as growth picture is concerned and we are going to see some more moderation in GDP growth. On Friday, we saw the GDP data for Q1 coming out which came in at 4.4% v/s the consensus expectation of 4.8%. The stand out number in the overall piece was the industry growth at 0.2% which is a very significant weakening of industrial activity in the country. The IIP number has indicated softness and there’s clearly no revival as far as the industrial activity is concerned. We would have the auto sales numbers today and we expect those numbers also to stay muted, the only good silver lining to that number would be tractor sales because of the good monsoons. As far as the impact of all this on Equities is concerned, we have already seen almost a 10% correction in Indian equities in the last 1 – 1.5 months. Although we believe that the correction in both Rupee and India Equities is overdone, in the short term news flow can cause markets to overshoot the fundamentals and this could be the case now. What we’ve seen is that interest rate sensitive sectors like Banks, Automobiles, Real Estate and Capital Goods have taken a much disproportionate hit when compared to the broader markets.
  • 3. 3 For the short term, we believe that these sectors are going to be under pressure. The view on banking space remains the same, we are not recommending any incremental selling as it has already corrected quite a bit and we are not recommending buying at the current valuations because we still don’t think that we’ve seen the worst in terms of asset quality pressures. Projections: GDP Growth: We expect Q2 number to be even slower than Q1 and expect some kind of recovery to happen in Q3 and Q4. Our GDP forecast for FY14 stays at 5%. However if we see further turmoil because of the U.S. Fed related events GDP number could slowdown further. Then we could see Q2 number at 4% or even below and the worst GDP prediction for the year would be around 4.2% Sensex Earnings target: In the beginning of the year, we had assumed a 10% earnings growth in FY14, 12% earnings growth for FY15. Based on our current estimates Sensex EPS is expected to be Rs.1,333 and Rs.1,495 for FY14 & FY15. In a stress case scenario, as mentioned above we could see GDP growth at 4.2% for FY14 and an earnings growth at 4%. In that scenario, Sensex earnings could get downgraded to Rs.1,260 and Rs.1,386 for FY14 & FY15 respectively. Assuming a worst case multiple of 12x on FY15 earnings, we get a stress case index level of 16,600 for the Sensex, which is a good 2000 points away from the current levels. However we would emphasize that it is not a base case at this point of time. This is something that we believe could happen only in case things really go out of hands; and we see a knee jerk reaction in Emerging Markets to any aggressive tapering activity from the U.S. Fed. We believe that in the short term, especially till the U.S. Fed meeting, we can see continuous volatility in all asset markets. It is very important to see first the stabilization of Rupee, because Rupee is the main factor which is driving all the asset classes. Any stability that we see in Rupee which is a durable kind of stability, in turn would also translate into a return of stability in Equity and Bond markets. That becomes really the driving asset class at this point of time and we believe that by the middle of the month we would see some kind of a durable bottom emerging on that. As far as the positives are concerned for the market, especially the equity markets, the monsoons have been pretty good; commodity prices have corrected globally and there’s been a strong macro economic recovery in the U.S. and Euro. Growth even in China is now bouncing back. These are certainly big positives for Indian Equities. We remain positive on the Equity markets from a medium to long term perspective. Our favorite sectors continue to be IT and Pharma along with FMCG and Telecom.
  • 4. 4 News: DOMESTIC MACRO:  India's economy grew at the slowest quarterly rate since the global financial crisis at 4.4% as per June’s figure, lower than expected and hurt by a contraction in mining and manufacturing.  Moody's currently has a "Baa3" sovereign rating on India, or its lowest investment-grade rating, with a "stable" outlook.  India's exports rose 11.64 percent in July to $25.83 billion from the previous month, but the trade deficit was almost unchanged at $12.27 billion, keeping pressure on the current account deficit and the beleaguered rupee. GLOBAL MACRO EURO  Italy raised nearly 4.0 billion euros ($5.3 billion) in a bond auction, with borrowing costs rising for short-term bills as fresh political uncertainty grips the eurozone's third-biggest economy.  Unemployment in the euro zone in July remained at a record high of 12.1 percent.  Having paid the price with six years of recession and draconian austerity, Greece now still faces a 10-billion-euro financing gap for 2014 and 2015. USA  U.S. gross domestic product grew at a 2.5 percent annual rate in the April-June period, according to revised estimates. That was more than double the pace clocked in the prior three months due to a surge in exports.  U.S Jobless Claims Fell to Five-Year Low over Past Month, the number of claims in the month ended Aug. 17 declined to 3,30,500 the least since November 2007. China  China's economic growth slows down to its weakest pace in two decades, and a growth rate of 7.5% is predicted for the economy. Indices: Date Sensex Midcap Auto Bankex CD CG FMCG HC IT Metals O&G Power Realty Teck 26/08/2013 18,558 5,391 10,248 10,679 5,742 7,326 6,321 8,758 7,617 7,899 8,156 1,420 1,236 4,283 27/08/2013 17,968 5,278 9,983 10,109 5,601 6,981 6,132 8,584 7,629 7,620 7,958 1,355 1,187 4,260 28/08/2013 17,996 5,224 9,992 9,979 5,435 6,944 6,106 8,684 7,834 7,763 7,870 1,362 1,170 4,336 29/08/2013 18,401 5,301 10,202 10,143 5,511 7,096 6,246 8,825 7,905 7,948 8,095 1,387 1,174 4,399 30/08/2013 18,620 5,300 10,202 10,304 5,616 7,085 6,342 8,966 8,028 7,785 8,149 1,387 1,174 4,462 0.33% -1.68% -0.45% -3.51% -2.19% -3.29% 0.34% 2.38% 5.39% -1.44% -0.08% -2.32% -5.02% 4.19%
  • 5. 5 Commodities and Currency: Date USD GBP EURO YEN Crude (Rs. per BBL) Gold (Rs. Per 10gms) 26-08-2013 64.23 100.01 85.93 65.21 7183 31911 27-08-2013 65.67 102.20 87.75 66.95 7113 32694 28-08-2013 68.36 106.03 91.47 70.25 7510 32694 29-08-2013 67.71 105.14 90.03 69.22 7972 32943 30-08-2013 66.57 103.34 88.16 67.83 7797 32207 31-08-2013 7590 32111 -3.51% Rupee Depreciated -3.23% Rupee Depreciated -2.53% Rupee Depreciated -3.86% Rupee Depreciated 5.67% 0.63% Debt: Tenor Gilt Yield in % (Friday) Change in bps (Week) 1-Year 9.54 14.4 5-Year 9.35 35.9 10-Year 8.60 33.2
  • 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”