Current Perspectives on Indian Market, Economy, Scenario, Equity, Debt, Mutual Fund

2. Market and economic outlook
05-Sep-201305-Sep-2013

3. Executive summary
◌ः The rupee has been falling because the dollar has
strengthened, and due to India’s high CAD.
◌ः The government needs to take steps to attract dollars
through NRI bonds and by get PSUs to raise money
abroad.abroad.
◌ः The rupee may rise to around 60 by March owing to
falling CAD (due to falling gold imports).
◌ः Economic growth in Q1FY14 was the lowest in four
years.

4. Executive summary
◌ः WPI inflation has begun to rise due to imported
inflation.
◌ः Corporate results (both sales and net profit) in Q1FY14
were anaemic.
◌ः The market is offering compelling valuations.◌ः The market is offering compelling valuations.
◌ः To protect your portfolio against the rupee’s decline,
you need to have investments in gold and international
funds.
◌ः FMPs are a safe avenue offering good returns.

5. Market outlook
Asset Class Current
Levels( as on Sep 03,
2013)
Summary
View
Why Risk to our View
Equity Nifty: 5,471.80
Sensex: 18,619.72
Markets will
continue to be
under pressure.
There has to be
conviction that govt.
and RBI can stem
RBI and govt. may
act promptly to
attract foreignunder pressure. and RBI can stem
rupee’s fall and
stabilise economy.
Fed’s QE moves could
create added pressure.
attract foreign
flows. QE may be
postponed.

6. Index watch
Benchmark Change in August (%) YTD change (%)
S&P BSE SENSEX -3.75 -4.15
S&P BSE Mid-Cap -4.38 -25.48
S&P BSE Small-Cap -2.26 -29.66
S&P BSE Capital Goods -13.88 -34.81
S&P BSE Realty Index -10.88 -44.40
S&P BSE Consumer Durables -10.32 -27.25S&P BSE Consumer Durables -10.32 -27.25
S&P BSE BANKEX -9.93 -28.17
S&P BSE PSU -8.44 -31.97
S&P BSE Power Index -7.29 -30.35
S&P BSE FMCG -6.62 7.20
S&P BSE OIL & GAS Index -5.00 -4.33
S&P BSE AUTO Index -3.47 -10.71
S&P BSE Health Care -1.19 10.25
S&P BSE TECh Index 3.89 30.18

7. Index watch
◌ः The benchmark index, the Sensex, declined once again
in August.
◌ः The market will look up only once there is confidence
that the steps taken by the RBI and the government to
stem the rupee’s decline have succeeded.stem the rupee’s decline have succeeded.
◌ः A wide valuation gap has emerged in the market
between large-cap stocks on the one hand and mid- and
small-cap stocks on the other.

8. Index watch
◌ः On the sectoral front, IT has emerged as a favourite.
Both the revival in the US economy and the rupee’s
decline favour this sector.
◌ः Rate-sensitive sectors (auto, realty, capital goods) are◌ः Rate-sensitive sectors (auto, realty, capital goods) are
down in the dumps, more so after tightening of
liquidity by the RBI led to a spike in interest rates.

9. FII and MF flows in equity market
Month FII investment (Rs-cr) MF investment (Rs-cr)
Jan 22,059.20 -5,212.40
Feb 24,439.30 -847.90
March 9,124.30 -1,550.60
April 5,414.10 -1,422.90
May 22,168.60 -3,507.10
June -11,026.90 -269.00June -11,026.90 -269.00
July -6,253.10 -2,184.30
August -5,922.50 1,349.90
Cumulative 60,003.00 -13,644.30
While FIIs have been pulling money out of the equity market for the last three
months, MFs have turned net investors after a long gap. Any acceleration in FII
outflows from the equity market will pose further risks to the rupee.

10. FII and MF flows in debt market
FII inflows (Rs-crore) MF inflows (Rs-cr)
January 2,947.10 40,651.50
February 4,001.20 40,092.10
March 5,795.10 68,114.30
April 5,334.40 51,854.60April 5,334.40 51,854.60
May 5,969.00 26,840.10
June -33,134.90 64,602.10
July -12,037.60 -23,740.20
August -9,772.90 3,485.90
YTD cumulative -30,898.60 2,71,900.40
FIIs have pulled out money from the debt market in June, July and August
and are net negative investors YTD. MFs pulled out money only in July and
are net positive investors YTD.

11. Rupee’s steep fall against the dollar
50.00
60.00
70.00
80.00
Rupee against dollar
54.69
65.7
168.83
28 August
0.00
10.00
20.00
30.00
40.00
01-Jan-2013 01-Feb-2013 01-Mar-2013 01-Apr-2013 01-May-2013 01-Jun-2013 01-Jul-2013 01-Aug-2013
Price
31-Aug-2013

12. Rupee’s steep fall against the dollar
◌ः The chief problem facing the Indian economy today is
the rupee’s steep fall against the dollar.
◌ः Since the start of May, the rupee is down 22.40%
against the dollar.
◌ः The rupee’s decline was triggered once Ben◌ः The rupee’s decline was triggered once Ben
Bernanke, the chairman of the US Federal
Reserve, spoke of quantitative easing (QE).
◌ः The dollar strengthened on expectation that there
would be less of it in future, and all emerging market
(EM) currencies fell against it.

13. Rupee’s steep fall against the dollar
◌ः The rupee’s fall was steeper than that of all other EM
currencies because India runs a large current account
deficit (CAD). Investors worry about how it will fund
the CAD.
◌ः Recently the RBI announced changes to the liberalised◌ः Recently the RBI announced changes to the liberalised
remittance policy. It reduced the amount that
companies and individuals can invest abroad. It also
placed restrictions on property purchases abroad
(August 14).
◌ः These steps were meant to preserve India’s foreign
exchange reserves.

14. Rupee’s steep fall against the dollar
◌ःBut they triggered the fear that India might
impose capital controls.
◌ःThis led to further outflows, and
exacerbated the rupee’s decline.

15. Key risks from rupee depreciation
◌ः FII holding in India is at 21% in BSE 200 companies (45%
of free float). This makes the Indian market vulnerable
to a sell-off in emerging markets.
◌ः Every 10% depreciation of the rupee raises inflation by
100 bps. Higher inflation will constrain the RBI's ability100 bps. Higher inflation will constrain the RBI's ability
to cut interest rates and kick start the economy.
◌ः Companies with dollar debt may default. Infrastructure
firms are especially vulnerable. Banks’ NPAs may rise.
◌ः If the rupee falls to 70 and beyond, FII pull-out from
the equity market may accelerate.

16. What needs to be done
◌ः The central bank needs to maintain tight liquidity to support the
rupee, but not so tight that growth gets choked.
◌ः In the short run, India needs to augment its dollar reserves. It can
either get public sector companies to issue quasi-sovereign bonds
or launch NRI bonds.
◌ः Both foreign equity investors and NRIs would be interested in◌ः Both foreign equity investors and NRIs would be interested in
taking advantage of the weak rupee.
◌ः In the longer run, the government needs to create an environment
that attracts more FDI than unstable FII flows.
◌ः Capital surplus countries like Japan are keen to invest in India's
infrastructure.

17. What needs to be done
◌ः Improve trade relations with Iran. This will allow India
to buy oil in rupees instead of dollars.
◌ः◌ः Implement the government’s welfare projects better so
that they increase productivity, instead of just leading
to higher inflation.

18. When will the rupee recover?
◌ः According to rating agency Crisil, the rupee will recover
to around 60 to the dollar by the end of FY14 from its
current level of above 65.
◌ः This will be driven by an improvement in CAD. CAD had
come in at 4.8% in FY13. Crisil expects it to fall to 3.9%come in at 4.8% in FY13. Crisil expects it to fall to 3.9%
in FY14.
◌ः The fall in CAD will be driven by a decline in non-oil
imports, chiefly gold.
◌ः Gold imports will fall because of the increase in import
duty from 8 to 10%, and the restrictions imposed by the
government on investing in gold coins and gold bars.

19. When will the rupee recover?
◌ः Import of consumption items and capital goods may also fall due to
weaker domestic demand.
◌ः CAD is now expected to be $71-72 billion in FY14.
◌ः But India will have difficulty in providing for even this lower amount
of CAD. That is why it is expected that the rupee will be 12-14%
weaker by the end of FY14 compared to the end of FY13.weaker by the end of FY14 compared to the end of FY13.
◌ः If the government takes immediate measures to encourage foreign
inflows (issue NRI bonds and get PSUs to borrow abroad) that too will
help the rupee.
◌ः The risk to its forecast, according to Crisil, comes from how the
tapering of QE3 will pan out.
◌ः According to Crisil, it is likely to begin in the Oct-Dec quarter of 2013.
If it proceeds at a fast pace, it could affect inflows into emerging
markets, and have an impact on EM currencies, including the rupee.

20. Slowing economic growth
◌ः The Indian economy grew by just 4.4% in the April-June
2013 quarter.
◌ः This was the slowest quarterly expansion in four years.
◌ः All the components of aggregate demand remained
subdued: government, private consumption andsubdued: government, private consumption and
investment.
◌ः Both manufacturing and mining contracted. While
manufacturing had grown 2.6% in the previous
quarter, it slumped to 1.2% in the first quarter.
◌ः The mining sector registered a decline of -2.8% in the
June quarter compared to a decline of -3.1% in the
previous quarter.

21. Slowing economic growth
◌ःSome segments of the service sector have also
begun to falter.
◌ःThe only saving grace is that a good harvest is
expected this year because of a good monsoon.expected this year because of a good monsoon.
This will lead to higher rural income, which
should in turn boost consumption.
◌ःThe PM remains hopeful of a 5.5% growth in FY
14, but this appears unlikely.

22. Slowing economic growth
◌ः Recent steps by the RBI to tighten liquidity (in order to
support the rupee) may further hurt growth prospects.
◌ः GDP growth may improve from the second or third
quarter once higher government spending makes an
impact on the economy. In the first quarter of thisimpact on the economy. In the first quarter of this
fiscal, the government has released 48-50% of the total
plan expenditure for the year.
◌ः Between January and April the Cabinet Committee on
Investments (CCI) has approved projects worth $ 27
billion.

23. Inflation inches up
◌ः WPI inflation was 4.6% in May, 4.9% in June, and then
accelerated sharply to 5.8% in July.
◌ः Non-food manufacturing or core inflation, which had
softened to 2% in June, rose to 2.4% in July. This was
the result of the rupee's depreciation, which is causingthe result of the rupee's depreciation, which is causing
imported inflation.
◌ः However, due to reduction in the pricing power of
manufacturers (weakened demand due to higher
interest rates), the underlying trend in core inflation is
expected to be benign in FY14.

24. Inflation inches up
◌ः A good monsoon is expected to result in a good kharif
harvest and lead to softening of food prices in FY14.
◌ः◌ः The rupee's depreciation could cause import inflation.
However, its pass-through effect may to some extent
be blunted by weak domestic demand.

25. Oil prices up again
◌ः Another risk to the Indian economy has arisen with the
price of oil strengthening.
◌ः With tensions in the Middle East rising, Brent crude has◌ः With tensions in the Middle East rising, Brent crude has
risen about 14% since April. This will again keep India's
twin deficit problem in focus, leading to further
weakness in the rupee.

26. First quarter results
◌ः Net sales of Sensex companies continued to decelerate
in the first quarter of FY14 to 1.7% y-o-y. This is the
lowest level since the global crisis of 2008.
◌ः This low sales figure confirms weakened demand within◌ः This low sales figure confirms weakened demand within
the economy.
◌ः Net profit of Sensex constituents declined to 1.9% y-o-y
in the first quarter of FY14.

27. First quarter results
◌ः The sectors that had high sales in the first quarter were
healthcare, IT and telecom. Those with poor sales
included industrials, metals and mining.
◌ः Sensex PAT growth was skewed in favour of◌ः Sensex PAT growth was skewed in favour of
healthcare, IT, and FMCG. Industrials, oil and gas and
telecom posted poor profits.
◌ः According to Kotak Securities, Sensex earnings will
grow 8.2% in FY14 and 14.5% in FY15.

28. Valuations have turned compelling
◌ः Free cash flow yield to enterprise value of the Sensex is
at around 8.5-9%, which is close to the 10-year bond
yield.
◌ः Sensex is trading at about 14.5 times FY14 EPS and◌ः Sensex is trading at about 14.5 times FY14 EPS and
12.7 times FY15 EPS.
◌ः The market has got bifurcated. Defensive stocks are
trading at high valuations and rate-sensitives are at
record lows. The price of the latter may not pick up
unless there are signs of a turnaround in the economy.

29. WHAT SHOULD YOU DO?

30. Gold acting as a hedge
20000.00
25000.00
30000.00
35000.00
40000.00
Price
30,780
32,25034,130
,
28
Aug.
0.00
5000.00
10000.00
15000.00
20000.00
Price
31-Aug-2013

31. Have an allocation to gold,
the classic hedge
◌ः If you had at least a 10-12% allocation to gold in your
portfolio, it would have acted as a hedge against the
rupee’s fall.
◌ः As the rupee fell, the value of gold, most of which is◌ः As the rupee fell, the value of gold, most of which is
imported from abroad, rose.
◌ः Since the start of the year it is up only 4.78%.
◌ः But from its nadir this year of Rs 25,018.50 on 28
June, it has rallied 28.90%.

32. Invest in international funds
◌ः Another way you could protect your portfolio against
the rupee’s decline is by investing in international
funds.
◌ः About 15% of your equity portfolio may be invested in
foreign equities.foreign equities.
◌ः 50% of your money in foreign markets should be
invested in the US market and the balance in emerging
markets.
◌ः If you are new to international investing, begin with
ETFs. They have low cost and offer you a
broad, diversified exposure.

33. FMPs offer safety and returns
◌ः Interest rates within the economy shot up after the RBI
introduced liquidity tightening measures to stem the
rupee’s fall.
◌ः The mutual fund industry has responded by launching a
large number of fixed maturity plans (FMPs).large number of fixed maturity plans (FMPs).
◌ः They are close-ended products with no mark-to-market
risk.
◌ः Investors may invest in them to take advantage of the
current spike in interest rates. If you hold them for
more than one year, the tax rate is also more
favourable compared to fixed deposits.

34. Thank you