ADVICE for the WISE
Newsletter –FEBRUARY 2014
From the Desk of CIO
The inflation headwinds have continued to be a major hindrance for economic
quite badly, Argentina following suit. Other emerging markets are not far
recovery in India. Add to that the change in stance at RBI in terms of the
behind in the rout. While Rupee is much better placed now than it was in the
inflation index of focus – from WPI to CPI – & it is likely that the ‘tracked’
mid-2013 (when tapering speculations first began), it is hard to gauge the
inflation remains high for quite some time to come. For several quarters now,
actual effect of the tapering on foreign fund flows to India. There are
the food & fuel price increases kept the CPI high even as the WPI had started
arguments for & against investing into India for global investors & the
easing. Fundamentally, the sensitivity of food & fuel prices to monetary
prospect of general elections in India in near future makes matters rather risky
conditions is much lower than that of say industrial input goods. The former
for any investor not keen to take a bet on who comes to power at the centre
are consumption driven while the latter are investment driven. Monetary
in May. The repo rate increase of RBI was probably also keeping in mind the
tightening operates through reduced investment demand by increasing the
possible downward pressure on Rupee with the continued tapering in US.
cost of borrowing. Its effect on consumption demand is only indirect &
second-level. Hence a tight monetary policy affects investment demand quite
Interestingly enough, while inflationary expectations are starting to get
quickly – as is evident from the reduced order book of most infrastructure
entrenched in Indian economy, there seems to be another curious
companies. However, it is likely to take much longer to affect food & fuel
development as regard interest rates. Increasingly, it would seem that the
prices. The operating mechanism for that is expected to be the reduced
high interest rate regime is also getting ‘entrenched’ in the economic system.
circulation of money in the economy due to the tight monetary policy – which
Companies & individuals alike are seemingly getting resigned to continued
in turn is expected to reduce the amount of money available for consumption
high interest rates. Such stabilization of beliefs in continued high interest rate
as well. How long before this mechanism starts to take effect is anybody’s
environment may on one hand aid growth by getting companies & individuals
to act on their investment plans – albeit with lesser profitability – rather than
postpone them with the expectations of lower rates later. On the other hand,
Besides inflation, RBI seems to be cognizant of another worry on the global
these rates may also keep most of the savings in relatively safe financial
side – thus prompting it to raise the interest rates in January, in a surprise
instruments such as government debt or quasi-government debt. The risk
move. The long-awaited & much-feared tapering of the monetary stimulus
aversion of investors coupled with high yields may starve several potentially
from the US Federal Reserve (also called quantitative easing – III) has
profitable investment projects of funds – thus delaying the recovery.
continued in the Fed’s latest meeting. The monthly purchase of US debt
Hopefully, a change of guard at the centre after the election would propel
securities by the Fed has been reduced from $85 billion earlier to $65 billion
investment activity with drivers other than cost of borrowing. That could end
now, in two steps. Several emerging market currencies have suffered from
the interest rate - low growth spiral.
what seems like the beginning of a ‘run’. Turkey in particular has suffered
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Economic Update - Snapshot of
As on 24th
S & P BSE Sensex
10 yr Gsec
10-yr G-Sec Yield
Crude Oil ($/bbl)
(As on 24th January)
• Indicates SBI one-year FD
•New 10 Year benchmark paper(8.15%, 2022 Maturity) was listed in the month of June , the 1 year yield is compared to the earlier benchmark(2021 Maturity)
Economy Update - Global
• U.S. Manufacturing PMI fell to 53.7 in January from 55.0 in December.
• The U.S. unemployment rate fell 0.3% to 6.7%, its lowest level since October 2008, despite the smallest
monthly job gains in three years.
• Fed trims asset purchases by another US$10bn to $65bn a month.
• Italy's cabinet approved the privatization of up to 40% of the post office as the government tries to bring
down its huge public debt.
• Consumer prices in Germany, rose 0.5% on the month in December, but the annual inflation dropped to
1.2% from 1.6% in November.
• Britain needs to cut 25 billion pounds ($41 billion) in spending after next year's election to reduce
borrowing as per finance minister.
• Japan January manufacturing PMI rose to a seasonally adjusted 56.6 in January from 55.2 in December, a
8-year high number.
• Japan Dec jobless rate falls to 3.7%, lowest since 2007.
• Japan's core consumer inflation, excluding fresh food, rose at the fastest pace in more than five years in
December by 1.3%
• IMF revises India's growth forecast in 2014-15 (Apr-Mar) to 5.4% from 5.0% in October.
• Exports of gold jewellery from India in December dropped 30.4% from a year ago to $443.19 million
• China's urban unemployment rate ticked up slightly to 4.05% at the end of December 2013 from 4.04%
three months earlier.
Economy Outlook - Domestic
• Q2FY14 GDP growth improved to 4.8% YoY as compared to 4.4%
in the previous quarter leading to growth of 4.6% in first half of
this fiscal. Strong agriculture sector growth and meager
improvement in industrial sector aided in pushing the growth in
the economy in the second quarter. While growth in services
sector continued to slow down.
• GDP at Market Price which had trended below GDP at Factor Cost
for five consecutive quarters rose above FC at 5.7% as subsidies
dropped in second quarter as compared to previous year.
Nov Dec Jan Feb Mar Apr May Jun
12 12 13 13 13 13 13 13
Jul Aug Sep Oct Nov
13 13 13 13 13
• Nov’13 IIP surprises with a continued deceleration in the growth,
as the performance declines by 2.1% YoY, compared to 1.6%
de‐growth and 2.0% growth in Oct’13 & Sep’13. Sharper than
expected deceleration in Consumer Durables sector dragged the IIP
performance. 12MMA IIP further dropped to 0.4%, which is near to
four year low levels.
• Headline figure for Oct’13 is revised upwards by 24bps to (1.6)%
YoY primarily driven by upward revision in Food products and
Chemical related products. Food products sector was also revised
• Agriculture growth rose to 4.6 per cent during July-September
from 2.7 per cent in April-June; the growth for the first half of
2013-14 for the farm sector, according to the data released, is 3.6
per cent. The agriculture growth achieved in the first half of 201314 is just about the long term average.
• Contribution of Services sector to overall GDP growth in Q2FY14
slowed down further to 76.5% of the GDP. Growth slowed down
sharply to 5.9% YoY from peak growth of 10.9% in Mar’11.
upwards by 1.2% in Aug’13 IIP numbers.
Economic Outlook - Domestic
Growth in credit & deposits of SCBs
Dec’13 WPI dropped to a 5 month low at 6.16% YoY, vis-à-vis
reading of 7.52% in Nov’13 and 7.24% in Oct’13. The sharp drop
in Inflation in Dec’13 is driven by 29.66% MoM decline in
Vegetable prices. However, Vegetable prices have more than
doubled so far in this fiscal.
Nov’13. WPI for the month of Oct’13 has been revised upwards
by 22bps to 7.24% YoY due to 33bps upward revision in
Manufacturing Inflation and 4.9% revision in LPG prices.
The average WPI for Apr-Dec’13 remains elevated at 6.15% YoY
as compared to 7.60% in the year-ago period
As on Dec 2013 Bank credits grew by 14.5% on a Y-o-Y basis
which is about 0.7% lower than the growth witnessed in Dec
2012. Aggregate deposits on a Y-o-Y basis grew at 15.8%, viz-a
viz a growth of 16.1% in Dec 2012.
On 28th Jan, RBI increased the repo & MSF rate by 25bps. There
was no change to liquidity measures. Despite the recent cool-off
in headline inflation numbers, the stickiness in core CPI has been
worrisome. RBI seems to have endorsed Dr. Urijit Patel
Committee recommendations for a ‘glide path’ to disinflation.
RBI will be targeting to reduce headline CPI to 8% by January
2015. RBI stated that “further policy steps will be data
dependent, if the disinflationary process evolves, further policy
tightening in the near term would not be anticipated at current
* End of period figures
Headline CPI eased to 9.87% YoY in Dec’ 13, as compared to
11.16% in Nov’13. The emphasis on CPI as an inflation metric
has become the cornerstone of India’s new monetary policy
under Governor Rajan. With a target for CPI to be 4% with a
range of +/-2% in a time span of 2 years.
Wholesale Price Index
Indian equity markets remained subdued last month. RBI hiked interest rates again, the third rates hike in last four months.
Global markets remained volatile due to further reduction in US Federal Reserve. The quantum of quantitative easing
(QE3) has been reduced to 65 billion dollars per month. There has been two consequent tapering actions in the last two
months due to strong macroeconomic recovery in United States. The revival of US growth is good news for global economy
and sooner or later, markets will start focusing on the positive side of reduction in monetary stimulus.
RBI Governor increased the repo rate by 25bps in the last policy review. Despite the recent cool-off in headline inflation
numbers, the stickiness in core CPI has been worrisome. RBI seems to have clearly endorsed Dr. Urijit Patel Committee
recommendations for a ‘glide path’ to disinflation. RBI will be targeting to reduce headline CPI to 8% by January 2015. We
expect RBI to maintain a hawkish stance to achieve these objectives as a significant drop in inflation appears unlikely in the
GDP growth in the last two quarters has remained below 5%. The slowdown is expected to have continued in third quarter
also. Manufacturing sector remains extremely weak and there are no signs of revival in industrial activity. RBI believes that
expected pick-up in agriculture should provide some support to growth.
The emphasis on core CPI as an inflation metric has become the cornerstone of India’s new monetary policy under
Governor Rajan. It is interesting to see RBI link rupee devaluation to CPI inflation. The current account deficit for FY14 is
now expected at 2.5% as compared to 4.8% in FY13. This puts India into a relatively comfortable position compared to
other emerging market peers given the uncertain external environment.
The political activity in the country is going to get more and more interesting as we approach the General elections
scheduled in May. The recent opinion polls indicate support building up for NDA lead by Narendra Modi, which is being
taken positively by equity markets.
The quarterly earnings have been largely in-line with expectations. While IT, Healthcare & telecom sectors have
delivered strong earnings growth, some banks have shown further deterioration in asset quality. Currently, Public sector
banks are trading at quite cheap valuations and we expect significant outperformance from that space in the next two to
three years. We expect export oriented sectors like IT & healthcare to continue to benefit from the significant rupee
depreciation seen last year. Telecom is another sector which might deliver strong earnings due to return of pricing power
& reduction in competitive intensity. We maintain our year-end Sensex target of 24,800 and are aggressive buyers of
We believe in the large sized opportunity presented by Pharma sector in India. India’s strength in
generics is difficult to replicate due to quality and quantity of available skilled manpower. With the
developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian
pharma players are at the cusp of rapid growth.
The regulatory hurdles and competitive pressures seem to be reducing. Incumbents have started
to increase tariffs slowly and pricing power is returning. We believe that consolidation will happen
sooner than expected.
Demand seems to be coming back in US. North American volume growth has also remained
resilient. With significant rupee depreciation in the last few months, margins will get a boost.
The recent rate hikes will cause pressure on asset quality in the short term. We expect public
sector to significantly outperform private sector due to cheap valuations and stabilization in asset
We like the regulated return characteristic of this space. This space provides steady growth in
earnings and decent return on capital.
We are positive on SUV’s and agricultural vehicles segment due to lesser competition and higher
We like the secular consumption theme. We prefer “discretionary consumption” beneficiaries such
as Cigarettes, IT hardware, durables and branded garments, as the growth in this segment will be
disproportionately higher vis-à-vis the increase in disposable incomes.
The significant slowdown in order inflow activity combined with lack of demand has hurt the sector.
It will take some time before capex activity revives
With the ongoing price deregulation of diesel, we believe the total subsidy burden on Oil PSU’s will
come down during the course of the year. However, rupee depreciation will reverse most of those
Steel companies will benefit because of rupee depreciation. However, commodity demand stays
demand globally due to low capex activity
Cement industry is facing over capacity issues and lacklustre demand. With regulator taking a
strong view against pricing discipline, the profits of the sector are expected to stay muted.
10-yr G-sec yield
• The yields on 10 Yr Gsec crossed 9% mark due to fear of Fed tapering and additional borrowing by Government of India
which let to spread contraction between corporate bonds and sovereign bonds.
• Bond yields have risen over last few days also due to the overhang from Urjit Patel Committee recommendations combined
with recent renewed emerging market fears.
• During the month, The RBI surprised by hiking repo rate by 25 bps today to 8%. Correspondingly, the reverse repo and MSF
rates have also been hiked to 7% and 9% respectively. All other rates were kept unchanged
• Year 2013 had been a wild ride for bond markets. It witnessed the highest levels of volatility in bond yields in four years.
The 10-year government bond yield, which started the year at eight per cent, saw a low of about seven per cent and then a
high of 9.5 per cent, before cooling towards the year-end.
With the current 25 bps repo rate hike and influence of domestic and global factors
in the market, some uncertainty is coupled with the interest rate scenario in the
coming quarters, hence, we would suggest to invest in and hold on to current
investments in short term debt. Due to liquidity pressures increasing in the market
as RBI has a huge borrowing plan, short term yields would remain higher. Short
Term funds still have high YTMs (9.5%–10%) providing interesting investment
Some AA and select A rated securities are very attractive at the current yields. A
similar trend can be seen in the Fixed Deposits also. Tight liquidity in the system has
also contributed to widening of the spreads making entry at current levels attractive.
Our recommendations regarding long term debt is neither buy nor sell for now. And
after the volatility settles Investors could look to add to dynamic and medium to long
term income funds over the next few months. Long term debt is likely to see capital
appreciation owing to the expected monetary easing. There is lesser probability of rate
cuts in the near future and there could be a lot of volatility in the g-sec yields as well.
An important point to note is that as commodity prices are cooling down, current
account deficit may reduce to some extent. But all this is coupled with uncertainty. We
suggest matching risk appetite and investment horizon to fund selection. Hence we
recommend that if investing for a period of 2 years or above then long term can be
looked upon or else holding/profit booking could be a good idea. Investors who may
want to stay invested for the medium term (exiting when prices appreciate) and those
who would want to lock in high yields for the longer term can also invest in longer
Rupee movement vis-à-vis other currencies (M-o-M)
Trade balance and export-import data
Trade Balance (mn $)
• The Indian Rupee appreciated against all the four major currencies in
the last month. It saw a depreciation of 0.5% against USD, 1.28%
against Japanese Yen & 2.2% against GBP.
• While emerging market jittered in the last week of Jan, with sharp
falls in the Argentinean peso and the Turkish lira, the Fed's
announcement has clearly spread the impact wider. Strikingly, while
the Indian rupee was amongst the hardest-hit currencies when the
idea of a taper first emerged last May, it has been amongst the most
stable this time around due to a rise in the interest rates that could
accelerate foreign fund flows into Indian debt.
• Rupee fell to near 62 against dollar on QE cut. To guard itself from
any selling, unlike Argentina, who had spent almost $4.5bn last year
to defend peso from falling, RBI has also built its foreign exchange
kitty. Currently India's foreign exchange reserves are at $292 billion.
Next, India is also making a conscious effort to bring down its fiscal
Exports during December, 2013 were valued at US $ 26.35bn which
was 3.49% higher than the level of US $ 25.46 bn during December,
2012. Imports during December,2013 were valued at US $ 36.49 Bn
representing a negative growth of 15.25% over the level of imports
valued at US $ 43.05 Bn in December 2012 translating into a trade
deficit of $10.14 Bn.
FY 11 (Q2)
FY 11 (Q3)
FY 11 (Q4)
FY 12 (Q1)
FY 12 (Q2)
FY 12 (Q3)
FY 12 (Q4)
FY 13 (Q1)
• The projected capital account balance for Q3 FY 13 is projected at
Rs. 171984 crores along with the Q1 and Q2 being at 88013 Cr
and 130409 Cr respectively.
• We expect factors such as higher interest rates to attract more
investments to India. Increased limits for investment by FIIs
would also help in bringing in more funds though uncertainty in
the global markets could prove to be a dampener.
Given the sharp sell off last year, the global commodity
indices increased their 2014 weightage to the bullions
given the attractive risk reward ratio. It seems that gold has
moved past the tapering concerns given the macro
uncertainties surrounding the world and safe haven is back.
The sharp fell off in emerging market currencies and slew
of central bankers surprising with rate hikes supports a
bullish argument for the metal. The talks of India relaxing
the import norms and reducing the custom duty further
kept prices elevated in anticipation of demand spike that
was largely absent last year. Expect prices to remain.
Oil & Gas
WTI crude rose trimming the biggest monthly decline for
January since 2010, as demand for distillate fuel countered
a second weekly increase in U.S. crude stockpiles. The
record US cold keep energy prices firmer as the distillate
demand rose 20% to 4.52 million barrels a day, the highest
level since February 2008, the EIA said. Cold weather will
dominate the central U.S. and Canada through
mid-February that would support higher prices going
forward. Expect prices to remain firm.
Real Estate Outlook
Due to a flurry of new launches in the first quarter of the year, most
markets witnessed an increase in the unsold inventory levels even with
relatively steady sales. Consequently, last quarter saw lesser new Demand in Tier II cities is largely driven by the trend
towards nuclear families, increasing disposable
income, rising aspiration to own quality products and
With reduced new launches and steady absorption, the demand supply the growth in infrastructure facilities in these cities.
Price appreciation is more concentrated to specific
gap is expected to reduce over the coming months.
micro-markets in these cities. Cities like Chandigarh,
Mid-income residential segment with Rs. 4,000 – 6,000 per sq. ft. Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur, Patna
entry pricing with good developers in Pune, Bangalore, NCR and and Cochin are expected to perform well.
Mumbai suburbs cane be expected to continue generating good
percentage returns with relatively lower risk.
The over-supply in commercial asset class still continues, thereby
dampening the capital values.
While rentals have been seen increasing at a slow pace over the last
couple of months, they still remain lower than the peal values achieved
in the past. In relative terms, Bangalore market continues to
outperform other markets owing primarily to the demand from the IT
Lease rentals as well as capital values continue to be
stable at their current levels in the commercial asset
class. Low unit sizes have played an important role in
maintaining the absorption levels in these markets.
Specific pre-leased properties with good tenant profile and larger lockin periods continue to be good investment opportunities over a longterm horizon.
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I markets
Real Estate Outlook
Capital values as well as lease rentals continue to be stagnant.
The effects of the change in FDI policy to allow 51% foreign
ownership in multi-brand retail and 100% in single-brand retail
are yet to have any effect of the market for retails assets.
Developers continue to defer the construction costs as
absorption continues to be low unsold inventory levels high.
Agricultural / non-agricultural lands with connectivity to Tier I
cities and in proximity to upcoming industrial and other Land in Tier II and III cities along upcoming / established growth
infrastructure developments present good investment corridors have seen good percentage appreciation due to low
opportunities. Caution should however be exercised due to the investment base in such areas.
complexities typically involved in land investments.
Tier II cities see a preference of hi-street retail as compared to
mall space in Tier I cities. While not much data on these rentals
gets reported, these are expected to have been stagnant.
The mall culture has repeatedly failed in the past n the Tier-2
cities. Whether the FDI in retail can change this phenomenon
can be known with more certainty once the effect of FDI is more
visible in Tier I cities.
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I markets
The information and views presented here are prepared by Karvy Capital Ltd. The information contained herein is based on our analysis and upon
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