Advice for the_wise-july_2014


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Advice for the_wise-july_2014

  1. 1. 1 ADVICE for the WISE Newsletter –JULY 2014
  2. 2. Economic Update 4 Equity Outlook 8 Debt Outlook 13 Forex 15 Real Estate Outlook 16 Index Page No. Contents 2
  3. 3. From the Desk of the CIO “Advisory services are provided through Karvy Capital having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide 18” Dear Investors, If May marked the beginning of what most experts called a secular bull run, June was a month of the reality check that there are no one-way streets. The enthusiasm about the new government continued through the month. However, several concerns emerged on domestic and global fronts. On the balance, the diagnostic is still positive. In the short term though, several challenges remain. Weak monsoon was widely expected. Actual rainfall (or the lack of it) in June partially confirmed the expectation. July to September might have their own deviations from average. It would be foolhardy to predict if the overall monsoon will be well below the long term average or at par with it. Nevertheless, the government seems to have got into action to target food price stability in case the monsoon shortfall turns out to be indeed significant. We will have to wait and watch how the food prices react to the expectation of weak monsoon (as of now) and the actual outcome (by September) and the initiatives of the government. What is likely though is that RBI will not alter its present stance of caution on monetary policy. Lower interest rates will have to wait for later – maybe early 2015. The progress on governance itself has been encouraging. While it is too early to judge, the intent and activity level both paint a positive picture. Some tough decisions on railway fare and fuel prices have been a good sign. A lot of perception hinges on the Union Budget to be presented on the 10th of July. However, this might not be necessarily a big-bang reform budget – albeit a few major reforms may be announced. Contrary to popular belief, the budgetary exercise does not in itself require major reforms announcements to be a part of it. Budget is simply an exercise of drawing up the overall income and expense account of the government. Some policy measures are definitely a part of this exercise. However, a lot of potential reforms have only limited implications for immediate budgetary matters (for instance, labor market reforms). Such reforms are probably best done through the normal course of policy making. Globally, the flare-up in Iraq with the potential disintegration of that state and establishment of the Caliphate driven by ISIS has long term implications for oil prices (and of course the geopolitics of the Middle East!). Iraq is the second largest producer of crude oil after Saudi Arabia. While majority of its oil is still in the southern (government-controlled) parts of Iraq, one major oil-well is in northern Iraq. Also while the Iraqi government of Nuri-Al-Maliki might continue to control the southern oil producing region, it would constantly face the concerns of terrorism and sabotage by ISIS. The only factor controlling the oil price for now despite such worries is the increasing production of shale oil by US. In the recent years the increase in US shale oil production has nearly balanced out the entire disruption on account of Libyan civil war, Syrian civil war and the turmoil in Iraq. Hopefully this would continue and thus limit oil price spikes in the short term. The long term prognosis for crude oil however is one of secular increase in prices – pace of increase being the only relevant variable. The volatility in crude oil has brought some interest back in gold. We still do not think it is a good idea to increase allocation to gold – especially since the rupee price of gold varies far more than the dollar price. We believe that the better diversification for Indian investors is dollar denominated growth assets such as developed market equities. In times of moderate turbulence these tend to have the dual benefit of lower falls than emerging market equities and some benefits from Rupee depreciation common to these periods. 3
  4. 4. As on 25th June 2014 Change over last month Change over last year Equity Markets BSE Sensex 25313 2.4% 36.4% S&P Nifty 7569 2.9% 35.4% S&P 500 1959 3.1% 22.2% Nikkei 225 15266 4.5% 19.0% Debt Markets 10-yr G-Sec Yield 8.70% 4 bps 123 bps Call Markets 7.97% 8 bps 80 bps Fixed Deposit* 9.00% 0 bps 25 bps Commodity Markets RICI Index 3777 1.6% 9.3% Gold (`/10gm) 28193 2.6% 1.5% Crude Oil ($/bbl) (As on 23rd June) 113.62 3.3% 10.1% Forex Markets Rupee/Dollar 60.27 (2.02%) (0.95%) Yen/Dollar 101.94 0.0% (4.0%) Economic Update - Snapshot of Key Markets 10 yr Gsec Gold • Indicates SBI one-year FD 4 75 85 95 105 115 125 135 145 155 165 S & P BSE Sensex CNX Nifty S&P 500 Nikkei 225 6.8000 7.3000 7.8000 8.3000 8.8000 9.3000 24000 26000 28000 30000 32000 34000 50 52 54 56 58 60 62 64 66 68 70 `/$
  5. 5. US Europe Japan Emerging economies • US Federal Reserve reduced its monthly bond buying program from $45 bn to $35 bn starting in July. • Initial jobless claims for US state unemployment benefits rose by 4,000 to 317,000 in the week ended June 7. • IMF cuts US growth outlook for 2014 to 2% from the 2.8% it predicted in April, due to a weak first quarter. Economy Update - Global • Japan’s unemployment rate hit a 16 year low in May, suggesting that the economy is rebounding. The jobless rate in the world’s third largest economy fell to 3.5% , the lowest since 1997. • Japan’s core machine orders spiked 17.6% in April on a yearly basis after surging 16.1% in the previous month. • World Bank projects a 5.5% growth for India in 2014-15, 6.3% in 2015-16 and 6.6% in 2016-17. • China's average home prices fell 0.2% in May for the first time in two years and price weakness spread to more major cities, adding to signs of cooling in the property market. • Government clears seven big-ticket investment projects worth Rs 21000 Cr. 5 • Annual inflation in the Euro zone fell to 0.5% in May from 0.7% in April. • UK’s retail sales dropped 0.5% in May compared to a downwardly revised gain of 1% in April . • Euro zone industrial production increased by 1.4% on an annualized basis in April after growing by an upwardly revised 0.2% in March.
  6. 6. Economy Outlook - Domestic • Q4FY14 GDP grew at 4.6% Y-o-Y as against 4.7% in the previous quarter. As per data released by Central Statistics Office ( CSO ) the economy grew at the rate of 4.7% in 2013-2014, slightly above the 4.5% growth registered in the previous year. • Growth in 2013-14 was helped by a smart rebound in the farm sector which grew at an annual 4.7% compared to 4.5% growth registered in a year earlier period. Electricity sector also grew at a healthy rate of 5.9% in 13-14 as against 2.3% in 12-13. • This is the second consecutive year in which the economy has grown at a sub 5% level, primarily hurt by policy delays, high inflation and global slowdown. • April ’14 IIP came in at a good 3.4% after registering a negative growth for two consecutive months. The rebound in the numbers was led by Manufacturing sector which grew by 2.6% the best figure since July ‘13. • Electricity grew nearly 12% on back of higher production and mining kept it’s head above water at 1.2% versus a contraction of 3.4% in April ‘13. Capital Goods did well with a 15% growth against a contraction of 0.3% in April ’13. • The return of industrial growth to positive terrain is noteworthy and has rekindled the hope of industrial recovery which is critical to lift the economy. IIP 6 -4.0% -2.0% 0.0% 2.0% 4.0% Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 5.3 5.5 5.3 4.5 4.8 4.4 4.8 4.7 4.6 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 GDP Growth
  7. 7. Economic Outlook - Domestic  As on May 2014 Bank credits grew by 13.8% on a Y-o-Y basis. Aggregate deposits on a Y-o-Y basis grew at 15.3%, vis-a-vis 14% in April 2014.  RBI met on 3rd June for it’s second bi-monthly policy review and based on assessment of current and evolving macro economic situation decided to keep the repo rate and CRR unchanged at 8% and 4% respectively. It decided to reduce the Statutory Liquidity Ratio(SLR) by 50 bps from 23% to 22.5% , the RBI will also reduce the liquidity provided under export credit finance facility from 50% to 32% with immediate effect.  The Reserve Bank Governor also said that “the Central Bank is committed to keeping the economy on a disinflationary course and if the economy stays the course further policy tightening will not be warranted.”  Inflation as measured by WPI for May ’14 came in at 6.01%- a 4 month high after witnessing easing since Dec’13 and touching a 9 month low of 4.68% in Feb’14. The main reason for the spurt in inflation was food inflation which grew to 9.50% in May ‘14 as compared to 8.64% in the previous month. Prices of fruits also saw a sharp increase from 16.46% in April ‘14 to 19.40% in May ‘14.  Inflation in Fuel and Power rose to 10.53% in May ‘14 from 8.93% a month earlier, manufacturing grew by a modest 3.55% in May ‘14 against 3.15% in the month ago period.  Headline CPI for May ’14 came in at 8.28% as against 8.60% in Apr ’14. The spike came in due to food articles like fruits, vegetables, sugar and pulses. Growth in credit & deposits of SCBs * End of period figures 7 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Bank Credit Aggregate Deposits 4.00% 6.00% 8.00% 10.00% 12.00% WPI CPI
  8. 8. Equity Outlook As a strong reform oriented government takes shape in New Delhi, Indian equity markets have continued to rally post the election outcome. Markets have rallied almost 40% from the lows in August 2013. Despite so many negatives plaguing the economy, corrective measures by the new government can quickly revive growth. 8 15000 20000 25000 30000 BSE SENSEX one year Returns
  9. 9. Equity Outlook 9 Reforms Agenda There are a number of measures that we expect the new government to take in 2014 to accelerate the economy – Goods and Services Tax, Direct cash transfer of subsidies and boost to manufacturing sector. Revival of large stalled projects will give a boost to capital formation activity and restart the investment cycle. We expect that the new government will identify some large infrastructure projects and concerted push will be given to drive them to completion. Dedicated Freight corridor between Mumbai and Delhi is one such project. Environmental clearances, a big road-block for large projects, to be IT enabled thereby cutting lead times and expediting infrastructure creation. Several financial sector reforms are expected which will give a boost to financial savings paving the way for larger domestic participation in equity markets. The Budget could see some announcements on excise duty realignments for consumer staples and durables space to boost short term demand. Monetary Policy RBI Governor surprised the market by cutting SLR by 50 bps in the last policy statement. Despite the inflation data getting comfortable, RBI has decided to hold rates at current levels. Governor believes and we agree that it is important to break the back of inflation to ensure a sustainable growth trajectory. The emphasis on core CPI as an inflation metric as compared to WPI is expected to continue. We expect CPI to average around 8% level for next few months thus ruling out any monetary easing in the first half. However, core CPI should moderate to 6% which is within the tolerance limit of RBI. The second half of the year should see interest rates coming off which would be beneficial to interest rate sensitive sectors like banking, automobiles and infrastructure.
  10. 10. Equity Outlook 10 Global Macro Outlook Continued recovery in US & a stable Euro area are significant positives for Indian equity markets. Global growth outlook remains supportive of equity investments. US economy shrank at an annual rate of 1% during the first quarter due to a very harsh winter in some of the more populous states. However, this de growth was largely due to run downs in inventory levels. We would expect consumer spending to revive in the next few quarters. European Central Bank has carried out a fresh monetary stimulus by bringing deposit rates into negative territory. This will help stabilize European economy. Japan is showing clear signs of coming out of a five year deflationary trend. Fresh monetary stimulus and labor reforms will make the recovery stronger. The revival in global risk appetite has resulted in fresh FII inflows into emerging market equities with India turning out to be a big beneficiary. India has been one of the top performing equity markets since the middle of September with fresh equity inflows of 16 billion dollars. Market View Corporate earnings growth has started to recover since the last quarter. Sensex earnings growth has improved from 5% in FY13 to about 10% in FY14 on the back of INR depreciation, for FY15, we would expect a Sensex EPS growth around of 15%. We would expect earnings growth to accelerate once investment activity is revived and average at 25% for the next six years. We arrive at a year end Sensex target of 29,300 based on 15 times FY16 earnings, we continue to maintain a 2020 target of 100,000 on Sensex.
  11. 11. Sector Stance Remarks BFSI Overweight Private sector banks and NBFC’s are expected to deliver healthy earnings growth. We expect public sector to significantly outperform due to cheap valuations and stabilization in asset quality. Energy Overweight 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. Rupee appreciation will also help. E&C Overweight The significant slowdown in order inflow activity will reverse in the next few quarters. We see a new infrastructure cycle taking shape this year. Automobiles Overweight We are positive on SUV’s and agricultural vehicles segment due to lesser competition and higher pricing power. Two wheeler and four wheeler sales are also showing signs of upturn. Power Utilities Neutral We like the regulated return characteristic of this space. This space provides steady growth in earnings and decent return on capital. Sector View 11
  12. 12. Sector Stance Remarks Healthcare Neutral 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. FMCG Neutral We like the secular consumption theme. We prefer discretionary consumption beneficiaries such as cigarettes, durables and branded garments, as the growth in this segment will be disproportionately higher vis-à-vis the increase in disposable incomes. IT/ITES Neutral 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. Telecom Underweight While regulatory hurdles seem to be reducing, recent aggressive bidding for spectrum has revived fears of unhealthy competition. Emergent competition from the social media space also present a formidable challenge. Metals Underweight Steel companies will benefit because of rupee depreciation. However, commodity demand stays low globally due to low capex activity. Cement Underweight Cement industry is facing over capacity issues and lack luster demand. With regulator taking a strong view against pricing discipline, the profits of the sector are expected to stay muted. Sector View 12
  13. 13. Debt Outlook •The yields on 10 Yr G sec closed at 8.70% which is 4 bps higher than the last months close of 8.66%. • The RBI infused Rs 61,000 Cr into the banking system through a 14 day term repo auction to prop up liquidity. •RBI announced the cut-off price of 91-Days Treasury Bills at Rs. 97.91 (YTM - 8.5619%). The entire auction was fully subscribed. •The spread on the 10 year AAA rated corporate bond decreased to 27 bps on 25th June, 2014 from 63 bps (as on 26th May, 2014). 10-yr G-sec yield Yield curve (%) (%) 13 7.60 7.80 8.00 8.20 8.40 8.60 8.80 9.00 0.0 0.8 1.6 2.4 3.2 4.0 4.9 5.7 6.5 7.3 8.1 8.9 9.7 10.5 11.3 12.1 12.9 13.7 14.5 15.3 16.1 16.9 17.7 18.5 19.4 6.8000 7.3000 7.8000 8.3000 8.8000 9.3000
  14. 14. Debt Strategy OutlookCategory Details Long Tenure Debt 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 tenure papers/Funds. 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. With RBI maintaining status quo on key interest rates in the economy 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 in the first half of the new fiscal, short term yields would remain higher. Short Term funds still have high YTMs (9.5%–10%) providing interesting investment opportunities. Short Tenure Debt Credit 14
  15. 15. Forex • The Indian Rupee depreciated against all the four major currencies in the last month. It saw a depreciation of 2.61% against GBP,2.02% against USD, 1.99% against Japanese Yen and 1.76% against the EURO. • The currency depreciated on account of dollar demand by state run banks on behalf of importers, mainly oil importers. Further, weak domestic market sentiments exerted downside pressure on the currency. • Additionally, uncertainty over Iraq turmoil continued the downside movement in the currency, however, sharp downside in the currency was prevented due to inflow of foreign funds in equities and debt markets. Foreign inflows stood around $2.3 billion in equities and $2.9 billion in debt for the month of June and total inflows for the current year at $9.9 billion and $10.5 billion respectively. Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data • 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. 15 Exports during May,2014were valued at US $ 27.99 bn which was 12.40% higher than the level of US $24.91 bn during May, 2013. Imports during May,2014 were valued at US $ 39.23 bn representing a negative growth of 11.41% over the level of imports valued at US $ 44.28bn in May, 2013 translating into a trade deficit of $11.24 bn. -10000 40000 90000 140000 FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1) FY14(Q2) -2.02% -2.61% -1.76% -1.99% -3.00% -2.50% -2.00% -1.50% -1.00% -0.50% 0.00% USD GBP EURO YEN -25000 -20000 -15000 -10000 -5000 0 -20 -15 -10 -5 0 5 10 15 20 Export(%) Import Trade Balance (mn $)
  16. 16. 16 Real Estate Outlook Asset Classes Tier I Tier II Residential Sales in the last quarter were slow. Investors and end-users were postponing the purchase decision at the backdrop of the impending General elections as well as state level elections in some markets. With a single party gaining majority at the Centre and the consequent political stability, apartment sales could be expected to pick up over the next few quarters. Developers too have been facing delay in getting approvals on account of elections. Again, with the new political stability, it is expected that procuring approvals will be relatively faster and most markets may witness a lot of new launches. Mid-income residential segment with Rs. 4,000 – 6,000 per sq. ft. entry pricing with good developers in Pune, Bangalore, NCR and Mumbai suburbs can be expected to continue generating good percentage returns with relatively lower risk. Demand in Tier II cities is largely driven by the trend towards nuclear families, increasing disposable income, rising aspiration to own quality products and the growth in infrastructure facilities in these cities. Price appreciation is more concentrated to specific micro-markets in these cities. Cities like Chandigarh, Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur, Patna and Cochin are expected to perform well. Commercial/IT Currently, 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. However, companies across industries such as IT, consultancy and e- commerce could begin leasing and buying office space in expectations of an economic boom under a stable central government. Specific pre-leased properties with good tenant profile and larger lock- in periods continue to be good investment opportunities over a long- term horizon. 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.
  17. 17. Asset Classes Tier I Tier II Retail Capital values as well as lease rentals continue to be stagnant. The effects of the change in FDI policy to allow 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. 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 in 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. Land Agricultural / non-agricultural lands with connectivity to Tier I cities and in proximity to upcoming industrial and other infrastructure developments present good investment opportunities. Caution should however be exercised due to the complexities typically involved in land investments. Land in Tier II and III cities along upcoming / established growth corridors have seen good percentage appreciation due to low investment base in such areas. Real Estate Outlook 17 Please Note: 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
  18. 18. Disclaimer The information and views presented here are prepared by Karvy Capital Ltd. 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. This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. 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 Capital Ltd nor any person connected with any associated companies of Karvy Capital Ltd accepts any liability arising from the use of this information and views mentioned here. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Karvy Capital Ltd, its affiliates, directors, its proprietary trading and investment businesses (hereinafter referred to as Karvy) may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned assets 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 and Karvy Comtrade Ltd. Any 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 equity investments. Karvy Capital Ltd Operates from within India and is subject to Indian regulations. Mumbai office Address: 702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051 18