The World This Week
August 26 – August 30, 2013
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.
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.
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.
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.
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.
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's economic growth slows down to its weakest pace in two decades, and a growth rate of
7.5% is predicted for the economy.
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%
Commodities and Currency:
Date USD GBP EURO YEN
(Rs. per BBL)
(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
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
Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Mehta
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