2. Equity View:
Last week we saw a lot of strength in the equity markets. The key political event which provided support
to the markets was the passing of the vote on FDI in Lok Sabha with a clear majority by the government.
We believe that the government had taken a big gamble and finally succeeded. Despite all the hue and
cry about who said what, finally what mattered was whether the government had the numerical strength
to push through reforms or not. The markets perceived that there is a lot of support within the
government and the government is willing to take a lot of risk to push these kinds of reform measures.
Hence the conclusion that one draws is that FDI in retail is a reality.
A sense that the government is determined in pushing a lot of reform measures came in form of the
parliamentary affairs minister announcing that there would be further financial sector reforms that
would come out this week. We have been talking about Insurance and Pension reforms, if these get
passed by the parliament in the next few months, not necessarily immediately, it will still be taken as a
positive by the market. Markets would look at it with a clear sign and things are going to turn around
from the government’s perspective. There is no longer a feeling that the government is gripped by a
policy paralysis and that nobody is around to take care of things. This in itself is a very big positive for the
market.
We’ve been maintaining a target of 21,500 for the Sensex by March 2013 and continue to stand by that.
Hence there is still around 11 – 12% upside from the current levels and we believe this kind of upside is
very much possible in the next 4 months that are left in this fiscal, also as we are expecting rate cuts from
January. Of course the pace of the rate cuts is not very certain at this point of time, but one thing that is
certain is that there will be rate cuts. So the monetary policy is going to get even more supportive.
We have seen the quarterly results come out which were largely better than expectations. If we exclude
the oil and gas companies the growth in Sensex was 18% which is a very good growth number. Growth
we believe has bottomed out and we believe going forward in the next quarter the growth will be more
than 5.3%.
Things are definitely improving from the macroeconomic perspective, governance perspective and also
from the monetary policy perspective. All these combined form a very positive and bullish case for
equities. We have been maintaining since the start that this is the year of equities and we have seen
more than 25% returns in Nifty since 1st January and believe that this could be the beginning of a new
industrial cycle or a new growth cycle. So equity is still an option of investment for investors who have a
horizon for the next 2 – 3 years. We continue to recommend buying equities at every dip and also
continue to recommend clients to increase their exposure to equities.
In terms of some key things that happened last week, the RBI governor expressed his concern about
weakening growth. There is a consensus that there would be a rate cut in January. There is a policy this
month also, but one is not sure whether RBI will do a CRR cut or give a surprise with a repo cut or nothing
might happen at all. So we will not bet whether there will be a cut this month, but there will surely be a
cut in the month of January.
3. In the month of December so far we’ve seen almost Rs.2,300 crores worth of FII inflow and in the month
of November we saw an inflow of around Rs.10,000 crores. There is a continuous set of buying into
Indian equities by investors all across the globe. We believe that the rally will only get broad based if the
Indian equity investors also participate. So we continue to be positive on the markets and believe that
every dip should be used as a buying opportunity.
Debt View:
On the debt front there has been a lot of speculation for almost a year now, hopefully this speculation
will be coming to an end by 2013. The consensus expectations are that 2013 would be a year in which
most of or some of the rate cuts would happen. Consensus expectation is that January rate cut will be in
range of 25 bps - 50 bps, thereafter there would be more sustained rate cuts.
In the real economy the investments have slowed down a fair bit, and it is largely because of two factors
– sustained tight monetary policy and an environment of uncertainty. So, if at least one of these clears
the second can essentially be waited on, but if both of them don’t clear up then we don’t have much of
hope in 2013 either. It is this fear that probably has conquered RBI to become little more dovish. The last
discussion and treatment from governor has also been to the effect that inflation is slowing down and we
might actually be looking at a range of 5–7% for next year.
A lot of cautious sentiment has been cleared from the government’s mind which has sprung into some
sort of action and hence after the passage of retail FDI there is a hope that subsequent bills including
insurance and maybe the tougher ones like Pension reforms might actually see the light of the day. This
might or might not go a long way in causing a big change in the fundamentals but would definitely create
a positive atmosphere which then as a side effect would be the primary beneficiary of the whole
sentiment. Post this we would see turn around in the sentiment as well as some action in the monetary
policy. If both of them happen then obviously we have a massive upside in both debt and equity markets.
The current stance of the government would continue and the opposition though it is vocal would remain
relatively devoid of an active ability to destabilize the government. Despite couple of hiccups the retail
bill did pass. Post this RBI will be forced into some kind of action on monetary front. So on the whole, the
consensus is the expectation of a rate cut in January and a few policy announcements after that.
We don’t believe that the rate cuts will be like those witnessed in the year 2008, when the RBI cut the
rates by 25 bps in 4-5 announcements and we saw a massive rise in the values of long term debt. If one
expects a rapid rate cut then it might lead to disappointment. Rate cuts this time are not as urgent and
hence would happen lot more slowly. In fact, we are actually in the middle of monetary easing, the first
rate cut happened about a year ago and the subsequent one’s just got delayed. So it might be that glacial
pace might continue in future as well.
Debt Recommendations: If one is looking for short term horizon (3-6 months) in the debt, then gilt funds
is what we would recommend. If RBI decides for a sharp & aggressive rate cut actions in next 6 months
then we might see most of the capital appreciation in the prices in first 6 months itself. If the aggressive
4. rate cuts do not happen, then one could earn 8-10% p.a. returns in way of coupons. Someone with a
horizon of 1-1.5 years can also look at gilt funds as an option.
Also, someone who does not want to play on policy actions can invest into dynamic bond funds. As the
fund manager would look at each policy actions separately and would accordingly shift between different
durations of gilt as well as the corporate debt as required depending on the liquidity.
News:
DOMESTIC MACRO:
The UPA government won a second parliament vote on Friday on allowing foreign supermarkets into the
country, paving the way for Prime Minister Manmohan Singh to press ahead with more reforms,
including freeing up a cash-strapped insurance sector.
Morgan Stanley has raised India's FY13 GDP growth forecast to 5.4% from 5.1%, citing better-than-
expected GDP growth for the September quarter and also the stabilization in non-agriculture growth
indicators.
India sought to spend an extra 308.4 billion rupees in the current fiscal year ending March 2013, as
expected, to meet its upwardly revised fiscal deficit estimate though it assured there will be no extra
borrowing.
The Reserve Bank of India signed a currency swap agreement with Bank of Japan to swap their local
currencies against the U.S. dollar for up to $15 billion.
GLOBAL MACRO
EURO
Italian Prime Minister Mario Monti announced on Saturday that he would resign once next year's budget
is approved; two days after Silvio Berlusconi's party withdrew its parliamentary support for his
technocrat government.
Greece's three biggest banks won board approval to take part in the country's debt buyback which
expires on Friday, putting Athens on track to meet targets set by international lenders. National Bank
(NBGr.AT), Alpha (ACBr.AT), Eurobank (EFGr.AT) and Piraeus bank (BOPr.AT) - each said they had
approval to participate, but did not specify how much of their sovereign debt holding they would tender.
US
The unemployment rate fell to a near four-year low of 7.7% in November, that was only because many
Americans gave up the hunt for work,
With little to show after a month of posturing, the White House and Republicans in Congress dropped
hints on Thursday that they had resumed low-level private talks on breaking the stalemate over the
"fiscal cliff" but refused to divulge details.
China
China's annual consumer inflation rebounded from 33-month lows to 2% in November from October's
1.7%, dimming the chance for more monetary policy easing as its economy recovers.
5. Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Mehta
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