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Market and economic outlook april 2013

Indian Market Economic Outlook perspective Mutual Fund Debt Equity Gold Environment

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Market and economic outlook april 2013

  1. 1. Market and Economic outlook –Market and Economic outlook – April 2013
  2. 2. Executive summary-Economy ◌ः While Wholesale Price Inflation (WPI) inflation has softened to below 7%, Consumer Price Inflation (CPI) remains in double digits. ◌ः Index of industrial production showed positive growth in January, but there is no sign of a sustained recovery.January, but there is no sign of a sustained recovery. ◌ः Owing to high CPI and high current account deficit (CAD), RBI has signaled a pause in rate cuts after the 25 bps cut in repo rate on March 19.
  3. 3. Executive summary-Economy ◌ःHigh CAD has emerged as a major point of worry for policymakers and market participants.
  4. 4. Executive summary-Politics ◌ःUPA’s strength has been reduced further after the DMK’s withdrawal. Getting reforms related legislation passed may become more difficult.difficult. ◌ःAs the government gets into election mode later this year, its commitment to fiscal prudence may take a back seat.
  5. 5. Executive summary-international ◌ः As the US economy improves, quantitative easing may be tapered. Will affect liquidity flows into emerging markets (EMs) like India. ◌ः As US market becomes more attractive, flows into EMs may be affected.may be affected. ◌ः The crisis in Cyprus showed that even a crisis of minor magnitude can snowball. If it leads to a risk-off environment, that could reverse the FII flows coming into India.
  6. 6. Executive summary-Markets ◌ः The market has stayed range-bound this month. Mid- and small-cap indexes have fallen more than the Sensex. ◌ः FII inflows in March were less than half compared to January and February. ◌ः Market is worried about bad economic data, winding down of QE, political weakness at the Centre, and so on. ◌ः Among positives, commodity prices have softened and valuations have become more attractive.
  7. 7. The Economy
  8. 8. CPI inflation: still in double digits ◌ः Headline CPI inflation for February 2013 moved up to 10.91% (y-o-y) from 10.79% in the previous month. ◌ः The index rose 0.63% month-on-month (m-o-m) in February, which was the fastest m-o-m increase since October 2012. ◌ः The rise in CPI inflation was the result of return of food inflation. Food◌ः The rise in CPI inflation was the result of return of food inflation. Food inflation had eased in the last few months due to seasonal factors. ◌ः Under food items, the major contribution came from cereals and protein products. ◌ः The next big contribution came from transport and communication followed by housing.
  9. 9. CPI will moderate – with a lag ◌ः According to a note from Morgan Stanley, high CPI is symbolic of the ills that have afflicted the Indian economy. ◌ः The government’s policies have encouraged consumption without improving supply. ◌ः Now the government has begun to go down the road of fiscal◌ः Now the government has begun to go down the road of fiscal consolidation. As the government reduces its fiscal deficit, CPI will decelerate. ◌ः However, inflationary expectations have become so deeply entrenched that it will take time for CPI to moderate. ◌ः High CPI will keep short-term rates elevated (prevent rate cuts), something that the market doesn't like.
  10. 10. WPI inflation: lower compared to CPI ◌ः WPI for February 2013 came in at 6.84%, higher than the 6.62% in January 2013. ◌ः WPI rose despite a favourable base effect. ◌ः WPI rose 0.6% month-on-month (m-o-m). ◌ः Year-on-year primary articles rose 9.7%, fuel and power◌ः Year-on-year primary articles rose 9.7%, fuel and power 10.5%, and manufactured products 4.5%. ◌ः Both primary articles and fuel power rose m-o-m. ◌ः Only manufactured articles declined 0.1% m-o-m. ◌ः All three broad categories within primary articles rose: food articles (up 0.2% m-o-m), non-food articles (1.6% m-o-m) and minerals (0.9% m-o-m).
  11. 11. IIP: marginal recovery ◌ः The index of industrial production (IIP) posted positive growth in January after having declined for six out of 10 months in FY13. ◌ः IIP rose 2.4% y-o-y in January 2013 whereas it had◌ः IIP rose 2.4% y-o-y in January 2013 whereas it had contracted 0.5% in December. ◌ः IIP rose 2.2% m-o-m in January vis-a-vis the 1.1% m-o-m fall in December.
  12. 12. IIP over last 13 months 4.1 8.3 4 6 8 10 IIP (y-o-y) % 1.82 1.1 4.1 -3.5 -0.9 2.4 -1.8 0.1 2.7 -0.4 -0.1 -0.6 2.4 -6 -4 -2 0 2 4 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 IIP (y-o-y) % IIP has seen negative growth in a number of months in the recent past.
  13. 13. IIP-component wise Y-o-Y M-o-M Overall IIP 2.4 -0.5 2.2 -1.1 Mining -2.9 -3.4 1 2.7 Electricity 6.4 5.3 0.1 2.1 Manufacturing 2.7 -0.7 2.8 -1.6 Use-based Basic 3.4 1.8 -0.3 1.1Basic 3.4 1.8 -0.3 1.1 Intermediate 2 0.7 1.3 0.8 Capital goods -1.8 -0.6 5.5 2.4 Consumer goods 2.8 -3.6 3.6 -1.9 Durables -0.9 -8.2 1.2 -10.1 Non-durables 5.3 -0.4 5.3 3.6 Some positivity in January due to electricity and manufacturing. Negative growth in durables points to weakening consumption.
  14. 14. IIP data may not improve soon ◌ःDespite some positivity in January IIP, growth outlook continues to be weak. ◌ःThe improvement in January IIP data may not sustain.
  15. 15. RBI cuts rate, signals a pause ◌ः RBI reduced repo rate by 25 basis points from 7.75% to 7.50% on March 19. Reverse repo rate now down to 6.50%. ◌ः Cash reserve ratio (CRR) left unchanged at 4%. ◌ः Why did RBI cut the repo rate? ◌ः One, Q3FY13 GDP growth rate came in at decade-low◌ः One, Q3FY13 GDP growth rate came in at decade-low 4.5%, compared to 5.3% in Q2FY13. ◌ः Recovery in GDP growth likely to be gradual. ◌ः WPI inflation has moderated in recent times. Core inflation is down. ◌ः Government's measures aimed at fiscal consolidation provided RBI room to go in for a small cut.
  16. 16. Will rate cuts continue? ◌ःThe central bank was cautious about future rate cuts. Why? ◌ःFood inflation remains high. Administered fuel◌ःFood inflation remains high. Administered fuel prices have been hiked in recent times. Likely to push inflation upward. ◌ःWide divergence between CPI and WPI. While WPI has softened, CPI continues to be in double digits.
  17. 17. ◌ःCurrent account deficit (CAD) is high. If interest rates are cut, it would result in more consumption, leading to higher imports and worsening of CAD. ◌ः Will rate cuts continue? ◌ःHence RBI indicated there is limited room for further cuts. ◌ःMost economists expect interest rates to be cut by another 50 bps in FY14.
  18. 18. Will banks reduce lending rates? ◌ःDespite cut in repo rate by the central bank, banks may not lower their lending rates. ◌ःWith deposit growth slowing down, several banks have raised their deposit rates in recent times. ◌ः have raised their deposit rates in recent times. ◌ःWith banks' cost of funds rising, it will be difficult for them to cut lending rates. ◌ःMany banks in difficulties due to high NPLs. Hence, can’t afford to lower rates.
  19. 19. High CAD poses a risk Oct-Dec 2011 Oct-Dec 2012 %age change Current-account deficit -19,954 -32,546 63.11 of which Merchandise trade balance -48,704 -59,604 22.38 Invisibles 28,750 27,059 -5.88Invisibles 28,750 27,059 -5.88 of which Software services 15,806 15,901 0.60 Private Remittances 16,208 15,670 -3.32 Capital account deficit 7,680 31,761 313.55 of which FDI 4,963 2,526 -49.10 Equity inflows 1,898 8,781 362.64 Loans 1,602 10,630 563.55 Other capital 4,703 4,544 -3.38
  20. 20. High CAD poses a risk ◌ः The current account deficit for the December 2012 quarter came in at a very high 6.7% of GDP. ◌ः This happened because merchandise trade balance (imports less export) has grown by 22.38% y-o-y. ◌ः On the other hand, invisibles (combination of software◌ः On the other hand, invisibles (combination of software earnings and private remittances) declined 5.88% year- on-year. ◌ः Of the two components of invisibles, software services rose 0.60 per cent but private remittances declined - 3.32 per cent.
  21. 21. High CAD poses a risk ◌ः Next, let us look at the capital account. ◌ः FDI, which represents stable inflows, is down -49.10% y-o-y. ◌ः Equity inflows, which are unstable, have grown 362.64%. ◌ः Even external loans have grown rapidly by 563.55% y-o-y. ◌ः Thus, India's current account deficit is being fuelled by hot money◌ः Thus, India's current account deficit is being fuelled by hot money inflows. ◌ः If at any time these flows decline (say, due to the normalisation of monetary policy in the West or due to the creation of a risk-off environment), financing the CAD will become difficult. ◌ः The rupee could see another bout of rapid depreciation.
  22. 22. Worst of CAD probably behind us ◌ःAccording to a note from Morgan Stanley, however, the worst of CAD is probably behind us. ◌ःThe trade deficit should improve from the◌ःThe trade deficit should improve from the next quarter, helped by the government's fiscal restraint. ◌ःSoft crude prices may also help.
  23. 23. UPA strength reduced post DMK pullout ◌ः The DMK pulled out of the UPA coalition in protest against the government's position on US-backed UN resolution on war crimes carried out during Sri Lanka's civil war. ◌ः The DMK had for long been putting pressure on the Indian government to protect Sri Lanka's minority Tamil population. ◌ः The government survived owing to outside support from the◌ः The government survived owing to outside support from the Samajwadi Party and the Bahujan Samaj Party. ◌ः The pullout has left financial market participants jittery. ◌ः Getting reforms-related legislation passed will become even more difficult. Reforms are also expected to take a back seat owing to state elections followed by the general election next year.
  24. 24. The equation in Lok Sabha post DMK pullout Who has how many seats in Lok Sabha Party No. of seats Congress 203 NCP 9 Rashtriya Lok Dal 5 J&K National Conference 3J&K National Conference 3 IUML, AIUDF, BPF, Kerala Cong. 5 Others 6 UPA 231 Outside Support 49 Samajwadi Party 22 Bahujan Samaj Party 21 Rashtriya Janata Dal 3 Janata Dal (Secular) 3 Total (with outside support) 280 Total no. of Lok Sabha seats 540
  25. 25. Will fiscal consolidation continue in a pre-election year? ◌ः According to Morgan Stanley, history suggests that government expenditure always rises in a pre-election year. ◌ः Therefore, the market is sceptical about the government's ability to achieve the 4.8% fiscal deficitgovernment's ability to achieve the 4.8% fiscal deficit target for FY14. ◌ः However, according to Morgan Stanley, the worst of the fiscal deficit and the current account deficit are probably behind us. The note adds that a falling twin deficit is good for stocks.
  26. 26. International scenario
  27. 27. US economy improving ◌ः According to Mohammed A El-Erian, CEO and co-CIO of PIMCO, the United States' economy is healing, and doing so in an accelerated fashion. ◌ः Most U.S.-based multinational companies are on a solid footing. ◌ः Smaller firms are gradually recuperating. ◌ः Banks have rebuilt their capital cushions and reduced dubious◌ः Banks have rebuilt their capital cushions and reduced dubious assets. ◌ः More and more households are re-establishing healthier balance sheets, especially as employment picks up. ◌ः The US budget deficit is on a downward trend, helped along by higher revenues and lower pressure on spending (payments to jobless have fallen).
  28. 28. Will QE continue? ◌ः Members of the US Federal Open Market Committee (FOMC) have begun to debate the wisdom of continuing with the QE program. ◌ः Many members favour ending, or at least tapering, the program.program. ◌ः Currently the US central bank purchases $ 85 billion worth of bonds from the open market every month. ◌ः Earlier the QE programme was expected to end only when there was significant improvement in the labour market. But now there are indications that it may end earlier.
  29. 29. Will QE continue? ◌ः If the central bank continues with the QE program for too long, it may result in an inflationary spiral that may become difficult to control. Sharp buildup of inflationary expectations may occur. ◌ः Excessively loose monetary policy also leads to excessive◌ः Excessively loose monetary policy also leads to excessive risk taking in financial markets. ◌ः If interest rates begin to rise, the value of bonds held by the central bank would erode, resulting in capital losses which could wipe out the paid-up capital of the US Fed. ◌ः In his testimony to the U.S. Congress, Fed Chairman Ben Bernanke said he's in favour of continuing with QE for the moment.
  30. 30. Will QE continue? ◌ः So an abrupt end to the QE program may not happen. But the size of QE could be reduced in the near future. ◌ः The US Fed’s policies have forced several other central banks (BoJ, ECB, etc) to also follow loose monetary policies (to aid their own economies but also to prevent their currencies from appreciating). If US Fed winds down QE, others will follow suit. their own economies but also to prevent their currencies from appreciating). If US Fed winds down QE, others will follow suit. ◌ः This has implications for India. ◌ः Given its massive current-account deficit, the country has become excessively dependent on short-term money flows to bridge its current-account deficit.
  31. 31. Growing attractiveness of US market ◌ः Another risk to the Indian economy arises from the growing attractiveness of the US market. ◌ः According to a recent article by Akash Prakash, CEO of Amansa Capital (in Business Standard), emerging markets have significantly underperformed the S&P 500. In the last two years, the MSCI emerging markets index is down nearly 10% significantly underperformed the S&P 500. In the last two years, the MSCI emerging markets index is down nearly 10% while the S&P 500 is up 20%. ◌ः As more and more investors believe in the growing attractiveness of the US markets, at some point inflows into the Indian markets will be affected. ◌ः The reallocation of assets from the US market to emerging markets, which we have seen in the past, could reverse.
  32. 32. Cyprus: crisis contained ◌ः Cyprus became the fifth country within the Eurozone to negotiate a bailout. ◌ः In this second deal to bail out Cyprus, a € 10 billion ($ 13 billion) loan was made to the country. This has reduced the probability of Cyprus exiting the Eurozone. ◌ः Bank of Cyprus, the largest bank, will be restructured.◌ः Bank of Cyprus, the largest bank, will be restructured. ◌ः Laiki Bank, the second-largest bank, will be wound up. ◌ः These banks got into trouble because they had invested a lot of their money in Greek bonds. ◌ः Savers with accounts below € 100,000 have been spared. ◌ः Losses will be borne in the following order: shareholders, junior bondholders, senior bondholders, and finally, uninsured depositors.
  33. 33. Repercussions of the deal ◌ः The collapse of Cyprus's oversized banking sector, which along with tourism was the mainstay of the economy, will cause an economic slide. It is expected that Cyprus's economy may shrink by 10-15% in 2013 and 5% in 2014. ◌ः Capital controls have been imposed on depositors so that there is no run on the banking system.no run on the banking system. ◌ः The decision to punish larger depositors means that a lot of money that is currently deposited in Cyprus will go elsewhere (one third of Cyprus's deposits are Russian). ◌ः People will also fear depositing money in weaker banks within peripheral Europe.
  34. 34. Repercussions of the deal ◌ः This will make it harder to keep sick banks alive in a crisis. ◌ः If and when a bank run starts, depositors will head for the exit earlier and faster. ◌ः What is needed in Europe is a unified banking system with fiscal backstop. It also needs a joint deposit insurance scheme. Only this will break the link between weak banks and weak governments. But Europe is lagging behind in these matters.
  35. 35. Repercussions of the deal ◌ः From the creditors' viewpoint, the era of all-encompassing bailouts is coming to an end. ◌ः Hereafter private investors will have to bear losses instead of being bailed out by euro zone taxpayers. ◌ः◌ः The Finns, Dutch and Germans don't want greater pooling of liabilities. They want the troubled Mediterranean countries to adopt reform measures and come out of trouble. ◌ः However, Northern countries need to design bailout packages in such a way that they do not impose unnecessary hardships. They must also delay adopting austerity measures at home at a time when other Eurozone economies are still recovering.
  36. 36. Impact on India ◌ः The big risk that India faces is that any flaring up of risk in Europe could create a risk-off environment that may lead to lower FII inflows, or even cause outflows from India. ◌ः This would make it difficult for India to fund its CAD and lead to another bout of rupee depreciation. ◌ः The Indian equity markets, which are very FII- dependent, would also decline.
  37. 37. The Market
  38. 38. Market outlook Asset Class Current Levels( as of Feb 28, 2013) Summary View Why Risk to our View Equity Nifty: 5,647.75 Markets will be under pressure, Bad economic data; government If RBI cuts rates aggressively or Sensex: 18,835.77 under pressure, especially mid- and small-cap stocks data; government weakened; US market becoming attractive. Absence of positive triggers. aggressively or Q4FY13 results show considerable improvement.
  39. 39. Index Watch Index 1-month return (%) YTD return(%) Sensex -0.14 -3.8 BSE Mid-Cap -2.55 -14.66 BSE Small-Cap -6.47 -22.12 BSE Auto -4.44 -13.28 BSE Capital Goods -1.82 -17.97BSE Capital Goods -1.82 -17.97 BSE Consumer Durables -1.08 -8.98 BSE FMCG Sector 4.41 -0.45 BSE Healthcare 2.53 -1.94 BSE IT 1.94 21.1 BSE Metal -3.41 -22.54 BSE Oil -3.72 -2.44 BSE Power Index -5.59 -18.05 BSE PSU -5.56 -12.54 BSE Tech 0.1 13.44 Figures as on March 28, 2013
  40. 40. FII inflows fall, MF outflow continues Month FII investment MF invest ment January 22,230 -865 February 22,122 -1,496 March* 10,399 -1,767March* 10,399 -1,767 *Upto March 26; all figures in Rs crore • FII inflows in March were less than half the level in January and February. • Mutual funds continued to be net sellers even in March.
  41. 41. High dependence on FII inflows ◌ः The Indian economy has become very dependent on foreign inflows to fund its current account deficit. ◌ः If FII inflows ebb, either due to QE ending or the creation of a risk-off environment due to the European situation flaring up again, the rupee could once again depreciate sharply.up again, the rupee could once again depreciate sharply. ◌ः With the rupee declining, the possibility of FIIs making a profit declines further. This would create a vicious cycle, leading to more pull-outs. ◌ः The high dependence of Indian markets on FII money would lead to the decline of equity markets.
  42. 42. High dependence on FII inflows ◌ः This year India has already received about $ 10 billion of inflows, yet the Indian equity market is among the worst performers in Asia year to date. ◌ः Since January 2012, India has received over $ 35 billion of FII inflows.of FII inflows. ◌ः It has received a disproportionate share of the flows coming into Asia. ◌ः If these flows stop or reverse, it would have a very negative impact on the Indian market.
  43. 43. Why are market participants worried? ◌ः Pessimism has once again increased within the market. ◌ः Both the mid- and small-cap index are down quite a bit year-to-date. Reasons: ◌ः Slew of bad data: GDP, CAD, CPI have all got market participants worried. ◌ः worried. ◌ः Political worries: Will reforms continue with the government weakened after DMK’s pullout? Will fiscal consolidation continue in a pre-election year? ◌ः Will QE continue? ◌ः Will FII inflows continue?
  44. 44. A few positives ◌ः Among the positives, valuations have become attractive. Valuations are approaching buy territory, as in the summer of 2012. ◌ः Commodity prices are not rising. ◌ः India’s growth cycle is at an inflection point. ◌ः Bad data seems to have touched its nadir, including the investment rate and◌ः Bad data seems to have touched its nadir, including the investment rate and exports, according to Morgan Stanley. ◌ः According to Morgan Stanley, the earnings cycle appears to be turning. Broad market earnings have reached a trough and may move up now, albeit gradually. ◌ः So far the level of global liquidity remains high. This is favourable for Indian stocks. ◌ः Bad sentiment is a good contra-indicator for stock returns.
  45. 45. Thank you

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Indian Market Economic Outlook perspective Mutual Fund Debt Equity Gold Environment

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