Market economy report september 2013


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Current Perspectives on Indian Market, Economy, Scenario, Equity, Debt, Mutual Fund

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Market economy report september 2013

  1. 1. Market and economic outlook 05-Sep-201305-Sep-2013
  2. 2. Executive summary ◌ः The rupee has been falling because the dollar has strengthened, and due to India’s high CAD. ◌ः The government needs to take steps to attract dollars through NRI bonds and by get PSUs to raise money abroad.abroad. ◌ः The rupee may rise to around 60 by March owing to falling CAD (due to falling gold imports). ◌ः Economic growth in Q1FY14 was the lowest in four years.
  3. 3. Executive summary ◌ः WPI inflation has begun to rise due to imported inflation. ◌ः Corporate results (both sales and net profit) in Q1FY14 were anaemic. ◌ः The market is offering compelling valuations.◌ः The market is offering compelling valuations. ◌ः To protect your portfolio against the rupee’s decline, you need to have investments in gold and international funds. ◌ः FMPs are a safe avenue offering good returns.
  4. 4. Market outlook Asset Class Current Levels( as on Sep 03, 2013) Summary View Why Risk to our View Equity Nifty: 5,471.80 Sensex: 18,619.72 Markets will continue to be under pressure. There has to be conviction that govt. and RBI can stem RBI and govt. may act promptly to attract foreignunder pressure. and RBI can stem rupee’s fall and stabilise economy. Fed’s QE moves could create added pressure. attract foreign flows. QE may be postponed.
  5. 5. Index watch Benchmark Change in August (%) YTD change (%) S&P BSE SENSEX -3.75 -4.15 S&P BSE Mid-Cap -4.38 -25.48 S&P BSE Small-Cap -2.26 -29.66 S&P BSE Capital Goods -13.88 -34.81 S&P BSE Realty Index -10.88 -44.40 S&P BSE Consumer Durables -10.32 -27.25S&P BSE Consumer Durables -10.32 -27.25 S&P BSE BANKEX -9.93 -28.17 S&P BSE PSU -8.44 -31.97 S&P BSE Power Index -7.29 -30.35 S&P BSE FMCG -6.62 7.20 S&P BSE OIL & GAS Index -5.00 -4.33 S&P BSE AUTO Index -3.47 -10.71 S&P BSE Health Care -1.19 10.25 S&P BSE TECh Index 3.89 30.18
  6. 6. Index watch ◌ः The benchmark index, the Sensex, declined once again in August. ◌ः The market will look up only once there is confidence that the steps taken by the RBI and the government to stem the rupee’s decline have succeeded.stem the rupee’s decline have succeeded. ◌ः A wide valuation gap has emerged in the market between large-cap stocks on the one hand and mid- and small-cap stocks on the other.
  7. 7. Index watch ◌ः On the sectoral front, IT has emerged as a favourite. Both the revival in the US economy and the rupee’s decline favour this sector. ◌ः Rate-sensitive sectors (auto, realty, capital goods) are◌ः Rate-sensitive sectors (auto, realty, capital goods) are down in the dumps, more so after tightening of liquidity by the RBI led to a spike in interest rates.
  8. 8. FII and MF flows in equity market Month FII investment (Rs-cr) MF investment (Rs-cr) Jan 22,059.20 -5,212.40 Feb 24,439.30 -847.90 March 9,124.30 -1,550.60 April 5,414.10 -1,422.90 May 22,168.60 -3,507.10 June -11,026.90 -269.00June -11,026.90 -269.00 July -6,253.10 -2,184.30 August -5,922.50 1,349.90 Cumulative 60,003.00 -13,644.30 While FIIs have been pulling money out of the equity market for the last three months, MFs have turned net investors after a long gap. Any acceleration in FII outflows from the equity market will pose further risks to the rupee.
  9. 9. FII and MF flows in debt market FII inflows (Rs-crore) MF inflows (Rs-cr) January 2,947.10 40,651.50 February 4,001.20 40,092.10 March 5,795.10 68,114.30 April 5,334.40 51,854.60April 5,334.40 51,854.60 May 5,969.00 26,840.10 June -33,134.90 64,602.10 July -12,037.60 -23,740.20 August -9,772.90 3,485.90 YTD cumulative -30,898.60 2,71,900.40 FIIs have pulled out money from the debt market in June, July and August and are net negative investors YTD. MFs pulled out money only in July and are net positive investors YTD.
  10. 10. Rupee’s steep fall against the dollar 50.00 60.00 70.00 80.00 Rupee against dollar 54.69 65.7 168.83 28 August 0.00 10.00 20.00 30.00 40.00 01-Jan-2013 01-Feb-2013 01-Mar-2013 01-Apr-2013 01-May-2013 01-Jun-2013 01-Jul-2013 01-Aug-2013 Price 31-Aug-2013
  11. 11. Rupee’s steep fall against the dollar ◌ः The chief problem facing the Indian economy today is the rupee’s steep fall against the dollar. ◌ः Since the start of May, the rupee is down 22.40% against the dollar. ◌ः The rupee’s decline was triggered once Ben◌ः The rupee’s decline was triggered once Ben Bernanke, the chairman of the US Federal Reserve, spoke of quantitative easing (QE). ◌ः The dollar strengthened on expectation that there would be less of it in future, and all emerging market (EM) currencies fell against it.
  12. 12. Rupee’s steep fall against the dollar ◌ः The rupee’s fall was steeper than that of all other EM currencies because India runs a large current account deficit (CAD). Investors worry about how it will fund the CAD. ◌ः Recently the RBI announced changes to the liberalised◌ः Recently the RBI announced changes to the liberalised remittance policy. It reduced the amount that companies and individuals can invest abroad. It also placed restrictions on property purchases abroad (August 14). ◌ः These steps were meant to preserve India’s foreign exchange reserves.
  13. 13. Rupee’s steep fall against the dollar ◌ःBut they triggered the fear that India might impose capital controls. ◌ःThis led to further outflows, and exacerbated the rupee’s decline.
  14. 14. Key risks from rupee depreciation ◌ः FII holding in India is at 21% in BSE 200 companies (45% of free float). This makes the Indian market vulnerable to a sell-off in emerging markets. ◌ः Every 10% depreciation of the rupee raises inflation by 100 bps. Higher inflation will constrain the RBI's ability100 bps. Higher inflation will constrain the RBI's ability to cut interest rates and kick start the economy. ◌ः Companies with dollar debt may default. Infrastructure firms are especially vulnerable. Banks’ NPAs may rise. ◌ः If the rupee falls to 70 and beyond, FII pull-out from the equity market may accelerate.
  15. 15. What needs to be done ◌ः The central bank needs to maintain tight liquidity to support the rupee, but not so tight that growth gets choked. ◌ः In the short run, India needs to augment its dollar reserves. It can either get public sector companies to issue quasi-sovereign bonds or launch NRI bonds. ◌ः Both foreign equity investors and NRIs would be interested in◌ः Both foreign equity investors and NRIs would be interested in taking advantage of the weak rupee. ◌ः In the longer run, the government needs to create an environment that attracts more FDI than unstable FII flows. ◌ः Capital surplus countries like Japan are keen to invest in India's infrastructure.
  16. 16. What needs to be done ◌ः Improve trade relations with Iran. This will allow India to buy oil in rupees instead of dollars. ◌ः◌ः Implement the government’s welfare projects better so that they increase productivity, instead of just leading to higher inflation.
  17. 17. When will the rupee recover? ◌ः According to rating agency Crisil, the rupee will recover to around 60 to the dollar by the end of FY14 from its current level of above 65. ◌ः This will be driven by an improvement in CAD. CAD had come in at 4.8% in FY13. Crisil expects it to fall to 3.9%come in at 4.8% in FY13. Crisil expects it to fall to 3.9% in FY14. ◌ः The fall in CAD will be driven by a decline in non-oil imports, chiefly gold. ◌ः Gold imports will fall because of the increase in import duty from 8 to 10%, and the restrictions imposed by the government on investing in gold coins and gold bars.
  18. 18. When will the rupee recover? ◌ः Import of consumption items and capital goods may also fall due to weaker domestic demand. ◌ः CAD is now expected to be $71-72 billion in FY14. ◌ः But India will have difficulty in providing for even this lower amount of CAD. That is why it is expected that the rupee will be 12-14% weaker by the end of FY14 compared to the end of FY13.weaker by the end of FY14 compared to the end of FY13. ◌ः If the government takes immediate measures to encourage foreign inflows (issue NRI bonds and get PSUs to borrow abroad) that too will help the rupee. ◌ः The risk to its forecast, according to Crisil, comes from how the tapering of QE3 will pan out. ◌ः According to Crisil, it is likely to begin in the Oct-Dec quarter of 2013. If it proceeds at a fast pace, it could affect inflows into emerging markets, and have an impact on EM currencies, including the rupee.
  19. 19. Slowing economic growth ◌ः The Indian economy grew by just 4.4% in the April-June 2013 quarter. ◌ः This was the slowest quarterly expansion in four years. ◌ः All the components of aggregate demand remained subdued: government, private consumption andsubdued: government, private consumption and investment. ◌ः Both manufacturing and mining contracted. While manufacturing had grown 2.6% in the previous quarter, it slumped to 1.2% in the first quarter. ◌ः The mining sector registered a decline of -2.8% in the June quarter compared to a decline of -3.1% in the previous quarter.
  20. 20. Slowing economic growth ◌ःSome segments of the service sector have also begun to falter. ◌ःThe only saving grace is that a good harvest is expected this year because of a good monsoon.expected this year because of a good monsoon. This will lead to higher rural income, which should in turn boost consumption. ◌ःThe PM remains hopeful of a 5.5% growth in FY 14, but this appears unlikely.
  21. 21. Slowing economic growth ◌ः Recent steps by the RBI to tighten liquidity (in order to support the rupee) may further hurt growth prospects. ◌ः GDP growth may improve from the second or third quarter once higher government spending makes an impact on the economy. In the first quarter of thisimpact on the economy. In the first quarter of this fiscal, the government has released 48-50% of the total plan expenditure for the year. ◌ः Between January and April the Cabinet Committee on Investments (CCI) has approved projects worth $ 27 billion.
  22. 22. Inflation inches up ◌ः WPI inflation was 4.6% in May, 4.9% in June, and then accelerated sharply to 5.8% in July. ◌ः Non-food manufacturing or core inflation, which had softened to 2% in June, rose to 2.4% in July. This was the result of the rupee's depreciation, which is causingthe result of the rupee's depreciation, which is causing imported inflation. ◌ः However, due to reduction in the pricing power of manufacturers (weakened demand due to higher interest rates), the underlying trend in core inflation is expected to be benign in FY14.
  23. 23. Inflation inches up ◌ः A good monsoon is expected to result in a good kharif harvest and lead to softening of food prices in FY14. ◌ः◌ः The rupee's depreciation could cause import inflation. However, its pass-through effect may to some extent be blunted by weak domestic demand.
  24. 24. Oil prices up again ◌ः Another risk to the Indian economy has arisen with the price of oil strengthening. ◌ः With tensions in the Middle East rising, Brent crude has◌ः With tensions in the Middle East rising, Brent crude has risen about 14% since April. This will again keep India's twin deficit problem in focus, leading to further weakness in the rupee.
  25. 25. First quarter results ◌ः Net sales of Sensex companies continued to decelerate in the first quarter of FY14 to 1.7% y-o-y. This is the lowest level since the global crisis of 2008. ◌ः This low sales figure confirms weakened demand within◌ः This low sales figure confirms weakened demand within the economy. ◌ः Net profit of Sensex constituents declined to 1.9% y-o-y in the first quarter of FY14.
  26. 26. First quarter results ◌ः The sectors that had high sales in the first quarter were healthcare, IT and telecom. Those with poor sales included industrials, metals and mining. ◌ः Sensex PAT growth was skewed in favour of◌ः Sensex PAT growth was skewed in favour of healthcare, IT, and FMCG. Industrials, oil and gas and telecom posted poor profits. ◌ः According to Kotak Securities, Sensex earnings will grow 8.2% in FY14 and 14.5% in FY15.
  27. 27. Valuations have turned compelling ◌ः Free cash flow yield to enterprise value of the Sensex is at around 8.5-9%, which is close to the 10-year bond yield. ◌ः Sensex is trading at about 14.5 times FY14 EPS and◌ः Sensex is trading at about 14.5 times FY14 EPS and 12.7 times FY15 EPS. ◌ः The market has got bifurcated. Defensive stocks are trading at high valuations and rate-sensitives are at record lows. The price of the latter may not pick up unless there are signs of a turnaround in the economy.
  29. 29. Gold acting as a hedge 20000.00 25000.00 30000.00 35000.00 40000.00 Price 30,780 32,25034,130 , 28 Aug. 0.00 5000.00 10000.00 15000.00 20000.00 Price 31-Aug-2013
  30. 30. Have an allocation to gold, the classic hedge ◌ः If you had at least a 10-12% allocation to gold in your portfolio, it would have acted as a hedge against the rupee’s fall. ◌ः As the rupee fell, the value of gold, most of which is◌ः As the rupee fell, the value of gold, most of which is imported from abroad, rose. ◌ः Since the start of the year it is up only 4.78%. ◌ः But from its nadir this year of Rs 25,018.50 on 28 June, it has rallied 28.90%.
  31. 31. Invest in international funds ◌ः Another way you could protect your portfolio against the rupee’s decline is by investing in international funds. ◌ः About 15% of your equity portfolio may be invested in foreign equities.foreign equities. ◌ः 50% of your money in foreign markets should be invested in the US market and the balance in emerging markets. ◌ः If you are new to international investing, begin with ETFs. They have low cost and offer you a broad, diversified exposure.
  32. 32. FMPs offer safety and returns ◌ः Interest rates within the economy shot up after the RBI introduced liquidity tightening measures to stem the rupee’s fall. ◌ः The mutual fund industry has responded by launching a large number of fixed maturity plans (FMPs).large number of fixed maturity plans (FMPs). ◌ः They are close-ended products with no mark-to-market risk. ◌ः Investors may invest in them to take advantage of the current spike in interest rates. If you hold them for more than one year, the tax rate is also more favourable compared to fixed deposits.
  33. 33. Thank you