Advice for the Wise - August 2015 • The investor behaviour, bordering on split personality is probably why it is apt to call our times ‘interesting • Diversification is not merely ‘sensible’, it is an absolute must • Equity markets were broadly range bound for the month of July; with mid caps showing better strength compared to large cap stocks. • Global markets got a scare from plummeting Chinese stocks as large number of local investors had to unwind their leveraged positions on account of margin calls getting triggered. • The rate-cut cycle seems certain and one can anticipate interest rates to converge with the inflation rate in next 5-6 quarters

1. Advice for the Wise
August 2015

2. Contents
From the desk
of the CIO
Did you
know?
Domestic
Equity
Outlook
Global Equity
Outlook
Domestic
Debt Outlook
Domestic
Debt Strategy
Global Debt
Outlook
Global
Economy
Update
Foreign
Exchange
Commodities
Real Estate
Outlook
What’s
Trending?

3. From the desk of the CIO
Dear Investors,
The purportedly Chinese expression “May you live in interesting
times!” seems to apply to most of humanity in the last decade.
Lately however, the source of such interesting influence has also
been Chinese. Notwithstanding the massive and perplexing
government support of the stock markets in China, investors in
Chinese stocks have started to panic again. It is actually beside the
point whether the Chinese equity markets are over-valued or
undervalued.
In another part of the world, a historic nuclear deal (or is it accord?)
finally concluded between Iran and the so-called P5+1.
Understandably, this pushed the prices of crude oil down.
Speculation is rife again if this time the price drop will surpass the
recent lows. In a close but still another part of the world, the Greek
government strangely enough agreed to reforms worse than those it
had walked out of a month before. It seems like Greece blinked in
the war of nerves between Eurozone and itself. Investors watching
the developments nervously till then cheered the outcome and
hailed the continuation of Greece in Euro (for now at least!). That
seemed to send the price of gold south and that of emerging markets
equities north. Risk, it seems, was “on” again. The “off” did not seem
very far – as by the end of July the Chinese jitters mentioned above
returned.
This investor behaviour bordering on split personality is probably
why it is apt to call our times ‘interesting’. Admittedly it is a mistake
to generalize investor behaviour under one big trend in some
direction or other. At all times, specific investors have divergent
views and that is what brings about the so-called price discovery in
the capital markets. However, in recent years, the causality of
investment attractiveness of an asset class and fund flows into that
asset class has become lot less sharp than it used to be say 50 years
ago (or maybe it was always this way and our understanding of this
reality is finally catching up with the way of the world!)
The linear picture of ‘fundamentally sound’ investments attracting
fund flows and ‘fundamentally weak’ investments experiencing exits
is overly simple to describe any of the above phenomena. More
realistically, in absence of any objective measure of fundamental
soundness, investors are increasingly watching everybody else to
determine their own plans. It partly makes sense from liquidity point
of view. However, if an increasingly large proportion of investors are
making decisions based on behaviour of other investors, the fund
flows in and out of different asset classes are likely to become
extremely volatile. This behaviour is typical of non-linear systems.
An important characteristic of such systems is oversensitivity to
small perturbations. In non-technical terms, it simply means small
triggers can set off large panics (or euphorias).
A potential response to such non-linearity can be use of investment
rules instead of guidelines. Diversification is not merely ‘sensible’, it
is an absolute must. Likewise, it is not merely advisable to rebalance
but so important that it may drive large part of the final
performance. It probably makes sense to track the panic period
correlations amongst asset classes to study risks. Lastly it is probably
a good idea to focus on costs of investing rather than just returns.
Equally important is probably an attitude to live with the volatility
rather than hiding behind illusory determinism (of returns, risks,
performance etc.) which only camouflages it. Maybe it is time to
focus on woods and give the trees a miss!

4. Did You Know?
#Source: CheatSheet
The term “Blue Chip” comes from
the colour of the poker chip with
the highest value, blue
May 26 is celebrated as the
Science Day in Switzerland in
honour of former President Dr.
APJ Abdul Kalam, because on the
day, Kalam visited the country
John D. Rockefeller, who
revolutionized and dominated the
oil industry in the late 19th and
early 20th century, had a net
worth measuring $1.4 trillion
(today’s dollars) at the time of his
death.

5. Domestic Equity Outlook
As on 25th
July 2015
1 month
change
1 year
change
Equity
Markets
BSE Sensex 28112 0.80% 7.60%
CNX Nifty 8521 1.50% 9.40%
BSE Midcap 11147 4.30% 20.00%
BSE Smallcap 11668 5.00% 14.10%
Equity markets were broadly range bound for the month of July; with mid caps showing better strength compared
to large cap stocks. A ‘No’ vote to impose greater austerity measures at the Greek referendum unperturbed global
stocks, as lawmakers later passed bailout agreements for receiving further aid and thus avoid debt default.
However, the positive rally was short-lived. Global markets got a scare from plummeting Chinese stocks as large
number of local investors had to unwind their leveraged positions on account of margin calls getting triggered.
Slowing Chinese economy and centre’s intervention casts doubt on the longevity of sustainable rally. Meanwhile
all eyes have been on the onset of monsoons. After an above average June rainfall, July has been relatively
disappointing. Quantum and distribution of rainfall plays an important role for agri output. Crop sowing has
improved and better monsoons will boost chances of higher farm produce. It would also result in lowering food
inflation and thus help the economy to grow faster as interest rates would trend lower.
90
95
100
105
110
115
120
125 S & P BSE Sensex CNX Nifty
BSE Midcap BSE Smallcap

6. Domestic Equity Outlook
Macroeconomic Outlook (Contd.)
One does not expect any rate cuts in the coming monetary policy. However, the rate-cut cycle seems certain and
one can anticipate interest rates to converge with the inflation rate in next 5-6 quarters. The focus is also on the
ongoing quarterly earnings season. Overall first quarter results are likely to be subdued; similar to march
quarter. Single digit revenue growth with some improvement at EBITDA level is expected. Lower commodity
prices should aid gross margin expansion for many sectors. Indian markets over past six months have given
negative returns. Thus buying quality stocks via bottom-up strategy should be a preferred way to invest over
medium to long term.
Government Policy
The monsoon session of parliament has begun. As many as 32 bills are lined up for passage. However, the key
bills that have been carried over from previous session are the GST bill and Land Acquisition bill. One can expect
a stormy session for clearance of these bills as the ruling government does not have a majority in Rajya Sabha.
Some modifications also cannot be ruled out in order to garner support of other parties and have the bills
passed.

7. Domestic Equity Outlook
 Wholesale Price Index (WPI)-based inflation for the
month of June eased further to quote at -2.4%. The eighth
straight decline was mainly on the back of weak fuel
prices.
 Fuel and power index (15%) on WPI basket rose
by 0.6% to 191.0 from 189.8 due to higher price of
aviation turbine fuel, petrol and kerosene, lignite,
high speed diesel and bitumen.
 Consumer price index- (CPI) based inflation for June
jumped to a four-month high of 5.4%, mainly driven by
higher than expected food inflation dampening the
hopes of a further rate cut.
 Food inflation for June was 5.4 % compared to 4.8 % in
May.
Wholesale Price Index Consumer Price Index
#Source: Business Standard, moneycontrol
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00% WPI CPI

8. Domestic Equity Outlook
 The index of industrial production (IIP) for the month of
May came in at 2.7%, falling from 4.1%, led by a sharp fall
in capital goods and consumer goods data.
The cumulative growth for the period April-May 2015-16
over the corresponding period of the previous year stands
at 3%
 Growth rates for sectors stood as 6.4 % for basic goods,
1.8 % for capital goods, and 1.2 % for intermediate goods.
The consumer durables and consumer non durables
recorded growth of -3.9 % and -0.1 %, respectively.
 The Indian economy expanded 7.3% in the year ended
March, in line with the initial forecast and marginally
higher than 6.9% recorded in the previous year
 Financial services reported 11.5% growth while trade
and hotels segment was up 10.7%. Manufacturing
growth picked up further in the January-March period,
rising to 8.4%, but construction slowed to 1.4% and
agriculture contracted 1.4% because of the damage
caused by unseasonal rains in March.
4.0
5.0
6.0
7.0
8.0
GDP
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
IIP
#Source: Moneycontrol

9. Sector Outlook
Sector Stance Remarks
BFSI
Private sector banks continue to deliver healthy earnings in line with expectations. However,
we expect PSUs to deliver muted numbers on asset quality concerns.
Automobiles
Passenger vehicles and CVs to outperform two-wheeler segment. Tractors to continue weak
show. Auto-ancillaries expected to do well due to revival of demand.
FMCG
We prefer “discretionary consumption” theme within FMCG. Key beneficiaries such as
durables and branded garments, as the growth in this segment will be disproportionately
higher vis-à-vis the increase in disposable incomes. Gross margin expansion to continue.
IT/ITES
Cross-currency volatility has come down. Select verticals displaying better growth. Long term
outlook to improve once global uncertainties come down.
Power Utilities
Lack of fuel linkages , poor SEB health, adverse CERC guidelines have compromised the ROE’s
leading to de-rating in near term. In long run, they are core to India’s infra story.
Cement
Cement volumes witnessing pressure. Going ahead pricing and realizations would be key for
sector valuations.

10. Sector Outlook
Sector Stance Remarks
Healthcare
Huge global opportunity as a generic and bulk drug supplier. Better placed against peers in terms
of technology and labor cost arbitrage. To continue to gain global share and thus generate strong
earnings growth.
E&C
Order inflows expected to improve as spending and capital expenditure likely to move up on
economic recovery.
Energy
With the price deregulation of diesel, we believe the total subsidy burden on Oil PSU’s will come
down significantly this year. Govt. has decided to pay full subsidy to OMC’s
Telecom
Regulatory uncertainties have come down. However, aggressive bids for spectrum has revived
fears of sub-optimal returns on capital.
Metals
Lower global growth and Chinese slowdown has kept the growth subdued. Absence of US
monetary stimulus will lead to further downward pressure on prices.

11. Global Equity Outlook
As on 25th
July 2015
1 month
change
1 year
change
Equity
Markets
MSCI World 1745 -2.02% -0.16%
Hang Seng 25128 -7.43% 3.77%
S&P 500 2079 -1.08% 5.12%
Nikkie 20544 -1.09% 32.91%
World markets would continue to monitor the stance of US Fed in the forthcoming meeting. Macro data has given
a mixed picture till now but the recovery seems on the right lines. Thus, a rate hike in the coming quarters
remains probable.
On the Greece front, it is no longer in arrears with IMF as June dues have been cleared. The next major payment
needs to be made to ECB by August 20. With third bailout talks on, Greece should most likely accept the
proposals presented to them.
Sharp correction in Chinese markets and lower growth rates is another matter of worry on the global front.
However, government seems committed to boost the growth and has taken various stimulus measures. Though,
near term pressures persist, there is no change structurally from a long term point of view.
90
100
110
120
130
140
150
MSCI World Hang Seng S&P 500 Nikkie

12. Global Economy Update
United States
• United States’ unemployment rate fell to 5.3%, the lowest
in seven years. However this was driven by an exodus
from the work force, rather than more people finding
jobs.
• The US economy rebounded to 2.3% annualized rate
(adjusted for inflation) in the second quarter of April, May
and June.
Emerging Economies
• The country’s exports declined for the seventh straight
month, falling 15.82% year-on-year in June at $22.28
billion due to a sharp decline in petroleum products,
slowdown in manufacturing and soft external demand,
and raising concerns about the economic recovery
• China's consumer price index (CPI) rose 1.4% in June from
a year earlier following a 1.2% rise in May
Japan
• Japan's core consumer price index (CPI), which excludes
fresh food, rose 0.1 percent on-year in June. The "core-
core" CPI, which excludes both food and energy prices,
rose 0.6 percent from a year earlier
• Industrial output rose by 0.80% from 2.2% in May but is
still 16% below its peak in 2008. Japan’s exports to China
fell 2.5% in June from a year earlier.
Europe
• The European economy grew by 1.40% in the first three
months of this year based on the GDP measure while
consumer spending increased by 1.20% in the same
period.
• The Eurozone trade surplus narrowed to €18.8bn in May
from €24.9bn in April and €19.9bn in March. Seasonally-
adjusted exports rose 3.0% vs. 9.0% prior (y-o-y)
#Source: New York Times, The Independent, The Indian Express

13. Domestic Debt Outlook
•The yields on 10 Yr G sec closed at 7.83% which is 2 bps higher than with
the last months close of 7.81%.
•Government bond prices ended steady on amid subdued activity as
participants remained on the sidelines in the absence of fresh triggers
•Prices remained range bound as caution set in ahead of the outcomes of
the US Federal Open Market Committee (FOMC) interest rate decision and
the state development bond auction.
•The interbank call money rate ended above the RBI’s repo rate at 7.50%
as banks with excess funds opted to lend to the RBI via reverse repo
auctions.
As on 25th
July 2015
1 month
change
1 year
change
Debt Markets
10-Yr G-Sec Yield 7.83% 2bps (80bps)
Fixed Deposit 7.75% 25bps (100bps)
7.40
7.60
7.80
8.00
8.20
8.40
8.60
8.80
9.00
9.20
9.40
G-Sec
10 YR Gsec Yield 5 YR Gsec Yield
15 YR Gsec Yield
0
50
100
150
200
250
300
AAA AA+ AA AA- A+ A A- BBB+
Corporate Bond Spreads
5 Years 10 Years 15 Years

14. Domestic Debt Strategy
Our recommendations regarding short term debt is that investors with the time horizon
of 1 year to 2 years can look for short term debt funds. Even though, most of the short
term fund’s YTMs have fallen to sub-9%, our recommended short term debt funds still
have high YTMs (8.8%-10.8%) providing interesting investment opportunities.
The corporate bond market segment continues to be attractive over the medium term,
especially with expectations of an improvement in corporate profitability and an
improved economic outlook. The credit opportunities funds are better placed due to
stable returns and a change in taxation warranting a minimum holding period of three
years to avail indexation benefits.
Secondly, as we expect RBI to lower policy rates during the course of next 3-9 months,
dynamic bond funds are likely to outperform in the due course. Hence one could look at
dynamic bond funds having medium term of investment horizon.
G-sec funds may be less attractive now as the longer holding period (more than three
years) will neutralise any capital gains in the near term because of lower accrual income.
Hence our recommendations regarding long term debt is that investors could look to book
profits by reducing long term debt funds / Gilt funds in their portfolio.
Short Term
Debt
Corporate
Bond Funds
Dynamic
Bond Funds
Long Term
Debt Funds

15. Global Debt Outlook
• Outstanding loans for companies and households
in China stood at a record 207% of gross domestic
product at the end of June, nearly double the 125%
level seen in 2008.
• Puerto Rico defaulted on some of its debts this
weekend after years of battling to stay current on
its obligations, signaling the start of a long and
contentious restructuring process for the US
commonwealth’s $72bn debt pile
• China posted a $14.9 billion deficit on trade in
services in June and a deficit of $91.6 billion in the
first half of 2015, the foreign exchange regulator
said on Friday.
• Russian banks hobbled by sanctions are exploring
funding sources in Hong Kong to help the nation’s
companies refinance $117 billion in external debt
due in the coming year.
#Source: Financial Times, Economic Times, Bloomberg
Ratings Country
10 Yr G-Sec
Yield
1 month
change
AAA
Germany 0.66% 46bps
Hong Kong 1.92% 41bps
Sweden 0.76% 36bps
Switzerland -0.05% 7bps
AA+ USA 2.26% 32bps
AA-
China 3.47% (12bps)
Japan 0.41% 4bps

16. Commodities
Gold peaked in 2011 and since then it has been on a downtrend.
International gold prices corrected further in July and also broke
the $1100 mark. Better numbers from US economy and revival in
Europe has kept gold in weak zone. One can expect gold prices to
remain subdued and in a band of $1000-1200 for next few
months.
.
As on 25th July, 2015 : `24599 per 10gm
1 month change : (6.55%)
1 year change : (11.27%)
Oil fell to its lowest in six months on Monday, knocked by fresh
evidence of growing oversupply and data highlighting slowing
demand in China, leaving crude prices set for their weakest third-
quarter performance since 2008. The global market is
consolidating and commodities prices are at very low levels. Amid
a improvement in domestic fiscal situation, low global
commodities prices will further support India in the long-term
As on 25th July, 2015 : $54.29per bbl
1 month change : (9.90%)
1 year change : (49.20%)
*RICI: Rogers International Commodity Index – Tracks 38 commodity futures from 13 international exchanges.
24000
25000
26000
27000
28000
29000
Gold
2,000
2,500
3,000
3,500
4,000
RICI
0
50
100
150
Crude

17. Foreign Exchange
• The Indian rupee has depreciated against USD & YEN by o.44% and 0.31% respectively. It saw an appreciation of
0.70% against the GBP and 1.49% against EURO.
• The rupee weakened against the US dollar owing to losses in the Asian currencies markets. Since the beginning of this
year, the rupee has lost 1.4%
• India's foreign exchange reserves grew by $322 million in the week ended July 24.
Currency
As on 25th
July 2015
1 month
change
1 year
change
USD/INR 63.89 -0.44% -5.86%
GBP/INR 99.10 0.70% 3.14%
Euro/INR 70.12 1.49% 15.54%
Yen/INR 51.56 -0.31% 14.64%
USD/Euro 0.91 2.05% 22.78%
-0.44%
0.70%
1.49%
-0.31%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
USD GBP EURO YEN

18. Real Estate Outlook
Tier I
The Reserve Bank of India reduced repo rates by 25 basis points
in January and March and again in June 2015. Some of the banks
have correspondingly reduced the base rates and passed on the
corresponding benefit on home loans. With the reduction in EMIs,
potential homebuyers who have been sitting on the fence may
take a buy decision.
Tier II
Enquiries have started from companies across industries such as
IT, consultancy and e-commerce for leasing and buying office
space in expectations of an economic revival. The change in the
uptake of commercial asset class is slower than residential and it
could take a couple of quarters before commercial asset class
absorption starts increasing.
Rentals are expected to largely remain stable in 2015–16 as
supply pipeline is still strong.
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.
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.
Residential
Commercial

19. Tier I Tier II
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.
Capital values as well as lease rentals continue to be stagnant.
Developers continue to defer the construction costs as absorption
continues to be low unsold inventory levels high.
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.
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.
Retail
Land
Real Estate Outlook

20. EPFO’s debut on the Dalal Street
• The EPFO will start this process on 6th August with an initial corpus of Rs. 5000 Cr . EPFO’s Central Board
of Trustees has decided to invest 5 per cent of its incremental deposits in ETFs only during the current
fiscal.
• During April-June, EPFO’s monthly incremental deposit was around Rs 8,200 Cr, which could translate
into investments of Rs 410 Cr per month.
• SBI Mutual funds has been roped in by the EPFO to help the body for its investments in the ETFs and
understand the dynamics of the stock market.
• Presently, the Employees' Provident Fund Organisation (EPFO) invests subscribers’ annual deposits as
per the investment pattern stipulated by the Union Labour Ministry.
What’s Trending?

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