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1. 1 ADVICE for the WISE Newsletter AUGUST 2014
2. Economic Update 4 Equity Outlook 8 Debt Outlook 12 Forex 14
Real Estate Outlook 15 Index Page No. Contents 2
3. From the Desk of the CIO Advisory services are provided
through Karvy Capital having SEBI Registration No: INP000001512.
Investments are subject to market risks. Please read the disclaimer
on slide 17 Dear Investors, The Union Budget announced at the
beginning of the month was an important influencer for short term
market sentiment as well as long term forecasts regarding the
Indian economy. We have already sent our views on the budget in an
earlier communication. To summarize we believe that the budget,
while making no big-bang announcement, focused on right areas such
as infrastructure besides also demonstrating an overall intent to
put growth on fast track. The reaction to the Budget amongst equity
market participants was mixed. Part of this unenthusiastic reaction
was excessive expectations from the budget. The other part of the
reason for largely sideways movement in overall market levels
through July was also the divergent actions by institutional and
retail investors. While institutional investors continued to
invest, albeit selectively, many retail investors have continued to
exit. Part of the exit was driven by a lull in the upward momentum
in the markets post budget, which many took to be a good enough
sign to book whatever profits they have made so far and call it
quits. We believe that, barring tactical portfolio reallocations,
exit from equities at this stage of business cycle is poorly timed.
The results of several companies, including some in infrastructure
and banking, disappointed investors. That disappointment is
somewhat surprising for the simple fact that the revival of
sentiment is as recent as mid-May and it will be well over 3-4
quarters for any real effect of economic activity revival to show
in corporate earnings. The entire financial year 2014-15 will in
fact be marked by very high trailing P/E ratios for this reason.
That in itself should not flummox investors. During any period of
turnaround, the trailing 12 months and forward 12 months are going
to look very different. There is of course the crucial question of
whether the turnaround is real, but that is unlikely to be answered
by analysing the earnings of the quarters gone by. Better
forward-looking indicators for the same would be purchasing
managers surveys, capital raising by companies and greenfield
investment plans announced by public and private sector. On most of
such forward-looking measures, the macro indicators look quite
promising for now. The budget did away with the preferential
treatment of debt mutual funds for rates and holding period for
long term taxation. With long term for debt mutual funds now
defined as 3 years and taxed at 20%, investors have been forced to
reconsider their debt investment decisions for short and medium
term. We continue to believe that for long term debt allocation,
debt mutual funds are a good avenue. For medium term holding
(between 1 to 3 years), other alternatives such as listed NCDs (for
higher yield) and arbitrage mutual funds (for lower tax) could be
evaluated. 3
5. US Europe Japan Emerging economies US Federal Reserve
reduced its monthly bond buying program from $35 bn to $25 bn. US
initial claims for state unemployment benefits declined 19,000 to a
seasonally adjusted 284,000 for the week ended July 19, the lowest
level since February 2006. US Treasury Department reports a budget
surplus of $71bn in June, following a $130bn deficit in May.
Economy Update - Global Japans industrial production fell 3.3%
month-on-month in June after a 0.7% rise in May. Japan's retail
sales fell 0.6% year-on-year in June, compared with a 0.4% decline
in May. Chinas economy expanded 7.5% annually in Q2 2014 compared
to 7.4% in the previous quarter. Asian Development Bank (ADB)
upgrades India's economic growth forecast to 6.3% in 2015-16 on
hopes of speedy reform process, but retains growth forecast of 5.5%
for this year. World Bank offers India up to $18bn in financial
support over the next three years. 5 Euro zones services PMI
climbed to a 38-month high of 54.4 in July, from 52.8 in June. UKs
economy expanded 3.1% on an annualized basis in Q2 2014, the
fastest pace since the end of 2007. Euro zones industrial
production fell 1.1% month-on-month in May, the biggest drop since
September 2012.
6. Economy Outlook - Domestic Q4FY14 GDP grew at 4.6% Y-o-Y as
against 4.7% in the previous quarter. As per data released by
Central Statistics Office ( CSO ) the economy grew at the rate of
4.7% in 2013-2014, slightly above the 4.5% growth registered in the
previous year. Growth in 2013-14 was helped by a smart rebound in
the farm sector which grew at an annual 4.7% compared to 4.5%
growth registered in a year earlier period. Electricity sector also
grew at a healthy rate of 5.9% in 13-14 as against 2.3% in 12-13.
This is the second consecutive year in which the economy has grown
at a sub 5% level, primarily hurt by policy delays, high inflation
and global slowdown. Industrial Output in May 14 grew by 4.7% , the
highest monthly rise since October 2012. This comes on the back of
a 3.4% growth in April 14 thereby raising hope of a recovery.
Manufacturing saw the highest uptick it grew by 4.8% in May 14 as
against a meagre 2.5% growth witnessed in April 14. Growth in the
manufacturing sector was well diversified with capital goods
growing at 4.5% and consumer durables growing at 3.2% after months
of contraction. Recovery in automobile sales also contributed to
the good show in the manufacturing segment. Mining sector was flat
as it registered a growth of 2.7% in May 14. Electricity, on the
other hand saw a slowdown as it grew by 6.3% in May 14 versus a
growth of 11.9% registered in April 14. IIP 6 5.3 5.5 5.3 4.5 4.8
4.4 4.8 4.7 4.6 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6 GDP Growth
-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% May 13
Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar
14 Apr 14 May 14
7. Economic Outlook - Domestic As on June 2014 Bank credits
grew by 13.8% on a Y-o-Y basis. Aggregate deposits on a Y-o-Y basis
grew at 14.1% which is 2.3% more than growth registered in June
2013. The Honorable Finance Minister presented the Union Budget on
10th July and it proved to be a shift away from the subsidy and
hand outs driven approach of the previous Government to a more
growth focused and development focused budget. Infrastructure got a
special mention in the budget speech with a lot of reforms being
announced for the sector. The Finance minister also laid down a
clear roadmap for fiscal consolidation by pegging FY15 fiscal
deficit at 4.1% and 3.6% for FY16. The Finance Minister has
increased the personal income tax exemption limit for individuals,
long term capital gain tax on debt mutual funds has been increased
to 20% and tenure has been increased from 12 months to 36 months.
WPI inflation for the month of June 14 came in at 5.43% a four
month low after the Government announced curbs on farm exports.
Food inflation cooled off to 8.14% in June 14 from a high of 9.50%
in May 14. Inflation for fuel and light dipped to 4.6% while that
for housing dipped to 9.1%. Headline CPI came in at 7.3% in June 14
against 8.28% last month. The fall in the headline number was
mainly due to fall in food prices. Growth in credit & deposits
of SCBs 7 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Bank Credit
Aggregate Deposits 4.00% 6.00% 8.00% 10.00% 12.00% WPI CPI
8. Equity Outlook 8 Growth is Bubbling Under! The macroeconomic
data points coming in the last few months have been very
encouraging. IIP data for May came in at a 19- month high of 4.7%
raising hopes of a sustained recovery. This was driven by improved
performance of the manufacturing sector, we believe a
macro-economic revival is on the anvil. Indias core sectors grew at
7.3% in June 2014 compared to 1.2% growth in the year-ago month.
Activity in the eight core sectors - coal, crude oil, natural gas,
petroleum refinery products, fertilizers, steel, cement and
electricity are considered as vital cog in economic growth and a
higher growth number should reflect in heightened industrial
activity and GDP growth numbers for the quarter. Cement and four
wheeler sales numbers have also been on the uptrend. GDP growth has
stagnated at 4.5%-5.0% for last eight quarters pulled down by poor
performance of manufacturing and industrial sectors. We believe
that the worst is behind us. We would expect a GDP growth of 6% in
FY15 and believe that economy will see a revival of growth and
earnings cycle. Global Macro Outlook Continued recovery in the US
& a stable Euro area are significant positives for Indian
equity markets. Global growth outlook remains supportive of equity
investments as well. US Federal Reserve has decided to reduce the
monthly bond buying being carried out as part of QE3. Beginning
August, Federal Reserve will buy $25bn worth of debt securities
instead of $35 billion per month. This is on the back of reducing
unemployment rate and normalization in labor markets. We expect US
interest rates to remain low going into 2015. European Central Bank
has carried out a fresh monetary stimulus by bringing deposit rates
into negative territory. This will help stabilize European
economies. The revival in global risk appetite has resulted in
fresh FII inflows into emerging market equities with India turning
out to be a big beneficiary. India has been one of the top
performing equity markets since January this year with fresh equity
inflows of $12 billion . We expect the remaining months of this
fiscal to witness healthy portfolio inflows.
9. Equity Outlook 9 Reforms Agenda Insurance bill is likely to
be tabled in Parliament in the current budget session. FII limit in
both Insurance and pension sectors is being raised to 49%.
Environmental clearances, a big road-block for large projects, has
been IT enabled thereby cutting lead times and expediting
infrastructure creation. GST is likely to be implemented from next
financial year, it is expected that a successful implementation of
GST will add 1% to GDP growth rate. Large stalled projects are
being revived to give a boost to capital formation activity and
restart the investment cycle. Dedicated Freight corridor between
Mumbai and Delhi is being fast-tracked. Large spending will be
carried out to construct new roads and highways. Budget has made a
provision of 38,000 Cr this fiscal for the road sector. Market View
Corporate earnings growth has started to recover since the last
quarter. Sensex earnings growth has improved from 5% in FY13 to
about 10% in FY14 on the back of INR depreciation. Q1 FY15 results
have been inline with expectations with IT, healthcare and private
banks coming in with good numbers. For FY15, we would expect a
Sensex EPS growth of around of 15%. We would expect earnings growth
to accelerate once investment activity is revived and average at
20%-25% for the next six years. We arrive at a year end Sensex
target of 29,300 based on 15 times FY16 earnings and continue to
maintain a 2020 target of 100,000 on Sensex.
10. Sector Stance Remarks BFSI Overweight Private sector banks
and NBFCs are expected to deliver healthy earnings growth. We
expect public sector to significantly outperform due to cheap
valuations and stabilization in asset quality. Energy Overweight
With the ongoing price deregulation of diesel, we believe the total
subsidy burden on Oil PSUs will come down during the course of the
year. Rupee appreciation will also help. E&C Overweight The
significant slowdown in order inflow activity will reverse in the
next few quarters. We see a new infrastructure cycle taking shape
this year. Automobiles Overweight We are positive on SUVs and
agricultural vehicles segment due to lesser competition and higher
pricing power. Two wheeler and four wheeler sales are also showing
signs of upturn. Power Utilities Neutral We like the regulated
return characteristic of this space. This space provides steady
growth in earnings and decent return on capital. Sector View
10
11. Sector Stance Remarks Healthcare Neutral We believe in the
large sized opportunity presented by Pharma sector in India. Indias
strength in generics is difficult to replicate due to quality and
quantity of available skilled manpower. With the developed world
keen to cut healthcare costs, and a vast pipeline of drugs going
off-patent, Indian pharma players are at the cusp of rapid growth.
FMCG Neutral We like the secular consumption theme. We prefer
discretionary consumption beneficiaries such as cigarettes,
durables and branded garments, as the growth in this segment will
be disproportionately higher vis--vis the increase in disposable
incomes. IT/ITES Neutral Demand seems to be coming back in US.
North American volume growth has also remained resilient. With
significant rupee depreciation in the last few months, margins will
get a boost. Cement Neutral Cement industry has seen good volume
growth in the last quarter. The sector has also seen price hikes
which would boost profitability. Telecom Underweight While
regulatory hurdles seem to be reducing, recent aggressive bidding
for spectrum has revived fears of unhealthy competition. Emergent
competition from the social media space also present a formidable
challenge. Metals Underweight Steel companies will benefit because
of rupee depreciation. However, commodity demand stays low globally
due to low capex activity. Sector View 11
12. Debt Outlook The yields on 10 Yr G sec closed at 8.66%
which is 4 bps lower than the last months close of 8.70%. The RBI
announced the new 10 year 8.40% G-sec 2024 benchmark. Hence, the
yields of the current 10 year benchmark G-sec 8.83% maturing in
2023 ended lower by 10 bps on Friday in comparison to the previous
weeks close. The 364Days TBill auction worth Rs 6,000 Cr was fully
subscribed. The cutoff for 364Days TBill was set at Rs 92.02,
implying an yield of 8.70%. The spread on the 10 year AAA rated
corporate bond increased to 43 bps on 25th July, 2014 from 27 bps
(as on 25th June, 2014). 10-yr G-sec yieldYield curve (%) (%) 12
8.50 8.55 8.60 8.65 8.70 0.0 0.8 1.6 2.4 3.2 4.0 4.7 5.5 6.3 7.1
7.9 8.7 9.5 10.2 11.0 11.8 12.6 13.4 14.2 15.0 15.7 16.5 17.3 18.1
18.9 19.7 6.8000 7.3000 7.8000 8.3000 8.8000 9.3000
13. Debt Strategy OutlookCategory Details Long Tenure Debt Our
recommendations regarding long term debt is that investors could
look to add to dynamic and medium term income funds over the next
few months. Macro economic data-particularly inflation is pointing
towards a declining interest rate regime with few caveats.
Dynamically managed funds have the flexibility to go extremely
short or long depending on the fund managers view on interest
rates. An important point to note is that as commodity prices are
cooling down, current account deficit may reduce to some extent.
But all this is coupled with uncertainty. Hence entry into pure
long term debt should be avoided, we suggest matching risk appetite
and investment horizon to fund selection. Hence we recommend that
if investing for a period of 2 years or above then long term can be
looked upon. Some AA and select A rated securities are very
attractive at the current yields. A similar trend can be seen in
the Fixed Deposits also. Tight liquidity in the system has also
contributed to widening of the spreads making entry at current
levels attractive. With RBI maintaining status quo on key interest
rates in the economy we would suggest to invest in and hold on to
current investments in short term debt. Due to liquidity pressures
increasing in the market as RBI has a huge borrowing plan in the
first half of the new fiscal, short term yields would remain
higher. Short Term funds still have high YTMs (9.5%10%) providing
interesting investment opportunities. Short Tenure Debt Credit 13
Dynamic Bond Funds
14. Forex The Indian Rupee was more or less flat with ~0.03%
gains against the dollar , 0.02% gains against GBP and Yen.
However, against Euro the appreciation was steep with 1.27% . The
Indian Rupee continued a pattern of range bound trading as solid
foreign inflows into debt and stocks were offset by month end
dollar demand from importers. The central bank is also stepping-in
to buy dollars when the rupee strengthens, further capping gains.
Data showed India's foreign exchange reserves rose to $317.85
billion as of July 18, the highest since October 2011. Rupee
movement vis--vis other currencies (M-o-M) Trade balance and
export-import data The projected capital account balance for Q3 FY
13 is projected at Rs. 171984 crores along with the Q1 and Q2 being
at 88013 Cr and 130409 Cr respectively. We expect factors such as
higher interest rates to attract more investments to India.
Increased limits for investment by FIIs would also help in bringing
in more funds though uncertainty in the global markets could prove
to be a dampener. 14 Exports during June,2014 were valued at US $
26.47 bn which was 10.22% higher than the level of US $24.02 bn
during June, 2013. Imports during June, 2014 were valued at US $
38.24 bn representing a growth of 8.33% over the level of imports
valued at US $ 35.30 bn in June, 2013 translating into a trade
deficit of $11.76 bn. -10000 40000 90000 140000 FY 11 (Q2) FY 11
(Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13
(Q1) FY14(Q2) 0.03% 0.02% 1.27% 0.02% 0.00% 0.20% 0.40% 0.60% 0.80%
1.00% 1.20% 1.40% USD GBP EURO YEN -14000 -12000 -10000 -8000 -6000
-4000 -2000 0 -20 -15 -10 -5 0 5 10 15 20 Export(%) Import Trade
Balance (mn $)
15. 15 Real Estate Outlook Asset Classes Tier I Tier II
Residential There has been some positive news for affordable
housing segment in the recent budget. Issuance of bonds by
financial institutions for lending to affordable housing segment
shall be exempt from CRR and SLR requirements. (In the Tier I
cities, loans to affordable housing segment mean loans of up to Rs.
50 lacs for homes worth up to Rs. 65 lacs. This could translate
into some reduction in the interest cost for home buyers and could
give some boost to sales of mid-income projects in the Tier I
cities. With a single party majority at the Centre and the
consequent stable political outlook, enquires and foot-falls at
residential projects have started increasing. With a lag of a few
months, this is expected to translate into actual sales. The sops
on lending to affordable housing segment announced in the recent
budget may affect the sales in Tier II cities as well with a lag of
a few months. In Tier II cities, loans to affordable housing mean
loans of up to Rs. 40 lacs for homes worth up to Rs. 50 lacs.
Demand in Tier II cities is largely driven by the trend towards
nuclear families, increasing disposable income, rising aspiration
to own quality products & 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 & Cochin are
expected to perform well. Commercial /IT Currently, the over-supply
in commercial asset class still continues, thereby dampening the
capital values. While rentals have been seen increasing at a slow
pace over the last couple of months, they still remain lower than
the peal values achieved in the past. Enquiries have started from
companies across industries such as IT, consultancy &
e-commerce for leasing & buying office space in expectations of
an economic boom under a stable central govt. The change in the
uptake of commercial asset class is slower than residential &
it could take a couple of quarters before commercial asset class
absorption starts increasing. In the recent budget, clarifications
have been offered on the tax aspects of REITs (Real Estate
Investment Trusts). The final regulations are expected in the next
2-3 months. Once the regulations come into effect & provided
the much needed exit option to developers & funds,
institutional interest in the asset class could increase, thereby
giving it a boost. 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.
16. Asset Classes Tier I Tier II Retail 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. 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. Land 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. 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. Real Estate Outlook 16 Please Note:
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune,
Chennai, Hyderabad and Kolkatta Tier II* markets includes all state
capitals other than the Tier I markets
17. Disclaimer The information and views presented here are
prepared by Karvy Capital Ltd. The information contained herein is
based on our analysis and upon sources that we consider reliable.
We, however, do not vouch for the accuracy or the completeness
thereof. This material is for personal information and we are not
responsible for any loss incurred based upon it. This document is
solely for the personal information of the recipient, and must not
be singularly used as the basis of any investment decision. Nothing
in this document should be construed as investment or financial
advice. The investments discussed or recommended here may not be
suitable for all investors. Investors must make their own
investment decisions based on their specific investment objectives
and financial position and using such independent advice, as they
believe necessary. While acting upon any information or analysis
mentioned here, investors may please note that neither Karvy
Capital Ltd nor any person connected with any associated companies
of Karvy Capital Ltd accepts any liability arising from the use of
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the merits and risks involved), and should consult their own
advisors to determine the merits and risks of such an investment.
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inconsistent with or contradictory to the recommendations expressed
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