Advice for the Wise - May 2016

ADVICE FOR THE WISE

May 2016

CONTENTS • From The CEO’s Desk

• Did You Know?

• Domestic Equity Outlook

• Domestic Debt Outlook

• Domestic Debt Strategy

• Global Equity Outlook

• Global Economy Update

• Global Debt Outlook

• Sector Outlook

• Real Estate Outlook

• Commodities

• Foreign Exchange

• What’s Trending.

• Disclaimer

FROM THE CEO’s DESK

Dear Investors,

“May you live in interesting times” says an old Chinese expression. I certainly believe that we are living in exciting times, an age in which we are

witness to new innovations almost every other day. Disruptive innovations and new technologies have unleashed a wave of opportunity in the market

place in the last decade. Innovation and disruption are similar in that they create new “never-thought-about” reality; they change the game. Harvard

Business School professor and disruption guru Clayton Christensen says that a disruption displaces an existing market, industry, or technology and

produces something new and more efficient and worthwhile. It is at once destructive and creative. Be it in the domain of digital marketing, e-

commerce or telecom, innovation has revolutionised the way we live today. The recent launch of the Unified Payments Interface (UPI) by RBI

Governor Raghuram Rajan is going to be a game changer in the Financial space that will simplify cash transfers and enable us to move further

towards a cashless economy. We are also seeing another disruptor in the FMCG space, one that has taken the country by storm and threatens to

shake the stalwarts in this industry.

Analysts have been keenly awaiting the Q4 results to get a sense of the country’s growth trajectory. In contrast to the last few quarters, corporate

results of many companies this quarter have been in line with market expectations with some of them even surprising on the upside. Of the results

declared so far, fairly good numbers have been reported across various sectors like IT, Banking, Cement, Petrochemicals and even Telecom. This

leads me to believe that the green shoots of economic recovery are strengthening and confidence is slowly returning.

On the global front, the US Federal Reserve decided to leave policy rates unchanged while the Bank of Japan surprised markets by showing

reluctance to provide further stimulus to the Japanese economy. “Brexit” appears to be an imminent risk at this point of time, with the UK likely

to hold an in-out referendum in June this year to decide on the possibility of its exit from the European Union. The other major risk is China’s

growing debt to GDP ratio which is reported to be a staggering 280%, stoking fears of a credit blowout.

The last two months have seen the Sensex recovering significantly from its February lows of 23,000 to make a new 2016 high of 26,100. After

this breathtaking sprint, equity markets will do well to consolidate at these levels. If near term triggers like the Monsoon turn out to be

favourable, we could see higher levels in the coming months. However, it remains a stock-pickers market and investors should make their

investments decisions wisely.

DID YOU KNOW

The mutual fund industry in India

began in 1963 with the formation of

the Unit Trust of India (UTI) as an

initiative of the Government of

India and the Reserve Bank of

India.

Sweden's central bank is believed

to be the world's oldest,

forming in 1668, making it

245 years older than the

U.S. Federal Reserve.

There are a total of 21 stock

exchanges in India, with the

Bombay Stock Exchange (BSE)

and the National Stock Exchange

(NSE) being the largest

DOMESTIC EQUITY OUTLOOK

• An optimistic outlook for above average monsoon provided the

much needed momentum to the domestic equity markets. Higher

outlay for rural sector and increase in infrastructure investments

in the February budget catalyzed the markets further. Seventh

pay commission and OROP should boost consumption and

growth in the coming years.

• Uncertain global environment and weak inflation prevented US

Fed from making any rate hikes during the month. Global equities

too cheered the move as one would expect only two rate

increases this year as against four envisaged earlier. Domestic

macros remained mixed. Industrial growth continued to be mixed;

mainly on account of inconsistent performance across the

manufacturing and capital goods segment. However, retail

inflation surprised positively with a stronger than expected

comeback. Declining crude and gold imports led to lower trade

deficit. In this backdrop, April monetary policy emphasized on

providing more liquidity to the banking system. At a broader level,

markets continue to await recovery in the corporate earnings. Till

the time we see a full-fledged economic recovery, rate-sensitive

and consumer discretionary themes are expected to out-perform

the overall markets.

As on 25th

April 2016 1 Month Change

1 Year

Change

Equity Markets

BSE Sensex 25,678 2.85% -5.51%

CNX Nifty 7,855 3.15% -4.37%

BSE Mid Cap 11,003 5.99% 7.71%

BSE Small Cap 11,035 6.85% 3.19%

80

85

90

95

100

105

110

115

120 S & P BSE Sensex CNX Nifty BSE Midcap BSE Smallcap

DOMESTIC EQUITY OUTLOOK

GOVERNMENT POLICY With the budget now behind us, focus would be on continuing the reforms that would help in rejuvenating the investment cycle thereby pushing

overall growth. Progress on pending bills including the key GST bill would be keenly monitored.

WHOLESALE PRICE INDEX

• India's wholesale prices index stood at -0.85% for March,

2016 as compared to -0.91% for the month of February.

• Food inflation increased in the month of March by 3.73%.

Vegetables declined by 2.26%. Inflation in the fuel and power

segment was -8.30%%, while that of manufactured products it

was 0.40% in February.

CONSUMER PRICE INDEX

• CPI for the month of March came in at 4.83% as compared to

5.18% in February.

• Year-on-year, cost of food and beverages rose 5.27 percent

(5.52 percent in February).

• The food prices rose at a slower 5.2% compared to 5.3% in

the previous month.

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

WPI CPI

IIP

• Industrial output in India increased 2 percent year-on-year in

February of 2016, the first gain in four months.

• Manufacturing went up 0.7 percent, also recovering from falls in the

previous three months. Meanwhile, the mining sector output rose

by 5% in January 2016

• The cumulative growth for April – February 2016 stood at 2.6% as

per CSO.

GDP

• India's Gross Domestic Product (GDP) growth for the third quarter

of the current financial year grew at 7.3% versus an upwardly

revised 7.7% for the previous quarter.

• Manufacturing sector showed a robust growth of 12.3%, whereas

agricultural growth came in at -1%%. Mining sector witnessed a

growth coming at 1.2% Y-o-Y.

4.0

5.0

6.0

7.0

8.0

GDP

-5.0%

0.0%

5.0%

10.0%

15.0%

Feb 15

Mar 15

Apr 15

May 15

Jun 15

Jul 15

Aug 15

Sep 15

Oct 15

Nov 15

Dec 15

Jan 16

Feb 16

IIP

DOMESTIC DEBT OUTLOOK

The yields on 10 Yr G sec closed at 7.47% which is 4 bps lower

than the last months close of 7.51%

The central bank conducted open-market purchases of bonds

worth Rs30,000 crore in April, helping mitigate the impact of

government debt sales as Prime Minister Narendra Modi began

his record borrowing programme.

The Insolvency and Bankruptcy Code 2015 is before the Lok

Sabha and is being examined by the Joint Committee of

Parliament. It will replace the existing bankruptcy laws.

As on 25th

April 2016

1 Month

Change 1 Year Change

Debt Markets

10-Yr G-Sec-

Yield 7.47 (4bps) (32bps)

Fixed Deposit 7.25 0bps (125bps)

0

100

200

300

400

AAA AA+ AA AA- A+ A A- BBB+

Corporate Bond Spreads

5 Years 10 Years 15 Years

7.20 7.40 7.60 7.80 8.00 8.20 8.40 8.60 8.80 9.00 G-Sec

10 YR Gsec Yield 5 YR Gsec Yield 15 YR Gsec Yield

DOMESTIC DEBT STRATEGY

SHORT TERM DEBT Investors who have a low appetite for interest rate volatility and seeking accrual returns with moderate duration can look

at short term debt funds with the time horizon of 1 year to 2 years. 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 (9%-10.5%) providing interesting

investment opportunities.

CORPORATE BOND FUNDS

The macro economic outlook along with corporate profitability seems to be improving. We remain positive on the credit

outlook and we look for opportunities in the credit space. The corporate bond market segment continues to be attractive

over the medium to long term. The yields are at elevated levels and interest rate outlook seems favorable. The current

scenario offers the potential opportunity to lock in higher accruals, with the expectation that these levels of yields may not

sustain over the short to medium term. With credit easing, there are chances that the companies’ rating will be upgraded

that would further cause a rally in bonds, which in turn will benefit corporate bond funds.

DYNAMIC BOND FUNDS As RBI has reduced the key policy rates, dynamic bond funds have benefited a lot as most of them have a mix of gilt and

long term bonds in their portfolio. Going ahead, we expect RBI to further reduce key policy rates only after studying the

macro-economic data, which will further boost dynamic bond funds. Investors who don’t want to time the market and who

can depend on fund managers to take view on interest rates can look at dynamic bond funds.

LONG TERM DEBT FUNDS As RBI is expected to further reduce key policy rates, long term debt and gilt funds having long maturity will benefit from

rate cuts. Investors looking for long term investments in debt with medium to high risk appetite can look at Long term

debt and Gilt funds.

GLOBAL EQUITY OUTLOOK

As on 25th

April 2016

1 Month

Change

1 Year

Change

Equity Markets

MSCI World 1682 3.38% -6.60%

Hang Seng 21304 4.71% -25.07%

S&P 500 2087 2.49% -1.00%

Nikkei 17439 1.78% -12.73%

GLOBAL INDICES

70

80

90

100

110

120

130

140 MSCI World Hang Seng S&P 500 Nikkei

GLOBAL EQUITY OUTLOOK

• The US Fed kept the key policy rates unchanged during the month.

• Uncertain global economy and weak inflation were the key reasons for no monetary tightening. However with improving labor market and uptick

in consumer spend, one could expect a hike in June quarter.

• With Chinese officials not showing any intent of near term Yuan devaluation, emerging markets and related currencies should stabilize.

• A rebound in crude and commodities has been a welcome relief for emerging markets whose economies are driven by those prices.

•In an unexpected move, the bank of Japan decided to hold on to the monetary stimulus, impacting the sudden appreciation of the yen.

•Overall the global markets are currently stable and will continue to be in tandem with the corporate results worldwide.

GLOBAL ECONOMY UPDATE

UNITED STATES U.S. economic growth braked sharply in the first quarter to its slowest pace in two years as consumer

spending softened and a strong dollar continued to undercut exports.

Weaker bank earnings in the first quarter were not a surprise given the macroeconomic backdrop that

included fears of a global slowdown, negative interest rates in the US, energy-related concerns and a

strong dollar, according to Fitch Ratings.

JAPAN Yen soars, stocks slump as BOJ holds policy, pushes back inflation target The yen surged the most

against the dollar and the euro in nearly six years as the decision caught investors off guard, while the

Nikkei share average sank 3.6 percent

Japan's seasonally adjusted unemployment rate fell to 3.2 percent in March, data by the Ministry of

Internal Affairs and Communications showed.

Source – Reuters

GLOBAL ECONOMY UPDATE

EUROPE Uncertainty about the outcome of Britain's European Union referendum gnawed at consumers and

businesses in April , consumer confidence fell to its weakest reading since December 2014.

Manufacturing growth was strong in Italy and Spain last month and Germany showed signs of reviving, but

activity in France contracted at the steepest rate in a year.

EMERGING

ECONOMIES

China has rolled out a value-added tax (VAT) system across all industries that previously had a business

tax, in the most ambitious overhaul of its tax regime in three decades.

The official purchasing managers’ index (PMI) was 50.1 in April, easing from March’s 50.2 and barely

above the 50-point mark that separates expansion in activity from contraction.

Source – Reuters

GLOBAL DEBT OUTLOOK

The world’s biggest bond underwriter, JPMorgan Chase & Co.

predicts record-low global yields ahead, based on forecasts of $1.86

trillion of net worldwide issuance this year versus $1.74 trillion of

estimated net purchases. While those figures signal that supply will

outstrip demand for the fifth straight year, the key for the bank is that

the gap -- the amount of excess issuance -- is set to shrink the most

since 2009.

Argentina barreled back into the bond market with the largest

emerging-market debt sale on record, attracting intense investor

interest after years as a financial pariah. The $16.5 billion global

debt offering was more than double the previous highs from

governments in developing countries.

Ratings Country 10 Yr G-Sec Yield 1 Month

Change

AAA

Germany 0.25% 10 bps

Hong Kong 1.32% (9 bps)

Sweden 0.63% 12 bps

Switzerland -0.26% 10 bps

AA+ USA 1.82% 1 bps

AA-

China 2.90% (4 bps)

Japan -0.12% (9 bps)

SECTOR OUTLOOK

SECTOR OUTLOOK

SECTOR STANCE REMARKS

Automobiles

Passenger vehicles and CVs will continue to outperform two-wheeler segment. Tractors to benefit on

account of base effect and expected normal monsoons.

Auto-ancillaries expected to do well due to revival of demand and stable global markets.

IT/ITES Select verticals displaying better growth. Digital segment to drive revenues.

Long term outlook to improve once global uncertainties come down.

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. A bounce in raw materials could put pressure on margins. Expect uptick in

volumes post monsoons.

E&C Order inflows expected to improve as spending and capital expenditure likely to move up on economic

recovery. Moreover, sluggish execution and weak macros create a challenging environment.

SECTOR OUTLOOK

SECTOR STANCE REMARKS

Power Utilities

Lack of fuel linkages , poor SEB health, adverse CERC guidelines have compromised the ROE’s

leading to de-rating in near term. Reform initiatives through UDAY can improve sector prospects in

long run.

BFSI

Private sector banks continue to deliver earnings in line with expectations. However, PSBs delivering

muted numbers on higher slippages and lower credit growth. We expect this trend to continue for next

few quarters.

Cement

Cement volumes and realizations continue to witness pressure in South region. However, early signs

of recovery, specifically hopes of bounce back in North and West region. Cost benefits would drive

earnings. Pricing would be key for sector valuations.

Healthcare Regulatory risks have become more evident and frequent with FDA inspections for Pharma companies.

US growth continues to be muted for large caps due to lower approvals and regulatory issues.

SECTOR OUTLOOK

SECTOR STANCE REMARKS

Energy With declining crude prices and 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. Further, expected launch of R-Jio at competitive prices in 4QFY16 will

have negative implications.

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.

REAL ESTATE OUTLOOK

REAL ESTATE OUTLOOK

The Central Government has eased FDI norms and lifted

restrictions on ticket size, Project size and stage of entry

of capital thus, paving way for virtually any project to

receive Foreign equity funds. Residential Prices have

remained stagnant across Tier I markets. All Tier I

markets have continued to witness moderate decrease in

demand with sluggish market sentiments.

With improvements in infrastructure across cities like

Chandigarh, Jaipur, Lucknow, Ahmedabad, Bhopal,

Nagpur, Patna and Cochin and quality products being

offered the end users /investors are being spoilt for

choice. The Demand drivers have increased

nuclearization, rising disposable incomes and easier

availability of credit.

RESIDENTIAL Tier I Tier II

REAL ESTATE OUTLOOK

Bangalore NCR and Hyderabad have seen strong

demand in the commercial segment and even Mumbai

has picked up in the later half of the year. The capital

values have also been on rise in major markets except in

NCR where values have remained stable. Absorption

volumes have been surpassing new completions

consistently, since H1 2014, as a result of which, the

vacancy levels in India have been dwindling.

Low unit sizes have played an important role in

maintaining the absorption levels in these markets. Lease

rentals as well as capital values continue to be stable at

their current levels in the commercial asset class.

COMMERCIAL Tier I Tier II

REAL ESTATE OUTLOOK

In Mumbai demand for space in successful malls

continued to be on the rise and categories such as F&B,

premium apparel and entertainment dominated leasing

activity. International brands were seen increasing their

footprints . Hyderabad has seen a steady growth in

demand while markets like NCR, Bangalore and Chennai

remained stagnant.

The Mall concept is new to Tier II cities and High Street

retail is still popular. Anecdotal evidence suggests that

rentals have remained stagnant in this space.

RETAIL Tier I Tier II

REAL ESTATE OUTLOOK

Fringe areas with improving connectivity to Metro cities

and other top 8 to 10 cities in India have seen interest in

purchase of Plotted / Villa developments due to lower

ticket size and better marketing by developers

/aggregators. There is an uptick in demand for

warehousing with the growth of E commerce.

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.

LAND Tier I Tier II

COMMODITIES

GOLD

During April, the “Risk-on” strategy was back as the preferred theme. After posting double digit gains in previous months, gold prices consolidated and remained in a narrow range. For near to medium term, the larger band of $1100-1300 remains.

• As on 25th April, 2016 : 29,110 per 10gm

• 1 month change : 2.31%

• 1 year change : 9.30%

24000

25000

26000

27000

28000

29000

30000

31000

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

Gold

COMMODITIES

CRUDE OIL

Crude oil prices recovered 12% month on month to close at

$42.97 per bbl

• As on 25th April, 2016: $42.97 per bbl

• 1 month change : 12.10%

• 1 year change : -31.60%

0.00

20.00

40.00

60.00

80.00

Crude

Currency As on 25th

April 2015 1 Month Change 1 Year Change

USD/INR 66.68 0.02% -4.61%

GBP/INR 96.32 2.15% 0.24%

Euro/INR 74.95 0.71% -7.70%

Yen/INR 59.99 2.16% -10.90%

USD/Euro 0.89 -0.70% -4.77%

FOREIGN EXCHANGE

• The U.S. government's inclusion of Korea on its monitoring

list of foreign exchange policies is expected to reduce room

for Korean financial authorities to maneuver the won on

currency markets

• The Nigerian economy recorded a decline of $7.95bn in

foreign exchange inflows in the last quarter of 2015, figures

obtained from the Central Bank of Nigeria have revealed.

• China’s foreign-currency reserves rose during March, the

first increase in five months, a sign Beijing may have

partially succeeded in stemming heavy capital outflows

that destabilized global markets earlier this year and

encouraged some investors to bet big against the yuan.

0.02%

2.15%

0.71%

2.16%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

USD GBP EURO YEN

WHAT’S TRENDING

BREXIT

What is it?

Withdrawal of the United Kingdom from the European Union, often shortened to Brexit is a political aim of some advocacy groups, individuals

and political parties in the United Kingdom (UK). The central group of advocates for Brexit is VoteLeave, which is composed of a broad range of groups

ranging from Labour to Conservative.

Impact of Brexit?

• It is plausible that Brexit could have a modest negative impact on growth and job creation. But it is slightly more plausible that the net impacts will

be modestly positive. This is a strong conclusion when compared with some studies.

• There are potential net benefits in the areas of a more tailored immigration policy, the freedom to make trade deals, moderately lower levels of

regulation and savings to the public purse. In each of these areas, it is not believed that the benefits of Brexit would be huge, but they are likely to

be positive

• Meanwhile, costs in terms of financial services, foreign direct investment and impacts on London property markets are more likely to be short-

term and there are longer-term opportunities from Brexit even in these areas

• It is not likely that any particular region or regions of the country would be more adversely affected by Brexit than the country overall. Likewise, its

not found that support for the notion that Brexit would benefit some sectors more than others, but the range of outcomes for production /

manufacturing industries is probably wider than for services

Source – Wikipedia, www.woodfordfunds.com

DISCLAIMER Karvy Investment Advisory Services Limited [KIASL] is a SEBI registered Investment Advisor and provides advisory services. The information in this newsletter has been prepared by KIASL based on information obtained from

public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed and the same are subject to change without any notice. This newsletter and

information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe to the securities mentioned. The securities discussed and opinions

expressed in this newsletter may not be taken in substitution for the exercise of independent judgment by any recipient as the same may not be suitable for all investors, who must make their own investment decisions, based on

their own investment objectives, financial positions and needs of specific recipient. The information given in this document is for guidance only. Final investment decisions have to be made by the recipients themselves after

independent evaluation of the investment risk. Recipients are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. Affiliates of KIASL may from time to time, be engaged in

any other transaction involving such securities/commodities and earn brokerage or other compensation or act as a market maker in the securities/commodities discussed herein or have other potential conflict of interest with

respect to any recommendation and related information and opinions. Wherever products offered by the Karvy Group entities may be recommended, it is to be noted that KIASL does not provide execution services and further

KIASL does not receive any monetary or non monetary benefit as regards such recommendations made. This newsletter and information contained herein is strictly confidential and meant solely for the selected recipient and may

not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KIASL. Past performance is not necessarily a guide

to future performance. KIASL and its Group companies or any person connected with it accepts no liability whatsoever for the content of this newsletter, or for the consequences of any actions taken on the basis of the information

provided therein or for any loss or damage of any kind arising out of the use of this newsletter.

Nothing in this newsletter constitutes investment, legal, accounting and tax advice or a representation that any of the investment mentioned is suitable or appropriate to your specific circumstances. The information given in this

document on tax is for guidance only, and should not be construed as tax advice. Investors are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. While we would

endeavor to update the information herein on reasonable basis, KIASL , its associated companies, their directors and employees (“Karvy Group”) are under no obligation to update or keep the information current. Also, there may

be regulatory, compliance or other reasons that may prevent KIASL from doing so. KIASL will not treat recipients as customers by virtue of their receiving this newsletter. The value and return of investment may vary because of

changes in interest rates or any other reason. Karvy Group may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this newsletter. Recipients are advised to see

the offer documents provided by the Issuers/ Product Providers to understand the risks associated before making investments in the products mentioned. Recipients are cautioned that any forward-looking statements are not

predictions and may be subject to change without notice. KIASL operates from within India and is subject to Indian regulations. This newsletter is not directed or intended for distribution to, or use by, any person or entity who is a

citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject KIASL and affiliates to any

registration or licensing requirement within such jurisdiction. Certain category of investors in certain jurisdictions may or may not be eligible to invest in securities mentioned in the newsletter. Persons in whose possession this

document may come are required to inform themselves of and to observe such restriction. Entities of the Karvy Group provide execution services in the capacity of being stock broker, depository participant, portfolio managers

and the like. Recipients may choose to execute their transactions through entities of the Karvy group and pay applicable charge for the same.

Registered office Address: Karvy Investment Advisory Services Limited, ‘Karvy House’, 46, Avenue 4, Street No. 1, Banjara Hills, Hyderabad – 500034

SEBI Registration No: INA200001959