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1. 1 ADVICE for the WISE Newsletter JULY 2014
2. Economic Update 4 Equity Outlook 8 Debt Outlook 13 Forex 15
Real Estate Outlook 16 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 18 Dear Investors, If May marked the beginning of what
most experts called a secular bull run, June was a month of the
reality check that there are no one-way streets. The enthusiasm
about the new government continued through the month. However,
several concerns emerged on domestic and global fronts. On the
balance, the diagnostic is still positive. In the short term
though, several challenges remain. Weak monsoon was widely
expected. Actual rainfall (or the lack of it) in June partially
confirmed the expectation. July to September might have their own
deviations from average. It would be foolhardy to predict if the
overall monsoon will be well below the long term average or at par
with it. Nevertheless, the government seems to have got into action
to target food price stability in case the monsoon shortfall turns
out to be indeed significant. We will have to wait and watch how
the food prices react to the expectation of weak monsoon (as of
now) and the actual outcome (by September) and the initiatives of
the government. What is likely though is that RBI will not alter
its present stance of caution on monetary policy. Lower interest
rates will have to wait for later maybe early 2015. The progress on
governance itself has been encouraging. While it is too early to
judge, the intent and activity level both paint a positive picture.
Some tough decisions on railway fare and fuel prices have been a
good sign. A lot of perception hinges on the Union Budget to be
presented on the 10th of July. However, this might not be
necessarily a big-bang reform budget albeit a few major reforms may
be announced. Contrary to popular belief, the budgetary exercise
does not in itself require major reforms announcements to be a part
of it. Budget is simply an exercise of drawing up the overall
income and expense account of the government. Some policy measures
are definitely a part of this exercise. However, a lot of potential
reforms have only limited implications for immediate budgetary
matters (for instance, labor market reforms). Such reforms are
probably best done through the normal course of policy making.
Globally, the flare-up in Iraq with the potential disintegration of
that state and establishment of the Caliphate driven by ISIS has
long term implications for oil prices (and of course the
geopolitics of the Middle East!). Iraq is the second largest
producer of crude oil after Saudi Arabia. While majority of its oil
is still in the southern (government-controlled) parts of Iraq, one
major oil-well is in northern Iraq. Also while the Iraqi government
of Nuri-Al-Maliki might continue to control the southern oil
producing region, it would constantly face the concerns of
terrorism and sabotage by ISIS. The only factor controlling the oil
price for now despite such worries is the increasing production of
shale oil by US. In the recent years the increase in US shale oil
production has nearly balanced out the entire disruption on account
of Libyan civil war, Syrian civil war and the turmoil in Iraq.
Hopefully this would continue and thus limit oil price spikes in
the short term. The long term prognosis for crude oil however is
one of secular increase in prices pace of increase being the only
relevant variable. The volatility in crude oil has brought some
interest back in gold. We still do not think it is a good idea to
increase allocation to gold especially since the rupee price of
gold varies far more than the dollar price. We believe that the
better diversification for Indian investors is dollar denominated
growth assets such as developed market equities. In times of
moderate turbulence these tend to have the dual benefit of lower
falls than emerging market equities and some benefits from Rupee
depreciation common to these periods. 3
5. US Europe Japan Emerging economies US Federal Reserve
reduced its monthly bond buying program from $45 bn to $35 bn
starting in July. Initial jobless claims for US state unemployment
benefits rose by 4,000 to 317,000 in the week ended June 7. IMF
cuts US growth outlook for 2014 to 2% from the 2.8% it predicted in
April, due to a weak first quarter. Economy Update - Global Japans
unemployment rate hit a 16 year low in May, suggesting that the
economy is rebounding. The jobless rate in the worlds third largest
economy fell to 3.5% , the lowest since 1997. Japans core machine
orders spiked 17.6% in April on a yearly basis after surging 16.1%
in the previous month. World Bank projects a 5.5% growth for India
in 2014-15, 6.3% in 2015-16 and 6.6% in 2016-17. China's average
home prices fell 0.2% in May for the first time in two years and
price weakness spread to more major cities, adding to signs of
cooling in the property market. Government clears seven big-ticket
investment projects worth Rs 21000 Cr. 5 Annual inflation in the
Euro zone fell to 0.5% in May from 0.7% in April. UKs retail sales
dropped 0.5% in May compared to a downwardly revised gain of 1% in
April . Euro zone industrial production increased by 1.4% on an
annualized basis in April after growing by an upwardly revised 0.2%
in March.
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. April 14 IIP came in at a good 3.4% after
registering a negative growth for two consecutive months. The
rebound in the numbers was led by Manufacturing sector which grew
by 2.6% the best figure since July 13. Electricity grew nearly 12%
on back of higher production and mining kept its head above water
at 1.2% versus a contraction of 3.4% in April 13. Capital Goods did
well with a 15% growth against a contraction of 0.3% in April 13.
The return of industrial growth to positive terrain is noteworthy
and has rekindled the hope of industrial recovery which is critical
to lift the economy. IIP 6 -4.0% -2.0% 0.0% 2.0% 4.0% Apr 13 May 13
Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar
14 Apr 14 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
7. Economic Outlook - Domestic As on May 2014 Bank credits grew
by 13.8% on a Y-o-Y basis. Aggregate deposits on a Y-o-Y basis grew
at 15.3%, vis-a-vis 14% in April 2014. RBI met on 3rd June for its
second bi-monthly policy review and based on assessment of current
and evolving macro economic situation decided to keep the repo rate
and CRR unchanged at 8% and 4% respectively. It decided to reduce
the Statutory Liquidity Ratio(SLR) by 50 bps from 23% to 22.5% ,
the RBI will also reduce the liquidity provided under export credit
finance facility from 50% to 32% with immediate effect. The Reserve
Bank Governor also said that the Central Bank is committed to
keeping the economy on a disinflationary course and if the economy
stays the course further policy tightening will not be warranted.
Inflation as measured by WPI for May 14 came in at 6.01%- a 4 month
high after witnessing easing since Dec13 and touching a 9 month low
of 4.68% in Feb14. The main reason for the spurt in inflation was
food inflation which grew to 9.50% in May 14 as compared to 8.64%
in the previous month. Prices of fruits also saw a sharp increase
from 16.46% in April 14 to 19.40% in May 14. Inflation in Fuel and
Power rose to 10.53% in May 14 from 8.93% a month earlier,
manufacturing grew by a modest 3.55% in May 14 against 3.15% in the
month ago period. Headline CPI for May 14 came in at 8.28% as
against 8.60% in Apr 14. The spike came in due to food articles
like fruits, vegetables, sugar and pulses. Growth in credit &
deposits of SCBs * End of period figures 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 As a strong reform oriented government takes
shape in New Delhi, Indian equity markets have continued to rally
post the election outcome. Markets have rallied almost 40% from the
lows in August 2013. Despite so many negatives plaguing the
economy, corrective measures by the new government can quickly
revive growth. 8 15000 20000 25000 30000 BSE SENSEX one year
Returns
9. Equity Outlook 9 Reforms Agenda There are a number of
measures that we expect the new government to take in 2014 to
accelerate the economy Goods and Services Tax, Direct cash transfer
of subsidies and boost to manufacturing sector. Revival of large
stalled projects will give a boost to capital formation activity
and restart the investment cycle. We expect that the new government
will identify some large infrastructure projects and concerted push
will be given to drive them to completion. Dedicated Freight
corridor between Mumbai and Delhi is one such project.
Environmental clearances, a big road-block for large projects, to
be IT enabled thereby cutting lead times and expediting
infrastructure creation. Several financial sector reforms are
expected which will give a boost to financial savings paving the
way for larger domestic participation in equity markets. The Budget
could see some announcements on excise duty realignments for
consumer staples and durables space to boost short term demand.
Monetary Policy RBI Governor surprised the market by cutting SLR by
50 bps in the last policy statement. Despite the inflation data
getting comfortable, RBI has decided to hold rates at current
levels. Governor believes and we agree that it is important to
break the back of inflation to ensure a sustainable growth
trajectory. The emphasis on core CPI as an inflation metric as
compared to WPI is expected to continue. We expect CPI to average
around 8% level for next few months thus ruling out any monetary
easing in the first half. However, core CPI should moderate to 6%
which is within the tolerance limit of RBI. The second half of the
year should see interest rates coming off which would be beneficial
to interest rate sensitive sectors like banking, automobiles and
infrastructure.
10. Equity Outlook 10 Global Macro Outlook Continued recovery
in US & a stable Euro area are significant positives for Indian
equity markets. Global growth outlook remains supportive of equity
investments. US economy shrank at an annual rate of 1% during the
first quarter due to a very harsh winter in some of the more
populous states. However, this de growth was largely due to run
downs in inventory levels. We would expect consumer spending to
revive in the next few quarters. European Central Bank has carried
out a fresh monetary stimulus by bringing deposit rates into
negative territory. This will help stabilize European economy.
Japan is showing clear signs of coming out of a five year
deflationary trend. Fresh monetary stimulus and labor reforms will
make the recovery stronger. 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 the middle of September
with fresh equity inflows of 16 billion dollars. 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, for FY15, we
would expect a Sensex EPS growth around of 15%. We would expect
earnings growth to accelerate once investment activity is revived
and average at 25% for the next six years. We arrive at a year end
Sensex target of 29,300 based on 15 times FY16 earnings, we
continue to maintain a 2020 target of 100,000 on Sensex.
11. 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
11
12. 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. 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. Cement Underweight Cement industry is facing
over capacity issues and lack luster demand. With regulator taking
a strong view against pricing discipline, the profits of the sector
are expected to stay muted. Sector View 12
13. Debt Outlook The yields on 10 Yr G sec closed at 8.70%
which is 4 bps higher than the last months close of 8.66%. The RBI
infused Rs 61,000 Cr into the banking system through a 14 day term
repo auction to prop up liquidity. RBI announced the cut-off price
of 91-Days Treasury Bills at Rs. 97.91 (YTM - 8.5619%). The entire
auction was fully subscribed. The spread on the 10 year AAA rated
corporate bond decreased to 27 bps on 25th June, 2014 from 63 bps
(as on 26th May, 2014). 10-yr G-sec yield Yield curve (%) (%) 13
7.60 7.80 8.00 8.20 8.40 8.60 8.80 9.00 0.0 0.8 1.6 2.4 3.2 4.0 4.9
5.7 6.5 7.3 8.1 8.9 9.7 10.5 11.3 12.1 12.9 13.7 14.5 15.3 16.1
16.9 17.7 18.5 19.4 6.8000 7.3000 7.8000 8.3000 8.8000 9.3000
14. Debt Strategy OutlookCategory Details Long Tenure Debt Our
recommendations regarding long term debt is neither buy nor sell
for now. And after the volatility settles Investors could look to
add to dynamic and medium to long term income funds over the next
few months. Long term debt is likely to see capital appreciation
owing to the expected monetary easing. There is lesser probability
of rate cuts in the near future and there could be a lot of
volatility in the g-sec yields as well. 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. 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 or
else holding/profit booking could be a good idea. Investors who may
want to stay invested for the medium term (exiting when prices
appreciate) and those who would want to lock in high yields for the
longer term can also invest in longer tenure papers/Funds. 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 14
15. Forex The Indian Rupee depreciated against all the four
major currencies in the last month. It saw a depreciation of 2.61%
against GBP,2.02% against USD, 1.99% against Japanese Yen and 1.76%
against the EURO. The currency depreciated on account of dollar
demand by state run banks on behalf of importers, mainly oil
importers. Further, weak domestic market sentiments exerted
downside pressure on the currency. Additionally, uncertainty over
Iraq turmoil continued the downside movement in the currency,
however, sharp downside in the currency was prevented due to inflow
of foreign funds in equities and debt markets. Foreign inflows
stood around $2.3 billion in equities and $2.9 billion in debt for
the month of June and total inflows for the current year at $9.9
billion and $10.5 billion respectively. 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. 15
Exports during May,2014were valued at US $ 27.99 bn which was
12.40% higher than the level of US $24.91 bn during May, 2013.
Imports during May,2014 were valued at US $ 39.23 bn representing a
negative growth of 11.41% over the level of imports valued at US $
44.28bn in May, 2013 translating into a trade deficit of $11.24 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) -2.02%
-2.61% -1.76% -1.99% -3.00% -2.50% -2.00% -1.50% -1.00% -0.50%
0.00% USD GBP EURO YEN -25000 -20000 -15000 -10000 -5000 0 -20 -15
-10 -5 0 5 10 15 20 Export(%) Import Trade Balance (mn $)
16. 16 Real Estate Outlook Asset Classes Tier I Tier II
Residential Sales in the last quarter were slow. Investors and
end-users were postponing the purchase decision at the backdrop of
the impending General elections as well as state level elections in
some markets. With a single party gaining majority at the Centre
and the consequent political stability, apartment sales could be
expected to pick up over the next few quarters. Developers too have
been facing delay in getting approvals on account of elections.
Again, with the new political stability, it is expected that
procuring approvals will be relatively faster and most markets may
witness a lot of new launches. Mid-income residential segment with
Rs. 4,000 6,000 per sq. ft. entry pricing with good developers in
Pune, Bangalore, NCR and Mumbai suburbs can be expected to continue
generating good percentage returns with relatively lower risk.
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. 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. However, companies across
industries such as IT, consultancy and e- commerce could begin
leasing and buying office space in expectations of an economic boom
under a stable central government. Specific pre-leased properties
with good tenant profile and larger lock- in periods continue to be
good investment opportunities over a long- term horizon. 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.
17. Asset Classes Tier I Tier II Retail Capital values as well
as lease rentals continue to be stagnant. The effects of the change
in FDI policy to allow 100% in single- brand retail are yet to have
any effect of the market for retails assets. 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. The mall culture has repeatedly failed in the
past in the Tier-2 cities. Whether the FDI in retail can change
this phenomenon can be known with more certainty once the effect of
FDI is more visible in Tier I cities. 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 17
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
18. 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.
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