The World This Week - 1st to 5th August, 2016

THE WORLD THIS WEEKTHE WORLD THIS WEEK

August 1– August 5, 2016

EQUITY VIEW

EQUITY VIEW

• The marginal uptrend in yields continued. Generally events of last quarter have ensured that yields remain much

lower than what has been seen for almost 2-3 decades, which is abnormal.

• This exposes the markets to shocks from time to time. So it induces more volatility in capital markets. For

example, if the US 10 year were to go back to 2.5 which it was two years back and the Fed rate was not as much example, if the US 10 year were to go back to 2.5 which it was two years back and the Fed rate was not as much

as it is today which has gone up by 0.5% over the last 6-9 months, there would be serious volatility in the markets.

EQUITY VIEW

• If yields remain at this level, it poses a very peculiar and a much more serious social problem for developed

markets. The reason for that is we have pension funds today which always work on long term expected returns,

portfolios would have been built and large allocations would be in bonds whether treasury or corporate.

• Due to the dramatically falling yields, the pension funds will be faced with many problems while deploying new • Due to the dramatically falling yields, the pension funds will be faced with many problems while deploying new

money as they will no longer be able to meet their liabilities if they keep the same asset allocation. Therefore, they

will have to go to much more risky assets. This is already happening with US based public pension funds because

the accounting regulations compel them or want them to discount liabilities at the expected return on assets.

EQUITY VIEW

• In the last 3-4 months, yields have dropped dramatically and prudence would suggest that the workers contribution

to pension funds should increase or the tax payer intervention should increase over a period of time since pension

deficits will be high. But in reality, many of these public pension funds have started investing in assets like private

equity, real estate and equities compared to what their asset allocation was 5-10 years back. This has its own

ramifications. ramifications.

• There is also a situation where insurance companies are finding it difficult to meet their liabilities because

deploying new capital at this point in time at such low yields is problematic. It is leading to higher premiums so this

is a social problem that will manifest itself. If yields remain abnormally low it exposes the capital markets to a lot of

vulnerabilities.

EQUITY VIEW

• The GST Bill was cleared in the Rajya Sabha . The Government’s ambition of getting 50% approval of all states by

September is little stretched. However, if it can be done then GST will be implemented from 1st April 2017. This is

something we would watch out for. Compared to a quarter back we have a better idea of the timelines of the GST.

• There is detail of the June quarter earnings that are coming to an end, numbers are mixed and generally below • There is detail of the June quarter earnings that are coming to an end, numbers are mixed and generally below

expectations since expectations were elevated. There was an important development with the Government and

RBI reaching an understanding on inflation targeting of 4% with a band of 2% on either side valid till 2021.

EQUITY VIEW

• Looking at Asian Bank’s and IMF’s forecast, about CPI in India, IMF says that lowest CPI that India can target is

4.9%. If these forecasts come true, it will be very interesting to see what the new RBI governor’s thinking is

because with inflation targeting of 4% and a band of 2% on either side.

• If India were to opt to come down to 4%, then the ability to cut interest rates is extremely limited. Therefore, large • If India were to opt to come down to 4%, then the ability to cut interest rates is extremely limited. Therefore, large

part of the interest rate cuts would be behind us and if at all, there might be a cut of not more than 50 basis points.

However, it is difficult to predict since inflation is nearing 6% so one has to be watchful in buying interest rate

sensitive assets at this point in time.

NEWS

DOMESTIC MACRO

• The Reserve Bank of India said large industrial companies will only be allowed to invest up to 10 percent

in banks, and thus, will not be allowed to set up lenders, according to final guidelines for banking licenses

issued on 1st August 2016.

• Indian shares rose more than 1 percent to notch up their biggest daily gain in almost four weeks after the

Bank of England's stimulus plan lifted markets worldwide, while the passage of the Goods and Services

Tax boosted sentiment.

GLOBAL MACRO• The Bank of England cut interest rates to next to nothing on 4th August 2016 and

unleashed billions of pounds of stimulus to cushion the economic shock from Britain's

vote to leave the European Union.

• Euro zone business activity expanded a touch faster than expected last month as the

EURO

region appeared, so far, to have largely shrugged off Britain's vote to leave the European

Union. The latest increase, which came alongside some of the fastest hiring growth in the

euro zone since before the financial crisis in 2008, was led by a surge in Germany,

masking stagnation in France and a slower pace in Spain and Italy.

GLOBAL MACRO• U.S. crude tumbled below $40 per barrel on 1st August 2016 for the first time

since April, as oil prices settled down nearly 4 percent on heightened worries

of a crude glut despite peak summer fuel demand.

• U.S. economic growth unexpectedly remained tepid in the second quarter as

UNITED STATES

inventories fell for the first time in nearly five years and business investment

weakened further, offsetting robust consumer spending. Gross domestic

product increased at a 1.2 percent annual rate after rising by a downwardly

revised 0.8 percent pace in the first quarter.

GLOBAL MACRO• China's exports and imports fell more than expected in July in a rocky start

to the third quarter, pointing to further weakness in global demand in the

aftermath of Britain's decision to leave the European Union.

• Imports fell 12.5 percent from a year earlier, the biggest decline since

CHINA

• Imports fell 12.5 percent from a year earlier, the biggest decline since

February and suggesting China's domestic demand may be faltering despite

a flurry of measures to stimulate economic growth. Government efforts to cut

overcapacity could produce an even bigger hit to demand in the next few

quarters.

INDICES

Date Sensex Midcap Auto Bankex CD CG FMCG HC IT Metals O&G Power Realty Teck

1/8/2016 28,003 12,709 21,191 21,422 12,414 15,116 8,680 16,279 11,003 9,530 10,601 2,074 1,604 6,043

2/8/2016 27,982 12,630 21,087 21,376 12,386 15,061 8,826 16,149 11,010 9,359 10,567 2,057 1,585 6,033

3/8/2016 27,698 12,441 20,728 21,245 12,172 14,799 8,646 16,115 10,989 9,366 10,449 2,021 1,551 6,020

4/8/2016 27,714 12,488 21,009 21,208 12,072 14,809 8,635 16,187 10,931 9,509 10,440 2,036 1,586 6,002

5/8/2016 28,078 12,698 21,668 21,644 12,226 15,155 8,656 16,307 10,914 9,752 10,726 2,063 1,618 5,997

0.27% -0.08% 2.25% 1.03% -1.51% 0.26% -0.27% 0.17% -0.81% 2.34% 1.18% -0.54% 0.89% -0.75%

COMMODITIES AND CURRENCY

Date USD GBP EURO YEN Crude (Rs. per BBL) Gold (Rs. Per 10gms)

1/8/2016 66.7412 88.4388 74.5165 65.08 2,789.00 31,076.00

2/8/2016 66.7612 88.0313 74.599 65.32 2,674.00 31,283.00

3/8/2016 66.9368 89.0126 74.9893 66.26 2,638.00 31,383.00

4/8/2016 66.9447 89.0699 74.5965 65.95 2,733.00 31,182.00

5/8/2016 66.8141 87.747 74.451 66.13 2,807.00 31,285.00

-0.11% 0.78% 0.09% -1.61% -0.65% -0.67%

DEBT

Tenor Gilt Yield in % (Friday) Change in bps (Week)

1-Year 6.85 0

2-Year 6.85 -3

5-Year 7.08 4

10-Year 7.17 1

KIASL TEAM

Jharna Agarwal

Head- Advisory

[email protected]

Nupur Gupta

Lead Advisor

[email protected]

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