advice for the wise october 2015
TRANSCRIPT
Advice for the Wise October 2015
Contents
From the desk of the CEO
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?
From the desk of the CEO
Dear Investors,
September saw a spillover of the previous month’s equity market correction. The main reason for this was the continuing bleak global events, which also negated domestic macro green-shoots to a large extent. In the West, the possibility of a US Fed rate hike lingers, keeping investors globally on their toes. Amidst this global weakness, uncertainties of global markets with respect to the Euro have reduced after Alexis Tsipras’ Syriza party returned to power once again in Greece, this time with a majority. The Chinese government is also taking initiatives like tightening trading rules on forex and stock market to stabilize their economy. The slowdown in China in a way has been India’s gain, which has led to India emerging as the top destination for FDI investments, attracting $30 billion by the end of June 2015.
Closer home, better looking green-shoots portray a recovering economy. Industrial growth has been above 4% for the past 2 months, whereas retail inflation continues to remain lower. Although there has been a double digit deficit in the rainfall this year, RBI is not too much worried about the pressure on the food prices given the comfort it has derived from the actions by the government to manage supply. An addition to these positives was RBI increasing the foreign investment limit in central government securities. This will help create a new
pool of money to compensate for the lowering SLR imposed on banks.
Markets rejoiced at the bonnes nouvelles (good news) of the 50 basis points rate cut by RBI at the fourth bi-monthly meeting. The main objective behind this was to enhance growth in the economy. Mr. Raghuram Rajan hopes that investment should respond more strongly after some certainty about the extent of monetary stimulus in pipeline, even if the transmission is low. With this transmission, investments in the real economy would increase. This announcement was then followed by a highly ‘dovish’ stance, with the RBI repeating that it would remain in an ‘accommodative mode’. The rate cut has increased the cumulative rate cut this year to 125 bps. It is hearting that banks like SBI has cut its base rate by 40 bps.
All in all, the month saw events that were unexpected, events that created a yin-yang sentiment among investors and events that made India shining more convincing. RBI has taken the first bold step on its part. The question now is what the government will do on its part to grow our economy!
Did You Know?
#Source: huffingtonpost
The Japanese were the first to use Technical Analysis to trade one of the world’s first rice futures markets in the 1600s.
Currency notes are made from the material created out of special blend of cotton and linen and not from paper as may be ordinarily perceived.
Apple's cash and investments are now equal to the GDP of Hungary and more than those of Vietnam and Iraq.
Domestic Equity Outlook
As on 25th Sep 2015
1 month change
1 year change
Equity Markets
BSE Sensex 25863 -0.6% -2.3%
CNX Nifty 7868 -0.2% -0.5%
BSE Midcap 10598 0.4% 13.3%
BSE Smallcap 10942 2.3% 4.8%
Equity markets extended its August correction to early part of the September month. Fears of US Fed increasing rates in September and no respite on the Chinese front ensured global weakness. Persistent foreign outflows led to markets moving in line with the global markets. Rainfall deficit in double digits further dampened the sentiment. However, positive macro data during the later part brought some recovery and kept the markets steady. Industrial growth has been above 4% for two months in a row, indicating some signs of recovery. Monthly retail inflation continues to trend lower and is comfortably below the target range. With US Fed once again postponing the rate hike; subdued domestic outlook and lower inflation prompted RBI to cut the repo rates by 50bps to 6.75%. This time it is expected that banks will transmit larger part of rate cuts to the end users which should give a positive flip to the economy.
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105
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115
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125
130 S & P BSE Sensex CNX Nifty
BSE Midcap BSE Smallcap
Domestic Equity Outlook
Government Policy With Monsoon session being a near washout, crucial bills like Real Estate and GST could be introduced for approval in the next session of parliament. One can expect the winter session to be advanced so that GST bill could still be possibly passed and effected before the April 2016 deadline. With an aim to channelize idle assets for productive use, government also launched a gold sovereign bond plan and gold monetization scheme.
Market View (Contd.)
A visible economic recovery seems few quarters away and thus markets are likely to remain range-bound for some extended period of time. Annual returns of large cap indices are now in negative zone. Thus any recovery in growth from hereon can lead to better margin of safety for long term investors. In the near to medium term, sectors like Healthcare, IT and Financials can out-perform over other segments. However, buying quality stocks via bottom-up strategy should be the preferred way for long term investments.
Domestic Equity Outlook
Deflationary trend continued for 10th month in a row with WPI inflation plunging to a historic low of (4.95%) in August as compared to (4.05%) in July.
Overall, food inflation basket remained in the negative territory for second month in a row at (1.13%). For vegetables, it was (21.21%), helped by potato where inflation was (51.71%). Inflation in the fuel and power segment was (16.50%), while that of manufactured
products was (-)1.92% in August.
CPI for the month of August came in at 3.66%, marginally lower than the July CPI which stood at 3.78%.
Food inflation for the month of August has come in almost flat at 2.20% versus 2.15% month-on-month (MoM), while vegetable price inflation stands at -6.36% against (7.93)% (MoM). Cereals and products inflation stands at 1.22% versus 1.06% in July.
Wholesale Price Index Consumer Price Index
#Source: Moneycontrol, Zee news
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00% WPI CPI
Domestic Equity Outlook
Industrial output growing at 4.2% in July, indicates a revival in industrial activity. It had grown by 0.9% in July last year.
The manufacturing sector, which constitutes over 75% of the index, grew by 4.7% in July 2015 against a contraction of 0.3% in the same month last year.
Meanwhile, the mining sector output improved 1.3% in July 2015, snapping (0.5%) decline in June 2015
India's Gross Domestic Product (GDP) growth for the first quarter of the current financial year grew at 7%
versus 6.7% YoY .
Manufacturing growth slowed down to 7.2% versus 8.4% YoY, whereas agricultural growth also slowed to 1.9% versus 2.6% YoY. With the change method, India's growth topped that of China in the first quarter this year
#Source: Business today
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%
Jul 14
Aug 14
Sep 14
Oct 14
Nov 14
Dec 14
Jan 15
Feb 15
Mar 15
Apr 15
May 15
Jun 15
Jul 15
IIP
Sector Outlook
Sector Stance Remarks
IT/ITES Select verticals displaying better growth. Long term outlook to improve once global
uncertainties come down.
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.
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.
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.
Power Utilities Lack of fuel linkages and clearances have led to poor performance for utility companies.
Proposed measures to support Discoms would act as a positive for power finance companies.
Cement Cement prices showing traction. Volumes still under pressure. Going ahead raw material
costs, pricing and realizations would be key for sector valuations.
Sector Outlook
Sector Stance Remarks
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 . International crude
price movements key to future performance.
E&C Order inflows expected to improve as spending and capital expenditure likely to move up on
economic recovery.
BFSI Private sector banks are expected to continue to deliver healthy earnings in line with
expectations. However, we expect PSUs to deliver muted numbers on asset quality concerns.
Recent rate cuts to benefit housing and other finance companies
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.
Global Equity Outlook
As on 25th Sep 2015
1 month change
1 year change
Equity Markets
MSCI World 1594 0.68% -6.36%
Hang Seng 21186 -1.02% -10.86%
S&P 500 1931 3.41% -1.76%
Nikkie 17880 0.41% 9.20%
US Fed once again postponed its rate hike for future months citing global volatility as the major reason. With revised second quarter GDP at 3.9%, the recovery seems better on back of increased construction and consumer spending. Most of the FOMC officials indicate a rate hike by December this year. Brazil credit rating has been downgraded to Junk by S&P. This adds woes to the depreciating currencies of most emerging markets. Chinese officials have taken various measures during the month so as reduce the market damage and improve economy. A steady Chinese economy will play a large role in tackling the global slowdown.
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150 MSCI World Hang Seng S&P 500 Nikkie
Global Economy Update
United States
• Contracts to buy previously owned U.S. homes decreased in August, indicating the robust housing market could be losing some steam. The Pending Home Sales Index rose 6.1% from the same month a year ago, marking 12 straight months of year-over-year gains.
• US gross domestic product rose at a 3.9 % annual pace in the April-June quarter, up from the 3.7 % pace reported last month.
Emerging Economies
• The Reserve Bank of India (RBI) lowered the benchmark repo rate by 50 basis points to 6.75%, while keeping the CRR unchanged at 4%. However, it has lowered its FY16 GDP growth target to 7.4% from 7.6%.
• China's giant factory sector likely shrank for the second month in a row in September the official manufacturing Purchasing Managers' Index (PMI) is forecast to inch down to 49.6 from August's 49.7.
Japan
• Japan Tobacco Inc is in advanced talks to buy assets worth about $5 billion from Reynolds American Inc , including some of the Natural American Spirit tobacco brand.
• Bank of Japan Gov. Haruhiko Kuroda vowed Monday the central bank will remain strongly committed to overcoming deflation, admitting that it will take more time for firms and households to adapt to inflationary changes.
Europe
• Loans to households and non-financial corporations, extended their steady but sluggish recovery. They respectively grew by 1.0% and 0.4% year-on-year in August, or 10bps faster than July's figures, which had been revised down last week.
• Ireland plans to bring in legislation linking residential rents to the rate of inflation, in a bid to curb soaring rental costs.
#Source: New York Times, Yahoo Finance
Domestic Debt Outlook
•The yields on 10 Yr G sec closed at 7.72% which is 5 bps lower than the last months close of 7.77%. •Advance tax and value-added tax payments tightened systemic liquidity. The overnight rate settled at 6.50% during the end of Sept, as against 8.00-8.10% during the mid-month. •The RBI’s 13-day term repo auction during the first half of Sept saw strong demand, with bids received totaling nearly Rs 32,000 crore compared with the notified amount of Rs 24,000 crore. •Gilts rose sharply as sentiment for dated securities was boosted by the RBI’s interest rate reduction.
As on 25th Sep 2015
1 month change
1 year change
Debt Markets 10-Yr G-Sec Yield 7.72 (5bps) (71bps)
Fixed Deposit 7.50 0bp (125bps)
0
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100
150
200
250
300
AAA AA+ AA AA- A+ A A- BBB+
Corporate Bond Spreads
5 Years 10 Years 15 Years
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
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 (8.1%-10.7%) 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; an improved economic outlook and due to the benefits of credit easing. 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.
As RBI has reduced the key policy rates, dynamic bond funds have benefited alot as most of them have a mix of gilt and long term bonds in their portfolio. A rally caused by easing yields could lead to capital appreciation in gilts as well as corporate bonds, which means over medium to long term we could see more gains coming from these funds.
As RBI has done the front loading of rate cut, we expect it to halt it for some time and go for further rate cuts over medium to long term as inflation comes down. Long term debt and Gilt funds looks attractive over medium to long term and is advisable for aggressive investors only.
Short Term Debt
Corporate Bond Funds
Dynamic Bond Funds
Long Term Debt Funds
Global Debt Outlook
• The top five largest sovereign EM (emerging market) debt issuers, as of end-2014, were China (with $3.5 trillion total sovereign debt outstanding), India ($1.3 trillion), Brazil ($1.2 trillion), Mexico ($387.5 billion) and Turkey ($265.5 billion). • Referencing a recent report from consultants McKinsey, Moody's said that between 2007-14 debt-to-GDP ratios increased by 20 percentage points or more in the corporate sectors of China, Turkey, Hungary and Chile, and in the household sector in Thailand. • The U.S. Federal Reserve kept interest rates unchanged on Thursday in a nod to concerns about a weak world economy, but left open the possibility of a modest policy tightening later this year. • US 10 years yields depreciated to 2.084 down by 0.5% as demand for the safe haven status propped up amidst global market weakness.
#Source: Economic Times, Reuters
Ratings Country 10 Yr G-Sec
Yield 1 month change
AAA
Germany 0.59% (13bps)
Hong Kong 1.71% (1bp)
Sweden 0.69% 5bps
Switzerland -0.12% 3bps
AA+ USA 2.07% (7bps)
AA-
China 3.33% (15bps)
Japan 0.35% (4bps)
Commodities
Gold continues to be range-bound with a negative bias. With global currencies remaining weak, the larger band of $1000-1200 remains. .
As on 25th Sep, 2015 : `26426 per 10gm 1 month change : -1.03% 1 year change : -0.16%
MCX Gold October futures are likely to trade with sideways trend during today's session. MCX Gold finds strong support at 26620 and resistance at 26850. Oil prices dropped in Asian trading hours on Monday despite a fourth weekly fall in US drilling activity, with analysts pointing to the weak economic outlook as the main reason for low crude prices.
As on 21st Sep, 2015 : $47.64per bbl 1 month change : 4.10% 1 year change : (50.80%)
*RICI: Rogers International Commodity Index – Tracks 38 commodity futures from 13 international exchanges.
2,000
2,500
3,000
3,500
RICI
24000
25000
26000
27000
28000
29000 Gold
0.00
50.00
100.00
150.00
Crude
Foreign Exchange
• The Indian rupee has appreciated against all the major currencies. It has appreciated by 4.26% against the EURO, 4.18% against GBP, 1.69% against YEN and 0.92% against USD.
• The rupee ended at a near one-month high against the US dollar on heavy dollar sales following the US central bank’s interest rate decision.
• Dollar purchases by state-owned banks for oil companies and defence payments prevented the rupee from rising higher.
• Yen traded on a marginally negative note and is expected to remain volatile before the Bank of Japan Chairman s speech at 11.00 IST
Currency As on 25th Sep 2015
1 month change
1 year change
USD/INR 66.09 0.92% -7.68%
GBP/INR 100.88 4.18% -1.45%
Euro/INR 73.96 4.26% 5.25%
Yen/INR 55.08 1.69% 1.43%
USD/Euro 0.89 2.51% 14.39%
0.92%
4.18% 4.26%
1.69%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
USD GBP EURO YEN
Real Estate Outlook
Tier I
RBI has exceeded expectations with a 50 bps rate cut in
September. SBI has followed suit and cut lending rates by 40 bps
for home, car and other retail loans. The home loan rates are
among the lowest in recent times. Developers have unsold
inventory and are constantly innovating lower down payment and
large backended payment schemes with/without requirement of
a home loan . New launches have reduced and focus has been on
completing projects on hand.
Tier II
Larger demand is being seen in Bangalore, Hyderabad and Pune
by E commerce and consulting firms. Rentals are expected to
largely remain stable in 2015–16 as supply pipeline is still strong.
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.
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 remain increasing nuclearization, rising disposable
incomes and easier availability of credit.
Residential
Commercial
Tier I Tier II
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.
Not much has changed for retail market in the last few months
and capital values and rentals remain flaccid. The absorption is
low and vacancy remains high.
Land in Tier II and III cities along upcoming / established
growth corridors have seen good %age appreciation due to
low investment base in such areas.
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.
Retail
Land
Real Estate Outlook
Base Rate • What is it? The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except in cases allowed by RBI. The Base Rate system has replaced the BPLR system with effect from July 1, 2010. • How will it impact markets? With the banks reducing their base rate, there is likely to be some impact on the net interest margin (NIM) in the coming quarters. The pressure on it will depend on the quantum of rate cut by each bank; most analysts broadly expect it to be in the range of 10-15 bps in the third quarter of this financial year. If Banks shift their Base Rate calculation from Average Cost of Funds to Marginal Cost of Funds than they will have more room to cut their Base Rate further. • How will it impact consumers? Lower Base Rate brings down the interest rate on loans. This helps corporate as well as individuals because it helps them to borrow at cheap interest rate.
What’s Trending?
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