ADVICE for the WISE

Newsletter – OCTOBER 2012

2

Economic Update 4

Equity Outlook 8

Debt Outlook 11

Forex 13

Commodities 14

Index Page No.

Contents

Real Estate 15

From the Desk of the CIO…

“Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.18”

Dear Investor,

As we had expected, September turned out to be quite influential in terms

of equity market direction. Of the three announcements we had been

tracking, two (from ECB and US Fed respectively) were positive while one

(from RBI) was neutral. The two positive announcements have already had

some impact on the capital markets globally.

The ECB announcement was a turning point in the sovereign debt crisis in

Euro-zone in more than one ways. ECB’s clearly articulated stand of

potentially “unlimited” purchase of illiquid/insolvent government bonds is

essentially a back-door mutualization of debt that the investors have been

hoping for all along. ECB draws its creditworthiness from Euro-zone as a

whole and hence in essence from Germany (for now at least). ECB debt is

thus Euro-zone combined debt. The fact that ECB could potentially end up

owning a large amount of troubled Euro-zone government (PIIGS) bonds

means that these bonds are underwritten by Euro-zone creditworthiness as

long as the commitment to buy them lasts. Temporarily at least, in a

roundabout manner, the bonds of all Euro-zone governments are

effectively mutualized. The caveat is that the commitment is not indefinite.

If and when it ends, the mutualization comes off. That might explain why

the yields on all Euro-zone government debt have not converged fully.

Nevertheless, September 2012 will come to be looked at as the turning

point of sovereign debt crisis in Euro-zone – the month in which the fiscal

integration of Eurozon began. Funnily enough, not many in Europe or the

rest of the world seem to have grasped the true depth of these

developments.

The US Fed announcement, while anticipated widely, was much more in

tune with the genuine requirement of the US economy unlike the previous

two rounds of quantitative easing (QE). In the earlier rounds, the US Fed

flooded the US debt capital markets with a lot of liquidity through purchase

of US government debt. That sent a tsunami of liquidity and risk capital

across the world – inflating risk asset prices. As the effects of liquidity

subsided, many investors realized that they had been overenthusiastic in

buying risk assets – which led to a turnaround in the prices of these assets

later on. This time though, the Fed seems to have learnt its lesson and is

proposing to do QE-3 in a more phased out manner. This would hopefully

better achieve the true objective of spurring investments in US economy

without causing too much liquidity driven upheaval in global assets. For this

reason, we believe that the positive effects of QE-3 will be felt through next

several months.

The neutral announcement came from RBI – along widely expected lines –

of no repo rate cut. Increasingly though, companies and government alike

have come to expect a rate cut in the next policy announcement. We are

not particularly sure about a change of heart at RBI just yet, with inflation

still in the uncomfortable zone and fiscal deficit still on the higher side.

Hence we maintain the cautious stance on long term debt and positive

outlook on short term debt and corporate debt.

However, with the global investor sentiment turning decisively positive, we

expect equity markets globally to do well in the next few months. Besides

India, US and Brazil might be good markets to take exposure to. The global

exposure is available to Indian investors through a select set of global

mutual funds and ETFs.

75

85

95

105

115

125

135 Sensex Nifty S&P 500 Nikkei 225

6.80

7.30

7.80

8.30

8.80

9.30

15000

20000

25000

30000

35000

4

As on 30TH Sept 2012

Change over last month

Change over last year

Equity Markets

BSE Sensex 18763 7.6% 14.0%

S&P Nifty 5703 8.5% 15.4%

S&P 500 1441 2.4% 27.3%

Nikkei 225 8870 0.3% 2.0%

Debt Markets

10-yr G-Sec Yield 8.20% (4 bps) (24 bps)

Call Markets 8.03% (5 bps) (24 bps)

Fixed Deposit* 8.50% 50 bps (75 bps)

Commodity Markets

RICI Index 3828 0.4% 10.5%

Gold (`/10gm) 31248 1.7% 20.2%

Crude Oil ($/bbl) 111.4 (2.3%) 5.6%

Forex

Markets

Rupee/Dollar 52.70 5.7% (7.2%)

Yen/Dollar 77.90 0.9% (1.6%)

Economic Update - Snapshot of Key Markets

10 yr Gsec

Gold

* Indicates SBI one-year FD

40

45

50

55

60

`/$

5

US

Europe

Japan

Emerging economies

• The Conference Board Consumer Confidence Index®, which had declined in August, has improved in

September. The Index now stands at 70.3 (1985=100), up from 61.3 in June.

• US Fed Reserve took the steps to support the economy. It will spend $40 bn a month to buy mortgage

bonds for as long as it deems necessary to make home buying more affordable and will keep interest

rates at record lows until mid-2015.

• The seasonally adjusted Markit Eurozone Manufacturing PMI rose to 46.1 in September (a 6-month high),

down from 45.1 in August. Despite seeing some easing in the rate of decline, manufacturers across the

euro area suffered the worst quarter for three years in the three months to September.

• The unemployment rate across 17 countries that use the Euro came in at a record high rate of 11.4% in

August slightly above 11.3% (revised) in July.

Economy Update - Global

• Japan’s Manufacturing PMI posted a reading of 48.0, a 3-month high in September, up from 47.7 in

August signaling a modest deterioration in operating conditions.

• Japan’s unemployment rate fell to 4.2 percent last month from 4.3 percent in July, the improvement was

not caused by increasing employment, but by people who left the job market.

• Japan’s exports in August totalled $64.3bn, down5.8%from a year earlier, while imports fell 5.4% to

$73.9bn,thereby resulting in a trade deficit of $9.6bn compared with a $9.9bn deficit last year.

• China’s HSBC PMI inched slightly higher to 47.9 in September from 47.6 in August signaling an eleventh

successive month-on-month deterioration in Chinese manufacturing sector operating conditions.

• China also approved $157bn on infrastructure spending to add flagging economy.

• The Indian government has relaxed foreign direct investment (FDI) in aviation, multi-brand retail, power

exchanges and broadcast services as part of package of measures aimed at reviving growth and staving

off a ratings downgrade.

6

Economy Outlook - Domestic

• India's economic growth fell below the psychologically

significant 6% level for the Second consecutive time in last 3

years, signalling that country’s slowdown is deepening and

affecting all sectors of the economy. GDP marginally grew by 2

bps when compared with the Last quarter of FY 12 reading of

5.3%. Sharp falls in the manufacturing & Agriculture sectors

have led to India’s GDP growing only at 5.5% as compared to

7.7% growth a year earlier.

• While the deceleration in the overall economy is apparent

across all industry groups, the construction sector has seen a

sharp year-on-year growth of 10.9% in the June quarter, which

is a five-year high. This has also driven demand for steel and

cement. The activities which gained substantially in this quarter

compared to a year-ago were ‘Financing, insurance, real estate

and business services’ at 10.84% and ‘Community, social

and personal services’ at 7.92%.

GDP growth

• Industrial output as measured by the index of industrial production

(IIP) expanded just 0.1% year-on-year in July, an improvement from

the 1.8% contraction seen in June. Contraction of manufacturing

sector output pulled down the industrial production in July. The

industrial growth during the four-month period ending July 2012,

contracted by 0.1 % as against the growth of 6.1% in the same

period last fiscal.

• Among various IIP constituents, manufacturing fell 0.2% in July,

slightly better than June's 3.1% decline, while mining output fell

0.7% and electricity generation growth slipped to 2.8% from 8.8%

in June. Production of capital goods, an indicator of investment

activity, fell 5% in July.

• Manufacturing and mining continued to remain laggards, with the

output of both the sectors declining in July — by 0.2 per cent and

0.7 per cent, respectively.

IIP

8.4 8.3 7.8 7.7

6.9

6.1

5.3 5.5

4.0

5.0

6.0

7.0

8.0

9.0

FY11(Q2) FY11(Q3) FY11(Q4) FY12(Q1) FY12(Q2) FY12(Q3) FY12(Q4) FY13(Q1)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Jun

11

Jun

11

Jun

11

Jul 1

1

Jul 1

1

Au

g 11

Au

g 11

Sep

11

Sep

11

Oct

11

Oct

11

No

v 11

No

v 11

No

v 11

Dec

11

Dec

11

Jan

12

Jan

12

Feb

12

Feb

12

Mar

12

Mar

12

Ap

r 12

Ap

r 12

May

12

May

12

May

12

Economic Outlook - Domestic

As on 31st August 2012, Bank credits grew by 17.7% on a Y-o-Y basis which is 295 Bps lower than the growth witnessed in August 2011 (i.e. 20.7%). Aggregate deposits on a Y-o-Y basis grew at 15.1%, viz-a viz a growth of 18.0% in August 2011.

On 17th Sept 2012, Reserve Bank of India kept the repo rate-the key policy rate-unchanged in its mid quarter monetary policy review, however it cut cash reserve ratio (CRR) by 25 basis points to 4.50%. The 25-basis point cut in CRR is expected to release around Rs 17,000 crore into the system.

The RBI explained the CRR reduction as a forward-looking measure to address the liquidity pressures expected to arise in the near term on account of the seasonal pickup in credit growth in the second half of the fiscal year; advance tax payments in end-September 2012; and increase in currency demand related to the onset of the festive season in India.

The annual rate of inflation, based on monthly WPI (Wholesale Price Index), stood at 7.55% for the month of August, 2012 as compared to 6.87% for the previous month and 9.78% during the corresponding month of the previous year. The rise in headline inflation is driven by an increase in fuel and power prices and inflation in manufactured products.

The Food inflation, which plays a major role in influencing the headline number, declined to 9.14%% in August against 10.06% in July.

Annual inflation rate based on all India general CPI (Combined) for August 2012 on point to point basis (August 2012 over August 2011) is 10.03 % as compared to 9.86 % (final) for the month of July 2012.

Growth in credit & deposits of SCBs

7 * End of period figures

5.0%

10.0%

15.0%

20.0%

25.0% Bank Credit Aggregate Deposits

6.0%

7.0%

8.0%

9.0%

10.0% Wholesale Price Index

8

Equity Outlook

Increase Allocation to Equity

The month of September saw fresh monetary measures undertaken by the European Central Bank (ECB) and the US Fed to calm financial markets

and provide further stimulus to economic activity. ECBs decision to buy unlimited bonds provided the much needed stability to the European

situation. In US, Fed announced that it will buy 40 billion dollars worth of mortgage backed securities till unemployment number improves. Global

equity markets reacted positively to these announcements with a sharp run-up in equity markets.

In India, Government undertook the long anticipated measures towards fiscal consolidation by reducing fuel subsidies. Also, steps were taken to

allow foreign direct investment in multi-brand retail and aviation which can contribute to both greater capital inflows and higher productivity. Indian

markets moved up by 8% and continues to be one of the best performing markets in the emerging world. FIIs bought over Rs. 20,000 crs of Indian

Equity Markets taking the calendar year till date (CYTD) number to 80000 crores. Markets await further positive policy actions and reforms

announcements by the central government.

RBI, in its Quarterly Policy Review undertook a CRR cut of 25 bps which will release Rs.17,000 crs of additional liquidity in the banking system. In the

inflation versus growth trade-off, RBI has decided to focus more on inflation as of now even as it has expressed concern about slowing growth. The

commentary is clearly more dovish now with RBI stating that ‘the Government’s recent actions having paved the way for a more favorable growth-

inflation dynamic’. We believe that the current steps taken by the Government on the fiscal front will give RBI the necessary cushion to carry out

rate cuts in the coming quarters. As interest rates come down, corporate investment cycle will revive leading to a bounce back in economic growth.

Monsoon rains were above average in September with the seasonal deficit narrowing to 6% and agricultural growth for the year should moderate

only slightly.

Market focus will now shift to Q2 FY13 results scheduled to start from 2nd week of October and RBI policy in October end where a rate cut is

expected. Visible improvement in quarterly earnings will help sustain this rally. In the next few months, we might see both fiscal and monetary policy

working in tandem to revive growth. Investors should increase allocation to equity at every-dip. There are enough beaten down stocks in

Automobiles, banking and infra spaces which have the potential to deliver returns superior to broader markets.

9

Sector View

Sector Stance Remarks

BFSI Overweight

.The reversal of the interest rate cycle will assist in managing asset quality better and would lead to

increase in credit growth. However, we like the private sector more than public sector due to better

management quality and higher balance sheet discipline

FMCG Overweight

We prefer “discretionary consumption” beneficiaries such as Cigarettes and branded garments, as

the growth in this segment will be disproportionately higher vis-à-vis the increase in disposable

incomes.

Automobiles Overweight

Raw material prices have started coming down which would boost margins. Auto loans are also

getting cheaper. We are more bullish on two-wheeler and agricultural vehicles segment due to

lesser competition and higher pricing power.

Healthcare Neutral

We believe in the large sized opportunity presented by Pharma sector in India. India’s 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. However, the government policy of putting price

control on selected drugs might cause some short term pressure on stock prices.

E&C Neutral

The significant slowdown in order inflow activity combined with high interest rates has hurt the

sector. Now since the interest rate cycle has started to reverse, we have turned more constructive

on this space.

10

Sector View

Sector Stance Remarks

Telecom Neutral

The regulatory hurdles, competitive pressures and leverage prevent any return to high profitability

levels in the short to medium term. However, incumbents have started to increase tariffs slowly and

we believe that consolidation will happen sooner than expected.

Cement Neutral Cement industry is facing over capacity issues and lackluster demand. With regulator taking a strong

view against pricing discipline, the profits of the sector are expected to stay muted.

Power Utilities Neutral We like the regulated return Characteristics of this space. This space provides steady growth in

earnings and decent return on capital.

IT/ITES Underweight

With the US and European customers of Indian IT companies are struggling, Order inflows might slow

down in near term. Most companies are loosing pricing power due to high competitive intensity. Sharp

rupee appreciation will put pressure on margins in the near term

Energy Underweight We would stay away from oil PSUs, due to issues of cross subsidization distorting the underlying

economics of oil exploration and refinery businesses.

Metals Underweight Commodity prices have corrected significantly over the last few months due to concerns about growth

in China and developed parts of the world.

11

Debt Outlook

• The 10-year benchmark G-sec yield fell marginally by 4 bps to 8.20%, during the month September 2012.

• The RBI kept policy rates on hold in the Mid Quarter Review on 17th September while reducing the Cash Reserve Ratio by 25bps. This cut brought the CRR of the scheduled banks to 4.5% & it will consequently inject around Rs.17000 cr of primary liquidity into the banking system.

• The RBI, while acknowledging the recent reform measures has highlighted the continuing risks from the elevated inflationary pressures and the fiscal and current account deficits. The guidance has interestingly acknowledged that monetary policy has an important role in supporting the growth revival.

• The spread on a 10 year AAA rated corporate bond decreased to 82bps on 28th Sept 2012 from 100 Bps(as on 31st Aug 2012). The AAA Rated bonds were yielding 8.97% on 28th September 2012.

10-yr G-sec yield Yield curve

(%)

(%)

7.9

8.0

8.1

8.2

8.3

8.4

8.5

8.6

8.7

0.0

0.9

1.7

2.6

3.4

4.2

5.1

5.9

6.8

7.6

8.5

9.3

10

.1

11

.0

11

.8

12

.7

13

.5

14

.4

15

.2

16

.1

16

.9

17

.7

18

.6

19

.4

6.80

7.30

7.80

8.30

8.80

9.30

Debt Strategy

Outlook Category Details

Long Tenure Debt

With the policy rates remaining unchanged by RBI along with the 100 bps SLR cut in july’12 and trend reversal of the interest rates which started with a 50 Bps rate cut in April’12, and signals passive cuts in near future, we would recommend to hold on to the current investment for a horizon of 18-24 months in Longer term papers and not to increase the exposure in the same. These, while being available at attractive yields, also provide an opportunity for Capital appreciation due to a decrease in interest rates. Hence, these would be suitable for both - 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.

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.

12

With the policy rates remaining unchanged by RBI along with the 100 bps SLR cut in july’12 and trend reversal of the interest rates which started with a 50 Bps rate cut in April’12, we would recommend investment in short term debt as further rate cuts are not going to be aggressive and early too. Due to liquidity pressures increasing in the market as RBI has a huge borrowing plan, 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

Forex

• INR has appreciated against all major currencies. INR appreciated by 5.7%, in Aug (Appreciated by 0.15% in Aug 2012) against the US Dollar. Rupee has appreciated against dollar since the beginning of the calendar year by 1.1%

• Growth and inflation worries in India keeps Indian currency rate under pressure. After starting July with strong gains, the rally started to fizzle out towards the second half but ended the month with an appreciation.

• The appreciation of rupee is seen due to the reforms taken in the policies and sustained softening in commodity prices, which can in-turn lead to lowering of the Indian current account deficit. But, The rupee remains sensitive to savings from abroad, depleting import cover from the pool of foreign exchange reserves and the huge foreign currency debt redemptions facing many Indian corporates this year.

Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data

• The projected capital account balance for Q2 FY 12 is revised from Rs. 84,400 Cr to Rs. 78,800 Cr also the Q1 figure was revised downwards to Rs. 99,500 Crores from Rs. 1,02,100 Crores.

• 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.

-10000

40000

90000

140000

FY 10 (Q3) FY 10 (Q4) FY 11 (Q1) FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2)

Capital Account Balance

Exports during August, 2012 were valued at US $ 22.33 bn which was 9.74% lower than the level of US $ 24.74 bn during August, 2011. Imports during August, 2012 were valued at US $ 37.94 Bn representing a negative growth of 5.08% over the level of imports valued at US $ 39.98 Bn in August, 2011 translating into a trade deficit of $15.24 Bn.

5.74%

2.61% 2.21%

4.47%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

USD GBP EURO YEN

-25000

-20000

-15000

-10000

-5000

0

-20

0

20

40

60 Export Import Trade Balance (mn $)

60

70

80

90

100

110

120

130

140

14

Commodities

Precious

Metals

Oil & Gas

As the central bankers across the world pumping liquidity into the system, oil prices are unlikely to see any major fall. Combined. Oil prices are likely to be firmer after an industry report showed stockpiles shrank to the lowest in more than five months in the U.S., the world’s biggest crude consumer. Expect prices to move higher.

Crude

Gold

We continue to maintain our bullish stance on gold on a medium to longer time frame following the bond purchase program of ECB and easy liquidity regime. While the gold in USD terms continue to move higher, rupee denominated gold went into consolidation phase following a sharp rise in rupee, thereby keeping domestic prices under the lid. Having said that, gold is entering into its seasonally best quarter and one can expect only prices to go north. The current consolidation phase should be used to accumulate for the long term.

15000

17000

19000

21000

23000

25000

27000

29000

31000

33000

35000

Real Estate Outlook - I

15

Asset Classes Tier I Tier II

Residential

With new DCR regulations Mumbai market saw some confidence

coming back for investors. Rates remained at peak levels and

shows no sign of stress. The sales in many premium pockets have

seen over 60% plunge. Thane and Panvel sees lot of end user

transactions. All other prime markets like Pune, Banaglore,

Chennai, Hyderabad, NCR are seeing rate stagnancy well over 2

quarters now. With new supply being announced every month,

the stress on sales continues. Given the overall average of these

markets, any project having Rs. 4000 per sqft entry point with a

good developer sees lot of interest (keeping the unit size well

under 1500 sqft)

Prices surged since last quarter, factors being

largely growth of infrastructure and young aspiring

first time home. Cities like Jaipur, Bhopal,

Trivandrum, Madurai, Lucknow, Patna, Chandigarh

highly attractive for apartments in 600-1100 sqft

range

Commercial/IT

Lease transactions are under pressure and new rate/sqft trends

getting established in all major IT driven pockets/cities. Mumbai

still manages to stay afloat due to heavy investment in small

office spaces from investors

Very less benchmarks available but the rents are

growing 8-10% every year for commercial

properties in Tier-II cities

Real Estate Outlook - II

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 The IC note is proposed to be presented every quarter

Asset Classes Tier I Tier II

Retail

Still to re-cover from the 2008 shock, many malls have

been experiment grounds for retailers. The FDI is well

awaited for re-starting the retail phenomenon in major

cities. 60% of the mall in India are not even 60% occupied

and if occupied, unable to get rent on time. Investment in

prime mall spaces can get good returns due to opening up

of FDI.

Hi-street rules the roost, the mall culture is repeated

beaten in the Tier-2 markets and predominantly seeing a

re-structure of plans to suit schools, hospitals, commercial

offices, call centers, super-market etc

Land

30-40 kms radius near in prime markets are becoming

expensive month on month. Interest from investors has

drawn lot of attention in well connected areas.

Land has given better appreciation in these markets than

Tier 1, since there is a natural demand to own land

property. Also, scarcity in old locations and new upcoming

areas due to infrastructure is making many invaluable land

valuable

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We closely track the historical performance across asset classes, sub-asset classes and product providers to identify, evaluate and recommend investment products (KPW’s or third-party). We have our own proprietary methodology for evaluating products; for product providers, we also note the investment style and risk management philosophy. Our comprehensive analysis determines truly exceptional performers to be added to your portfolio

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Honest, unbiased advise

17

A talented team of leaders with global and Indian experience, having a unique blend of backgrounds of wealth management, private equity, strategy consulting and building businesses powers Karvy Private Wealth and its operations.

Pedigreed Senior Management Team

18

Disclaimer

The information and views presented here are prepared by Karvy Private Wealth(a division of Karvy Stock Broking Limited) or other Karvy Group

companies. 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.

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 nor any person connected with any associated companies of

Karvy accepts any liability arising from the use of this information and views mentioned here.

The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned companies from time to

time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that

they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other

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restricted to place orders only through Karvy Stock Broking Ltd.

The information given in this document on tax are 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. We also expect significant changes in the tax laws once the new

Direct Tax Code is in force – this could change the applicability and incidence of tax on investments

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19

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