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ADVICE FOR THE WISE
April 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,
With the Indian summer well on its way, the Bulls (rather than the “Bears”) seem to be coming out of a long winter hibernation. It’s heartening to note
that the Indian equity markets have rallied by over 10% in the last one month itself. The Finance Minister’s decision to walk the path of fiscal prudence
has been well-received by both, global and domestic investors. Additionally, global risk factors seemed to have diminished into the background
temporarily, causing investors to return to equity markets. After several months of consistent outflows, we have received a net inflow of around
Rs.20,000 crores in equities in the month of March alone.
Apart from the equity markets, the month saw some significant action in the fixed income arena as well. The Government finally slashed the interest
rates for various Small Savings Schemes like NSC, KVP, PPF and other postal deposits. Though the move was largely expected, the steep fall in
some cases took investors by surprise. The rates will now be re-calibrated every quarter and will be linked to the prevailing returns on G-secs. Given
that inflation is well within the 6% mark, the real rate of return continues to be attractive in these instruments. More importantly, the Government’s
intent has been to remove the disparity between returns from Small Savings Schemes and Bank Deposits, thereby making the latter more attractive.
This would also enable banks to transmit the RBI’s rate cuts.
Hogging the headlines this month have been several news clips on how the Government and the RBI in conjunction with the judicial system,
have been tightening the noose around big corporate defaulters. The authorities are making sure they leave no stone unturned in solving the
NPA issues that are plaguing the banking system. On the other hand, we are looking at some large companies selling off their subunits to repay
debts or to reduce losses where there has been underperformance. Though it may appear to be a case of ‘too little too late’, I believe these
developments augur well for the impending clean-up that needs to take place on the balance sheets of the country’s corporate sector.
In spite of the recent run-up, the equity markets still present value and we recommend investors to keep continuing their systematic
investments. Corporate results which are to be declared in April, will provide us further direction.
With the Financial Year drawing to an end, let’s close all accounts on our misunderstandings, fears, failures and negative emotions, and start a
fresh account of hope, optimism and determination. Wishing you all a happy, healthy and prosperous new Financial Year 2016-17!
DID YOU KNOW
Saudi Arabia’s Ghawar oil field
contains about 85 billion barrels of
oil (the world’s largest).
First joint stock bank of british
India was State Bank of India
41% of all forex transactions
happen in the UK, whereas only
19% happen in the US. The rest of
the world only accounts for 40%.
DOMESTIC EQUITY OUTLOOK
Equity markets, taking positive cues from the Union Budget, rallied
smartly during the month of March. Higher outlay for rural sector and
increase in infrastructure investments is a step in the right direction.
Focus on social and farm sectors should also boost the domestic macro
growth over long term. However, retaining the fiscal deficit of 3.5% for
FY2016-17 was one of the key reasons for the optimism in the market.
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 contract; mainly on account of poor numbers in
manufacturing and capital goods segment. However, retail inflation
surprised positively with a better than expected figure of 5.2%. Declining
crude and gold imports led to lower trade deficit. With this data on hand,
the prospects of a rate cut in the April monetary policy seems certain.
Seventh pay commission and OROP should boost consumption and
growth in the coming years. 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 23rd
March 2016 1 Month Change
1 Year
Change
Equity Markets
BSE Sensex 25,337 9.43% -10.03%
CNX Nifty 7,716 9.77% -9.67%
BSE Mid Cap 10,524 9.94% 0.30%
BSE Small Cap 10,501 9.91% -1.40%
80
90
100
110
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 -0.91% for February,
2016 as compared to -0.90% for the month of January.
• Food inflation increased in the month of February by 3.35%.
Vegetables declined by 3.35%. Inflation in the fuel and power
segment was -6.40%%, while that of manufactured products it
was -0.58% in February.
CONSUMER PRICE INDEX
• CPI for the month of February came in at 5.18% as compared
to 5.69% in January.
• Year-on-year, cost of food and beverages rose 5.52 percent
(6.66 percent in January).
• The food prices rose at a slower 5.3% compared to 6.85% in
the previous month. The biggest rise came from pulses (up
38.3% from 43.32% in the previous month)
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
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
WPI CPI
IIP
• Industrial Output in India declined by 1.5% year-on-year in January
2016.
• The manufacturing sector, which constitutes over 75% of the index,
declined by 2.8% in January 2016. Meanwhile, the mining sector
output rose by 1.20% in January 2016
• The cumulative growth for April – January 2016 stood at 2.7% 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%
Jan 15
Feb 15
Mar 15
Apr 15
May 15
Jun 15
Jul 15
Aug 15
Sep 15
Oct 15
Nov 15
Dec 15
Jan 16
IIP
DOMESTIC DEBT OUTLOOK
The yields on 10 Yr G sec closed at 7.51% which is 31 bps
lower than the last months close of 7.82%
To boost inflows of foreign funds into Indian capital markets,
regulator Sebi today raised the FPI investment limit in central
government securities to Rs 1,40,000 crore from April 4.
Despite the government sticking to its fiscal deficit target of 3.5
per cent and maintaining the gross borrowing at Rs 6 lakh crore
for the next financial year, interest payments on public debt are
estimated to rise in 2016-17.
As on 23rd
March 2016
1 Month
Change 1 Year Change
Equity Markets
10-Yr G-Sec-
Yield 7.51 (31bps) (24bps)
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
7.40 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
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 (8.20%-11.50%) 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 by125 basis points in CY2016, 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 in FY2017, 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 term maturity will benefit
from rate cuts. Investors looking for long term investments (5 years and above) in debt with medium to high risk appetite
can look at Long term debt and Gilt funds.
GLOBAL EQUITY OUTLOOK
As on 25th
March 2016
1 Month
Change
1 Year
Change
Equity Markets
MSCI World 1623 4.45% -6.95%
Hang Seng 20345 5.07% -16.95%
S&P 500 2035 4.51% -1.22%
Nikkei 17002 5.03% -12.68%
80
90
100
110
120
130
140
150 MSCI World Hang Seng S&P 500 Nikkei
GLOBAL INDICES
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.
GLOBAL ECONOMY UPDATE
UNITED STATES Gold hit its lowest in a month, as the dollar firmed ahead of new U.S. economic data and speeches by
Federal Reserve officials that may signal more interest rate increases than anticipated.
The U.S. dollar index dropped to a five-month low while shares on Wall Street rallied to lead global
equities higher as a dovish U.S. Federal Reserve emboldened investors to take on more risk.
JAPAN Japan's factory output in February fell the most since 2011 when a devastating earthquake ruptured the
supply chain, stoking fears of another recession and renewing pressure on policymakers to take evasive
action.
Hosting this year’s Group of Seven summit will boost demand in the Japanese economy by around 107.1
billion yen ($942 million), a local government estimate shows.
GLOBAL ECONOMY UPDATE
EUROPE Economic recovery in the euro zone is set to continue in the coming months, but not as fast as hoped
owing to global uncertainties and slowing growth in emerging economies, view of European Central Bank.
Germany's debt agency would issue around 50.5 billion Euros worth of bond and treasury bills in the
second quarter of 2015, in line with issuance plans from December.
EMERGING
ECONOMIES
China's trade deficit in services narrowed to $16 billion in February compared with $20.7 billion in January.
February's gap was largely due to a $15.5 billion gulf in spending between Chinese who spent more
abroad than foreign tourists in China, data from the State Administration of Foreign Exchange (SAFE).
The Indian economy is expected to grow at 7.2 per cent in 2016-17, a tad lower than Central Statistics
Office's advance estimates of 7.6 per cent in the current fiscal due to weak investments and external
headwinds, says BMI Research.
GLOBAL DEBT OUTLOOK
Central banks are "running out of time" to reflate global economies
as their aggressive policies including quantitative easing and low,
even negative, interest rates are losing their effectiveness.
Argentina is expected to take a big step toward reentering the global
financial system with the Senate set to pass a landmark deal to
repay creditors who rejected earlier restructurings of the country's
sovereign debt.
Federal Reserve Chair Janet Yellen said on 22nd March, the U.S.
central bank should proceed only cautiously as it looks to raise
interest rates, pushing back on a handful of her colleagues who
have suggested another move may be just around the corner.
Britain's European Union referendum could push up credit costs and
weaken sterling more, the Bank of England warned on Tuesday, as
it moved to bolster banks' risk buffers and slow a boom in lending to
landlords.
Ratings Country 10 Yr G-Sec Yield 1 Month
Change
AAA
Germany 0.15% (2bps)
Hong Kong 1.41% (7bps)
Sweden 0.51% (3bps)
Switzerland -0.36% (8bps)
AA+ USA 1.81% (7bps)
AA-
China 2.93% (7bps)
Japan -0.04% (2bps)
SECTOR OUTLOOK
SECTOR OUTLOOK
SECTOR STANCE REMARKS
Automobiles
Passenger vehicles and CVs will continue to outperform two-wheeler segment. Tractors could 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.
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.
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 continued to deliver earnings in line with expectations. However, PSBs delivered muted
numbers on asset quality concerns and lower credit growth. We expect this trend to continue going forward.
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.
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
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 March, 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 23rd March, 2016 : 25,148 per 10gm
• 1 month change : -2.13%
• 1 year change : 8.78%
24000
25000
26000
27000
28000
29000
30000 Gold
COMMODITIES
CRUDE OIL
Crude oil prices recovered 23 % month on month to close at
$38.84 per bbl
• As on 23rd March, 2016: $38.84 per bbl
• 1 month change : 23.30%
• 1 year change : -27.80% 0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
Crude
Currency As on 31st
March 2015 1 Month Change 1 Year Change
USD/INR 66.33 -3.30% -6.29%
GBP/INR 95.09 -0.51% -2.48%
Euro/INR 75.10 -0.77% -9.14%
Yen/INR 59.06 -3.20% -11.56%
USD/Euro 0.88 -3.89% -4.77%
FOREIGN EXCHANGE
• Most emerging Asian currencies rose on 30th March,
adding to monthly and quarterly gains, as waning
expectations of near-term U.S. interest rate hikes spurred
investors to seek higher yields in the region.
• The Chinese yuan climbed as the central bank set its daily
guidance rate at its strongest this year. The renminbi was
set to post its largest quarterly gain since July-September
2014.
• Reuters has reported sources with direct knowledge that
the Peoples Bank of China has temporarily suspended
some FX business of several foreign banks until the end of
March
-3.30%
-0.51%
-0.77%
-3.20% -3.50%
-3.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
USD GBP EURO YEN
WHAT’S TRENDING
THE REAL ESTATE REGULATORY BILL
What is it?
• The real estate bill seeks to set up a Real Estate Regulatory Authority in states and federal territories to oversee real estate transactions. It will
help regulate sector and bring in clarity in terms of who governs/monitors realty projects. The bill is touted as a key reform measure in the vast
real estate sector.
Impact of the Bill?
• Once the bill becomes an Act, in case of any grievance, the consumer can go to the real estate regulator for redressal.
• The bill will make it mandatory for all commercial and residential real estate projects where the land is over 500 sq. mt. or eight apartments will
have to register with the regulator before launching a project.
• Developer will have to put 70% of the money collected from a buyer in a separate account to meet the construction cost of the project. States can
increase the ceiling but not lower it.
• It is likely to stabilize housing prices. The bill will lead to enhanced activity in the sector, leading to more housing units supplied to the market.
• The bill also seeks to impose strict regulations on the promoter and ensure that construction is completed on time.
Due to the above, and many more reforms in the real estate sector, the currently unregulated Real Estate Sector will have a Regulatory Authority
to mediate, regulate and protect both, the Buyer and the Developers interests.
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
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