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Advice for the Wise February 2016
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,
Barely had we gotten over the revelry of the New Year, we were jolted by a sharp correction in the global equity markets in early January this year. Led by a steep fall in crude prices, the Nifty breached the 7500 support level to touch a 52-week low of 7241. It is easier to do a post-mortem of the events that led to the fall than to actually anticipate them. With fresh supply coming in from Iran and a further fall in demand from China, crude prices dropped to a 12-yr low of $27.8/barrel; and analysts are not ruling out lower levels sometime later this year. Though this may be good news for oil-importing countries like India, it could seriously cripple the economies of several countries that are dependent on oil exports like Venezuela, Brazil & Russia. The other fallout has of course been the huge redemptions from Indian equity markets of sovereign funds from the Middle East.
The free fall in equity markets was somewhat contained following comments on further monetary easing by the ECB President Mario Draghi after their recent policy meeting. Amidst the global volatility, the US Federal Reserve also kept rates unchanged for the time being. The World Bank has projected a growth of 2.9% in global GDP in 2016, slightly higher than the 2015 figure of 2.5%. The U.S. is estimated to grow at about 2.5%, the highest annual rate since the Global financial crisis. Though emerging markets as a whole continue to be a pocket of concern, India stands out with an estimated growth forecast of 7.9%.
Back home, the third quarter results have been a mixed bag so
far. While some companies have shown improved revenues and better margins on the back of lower commodity prices, others (noticeably banks) may need a couple of quarters more to come out of the woods.
While the indices have seen a significant price correction (down 20% from the all-time high), the negative bias may last a little longer. So how does one approach his/her investments in this environment? The market is currently at fairly attractive valuations. With the recent correction in midcaps, the midcap indices have also given up some of their froth. It is always a good idea to strictly follow one’s asset allocation based on risk profile, at all times. It is certainly a good idea to continue with SIP’s and also start new ones in equity mutual funds; they will give the double benefit of rupee cost averaging as well as the power of compounding in the long run. The risk-reward ratio at this point of time appears favourable, and long term investors could even consider lumpsum investments in equity while more conservative investors could look at balanced funds.
The next major event is the Annual Budget of the Central Government, where the fiscal numbers will be keenly watched. It will also be interesting to see how the Government intends to take its reforms agenda forward. The investor sentiment has been so weak that expectations of a pre-budget rally seem to be low, but one can never rule out that possibility. Equity markets have always rewarded those who invest with a positive outlook and for the long term.
Did You Know?
#Source: investinganswers
The U.S. takes the top spot in the foreign direct investment confidence index from last 3
years.
India has overtaken Thailand as the world’s largest rice exporter in 2015.
Switzerland has been the most globally competitive country in terms of innovation, R & D and stable macro environment.
Domestic Equity Outlook
As on 25th Jan 2016
1 month change
1 year change
Equity Markets
BSE Sensex 24486 -5.24% -16.37%
CNX Nifty 7436 5.41% -15.84%
BSE Mid cap 10217 -7.27% -4.47%
BSE Small cap 10698 -8.80% -5.88%
Equity markets corrected further as concerns on China slowdown and devaluation of Yuan gained momentum. Indian markets, during January, though down fared somewhat better compared to other key global markets. Keeping global scene in mind, US Fed avoided any monetary tightening during the month. Domestic macros too did not lend any help to the Indian equities. Retail inflation during the month inched up higher to 5.6%. To add woes, Industrial production showed a contraction of 3.2%. Corporate results for December quarter till now have largely been in line with expectations. Revenues continue to remain subdued with volume pressure seen in segments related to commodities or rural growth. However soft commodity and crude prices have led to gross margin expansion; also improving the bottom line. Recent initiatives and reform measures taken by the government should translate into higher growth over next couple of years. However till that time arrives, focus should remain on domestic driven growth sectors which have a better visibility of earnings. We believe themes like consumer discretionary and sectors like Automobiles, FMCG and select financials should out-beat the overall markets over long term.
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106
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110 S & P BSE Sensex CNX Nifty
BSE Midcap BSE Smallcap
Domestic Equity Outlook
Government Policy With no great progress in the winter session of Parliament, focus would now be on the forthcoming budget session. Market participants would keenly monitor how the government plans various strategies related to rural boost, Make In
India theme and re-working of the fiscal math.
Domestic Equity Outlook
India's wholesale prices index stood at -1.07% for December, 2015 as compared to -1.99% for the month of November.
Food inflation in the month of December for food articles was 8.17%. Inflation in the fuel and power segment was -9.15%, while that of manufactured products it was -1.36% in December.
CPI for the month of December came in at 5.61% as compared to 5.41% in November.
The food and beverages inflation rose to 6.3% from
6.1% in December, vegetables rose by 4.6% as compared to 4% and pulses and products stood at 45.9% versus 46% on M-O-M basis.
Wholesale Price Index Consumer Price Index
#Source: Business standard
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00% WPI CPI
Domestic Equity Outlook
Index for Industrial Production (IIP) fell down to the levels of -3.2% in November as compared to 9.8% in October.
The manufacturing sector, which constitutes over 75% of the index, fell by 4.4% in November 2015. Meanwhile, the mining sector output down by 2.3% in November 2015.
The cumulative growth for April –November 2015 grew at 3.9% .
India's Gross Domestic Product (GDP) growth for the second quarter of the current financial year grew at
7.4% versus 7% for the previous quarter.
Manufacturing sector showed a robust growth of 9.3%, whereas agricultural growth came in at 2.2% exceeding expectations. Mining sector witnessed a slowdown with growth coming at 3.4%.
#Source: Business today
4.0
5.0
6.0
7.0
8.0
GDP
-5.0%
0.0%
5.0%
10.0%
15.0%
Nov 14
Dec 14
Jan 15
Feb 15
Mar 15
Apr 15
May 15
Jun 15
Jul 15
Aug 15
Sep 15
Oct 15
Nov 15
IIP
Sector Outlook
Sector Stance Remarks
Automobiles Passenger vehicles and CVs to outperform two-wheeler segment. Tractors could benefit on
base effect. Auto-ancillaries expected to do well due to revival of demand.
IT/ITES Select verticals displaying better growth. 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. Gross margin expansion to tone down as
cos will be expected to share the benefits.
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 .
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.
Cement Cement volumes and realizations continue to witness pressure. Cost benefits would drive
earnings. Pricing would be key for sector valuations.
Sector Outlook
Sector Stance Remarks
Healthcare Regulatory risks have become more evident and frequent with FDA inspections for pharma sector. Additionally, M&A and currency movements poses additional risk to earnings of cos.
E&C Order inflows expected to improve as spending and capital expenditure likely to move up on
economic recovery.
BFSI
Retail focused Private sector banks continued to deliver stable earnings in line with expectations. However, PSUs to deliver muted numbers on asset quality concerns and lower credit growth. We
expect this trend to continue going forward.
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.
Global Equity Outlook
As on 25th Jan 2016
1 month change
1 year change
Equity Markets
MSCI World 1521 -9.00% -11.07%
Hang Seng 19340 -12.25% -21.13%
S&P 500 1877 -9.07% -9.02%
Nikkei 16708 -11.07% -3.58%
US Fed kept the key policy rates unchanged during the month. However the medium term path seems fine and based on the commentary, a small rate hike could be expected during March quarter. China continues to slow down and fear of further Yuan devaluation remains. However, loose monetary policy by Japan and Europe could support global markets in the near term.
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100
110
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150
MSCI World Hang Seng S&P 500 Nikkie
Global Economy Update
United States
•U.S. economic growth likely braked sharply in the fourth quarter as businesses doubled down on efforts to reduce an inventory glut and unseasonably mild weather cut into consumer spending on utilities and apparel. •The U.S. central bank has now put the world on notice that the slide in oil prices and sharp slowdown in global growth may rank as one of those very shocks.
Emerging Economies •China’s central bank will inject 20 billion yuan (2.36 billion pounds) into the money markets through seven-day reverse bond repurchase agreements and an additional 80 billion yuan through 28-day reverse repos •India's fiscal deficit was 4.88 trillion rupees ($71.90 billion) during April-December, or 87.9 percent of the full-year target, government data showed on Friday.
a year ago
Japan
• The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to revive the economy as volatile markets and slowing global growth threaten its efforts to beat deflation.
• Japan's seasonally adjusted unemployment rate held steady in December at 3.3 percent,
Europe
• Banks that mis-sold complex financial products to shield companies from interest rate hikes that never happened have paid 2.1 billion pounds ($3 billion) in compensation so far, with reviews of customers completed,
• German economic output probably increased only slightly in the fourth quarter of 2015, but leading indicators suggest Europe's largest economy will soon recover.
#Source: Reuters
Domestic Debt Outlook
•The yields on 10 Yr G sec closed at 7.80% which is 5 bps higher than the last months close of 7.75%. •The latest inflow comes following a net investment of Rs 45,856 crore (USD 7.4 billion) by overseas investor in the debt markets in 2015. •Raghuram Rajan seen buying extra $4 billion of India bonds after outflows •Indian companies raised the lowest amount via both onshore and offshore debt markets in six years last year owing to subdued domestic investment climate and volatile global markets.
As on 25th Jan 2016
1 month change
1 year change
Debt Markets 10-Yr G-Sec Yield 7.80 5bps 9bps
Fixed Deposit 7.25 0bp (100bps)
0
50
100
150
200
250
300
350
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%-11%) 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 a lot 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
•German 10-year yields -- the euro zone's benchmark -- fell 2 basis points to 0.35 percent, their lowest since April 2015. U.S. Treasury yields dropped 6 bps from their day's high of 2.05 percent. •Investors are deserting emerging market bonds at the fastest rate on record, withdrawing more money than they did at the height of the global financial crisis. • Europe and Africa and the Middle East recorded net outflows. However, Latin America had net inflows of an estimated $4.2bn. •Shrugging off economic weakness in China, Japan and Europe, the Fed last month raised its key overnight lending rate by a quarter point to a range of 0.25 percent to 0.50 percent and issued upbeat economic forecasts that suggested four additional hikes this year.
#Source: Reuters
Ratings Country 10 Yr G-Sec
Yield 1 month change
AAA
Germany 0.40% (19bps)
Hong Kong 1.65% 10bps
Sweden 0.71% (34bps)
Switzerland -0.22% 12bps
AA+ USA 1.99% (24bps)
AA-
China 2.91% 3bps
Japan 0.23% (3bps)
Commodities
Gold prices jumped up almost 5% during January. Flight to safety and fragile currency globally were primary reasons for upward movement in Gold. For near to medium term, the larger band of $1000-1200 remains.. . . As on 25th Jan, 2016: `26,269 per 10gm
1 month change : 4.46% 1 year change : -6.24%
The expectation of crude oil prices going ahead would be around $30 per barrel in then first quarter of the year, and $38 by the end of 2016.
As on 25th Jan, 2016 : $29.89per bbl 1 month change : -20.5% 1 year change : -37.2%
*RICI: Rogers International Commodity Index – Tracks 38 commodity futures from 13 international exchanges, Business Insider
24000
25000
26000
27000
28000
29000 Gold
2,000
2,200
2,400
2,600
2,800
3,000
RICI
0.00
20.00
40.00
60.00
80.00
Crude
Foreign Exchange
• The Indian rupee has appreciated by 1.09% against the EURO, 4.11% against YEN, 2.04% against USD and depreciated by 1.99% against GBP.
• The BOJ said it would apply a negative interest rate of minus 0.1 percent on selected current account deposits that financial institutions hold with it, effectively charging banks interest for parking excess deposits at the central bank.
• Global investors are keeping faith in India’s rupee bonds, even as the currency inches toward the record low reached
in 2013, saying the nation’s finances have improved over the past two-and-a-half years.
Currency As on 25th Jan 2016
1 month change
1 year change
USD/INR 67.20 2.04% -9.13%
GBP/INR 96.74 -1.99% -4.10%
Euro/INR 73.12 1.09% -5.60%
Yen/INR 56.93 4.11% -8.66%
USD/Euro 0.9243 1.35% 3.61%
2.04%
-1.99%
1.09%
4.11%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
USD GBP EURO YEN
Real Estate Outlook
Tier I
The Central Government has eased FDI norms and lifted
restrictions on ticket size, Project size and stage of entry of
capital thus paving the way for virtually any project to
receive Foreign equity funds. Residential Prices have been
Stable to Stagnant across Tier I markets. All Tier I markets
have continued to witness moderate decrease in demand
with sluggish market sentiments.
Tier II
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.
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.
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 remain stagnant.
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.
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
Crude Reality: What is it? Oil is a vital source of energy for the world and will likely remain so for many decades to come, even under the most optimistic assumptions about the growth in alternative energy sources. Most countries are significantly affected by developments in the oil market, either as producers, consumers, or both. the decline has been dramatic since last year as crude cracked during this period. The reasons attributed to this crash in oil prices are, first, increased production in non-OPEC (Organization of the Petroleum Exporting Countries) countries, Slowing economic activity in regions such as Europe, Japan and China is also said to be contributing to the decline. Impact of Rate Hike? Simply put, at the country level, fall in oil prices will benefit net importers, while exporters would be worse off. However, at the aggregate level, fall in oil prices is said to be a positive for the global economy. Oil importers will benefit from a falling oil price because the value of their oil imports will drop. This will reduce the current account deficit of oil importers; this is important for a country like India who imports 75% of oil consumption and currently has a large current account deficit.
•
What’s Trending?
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. 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