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1-1.S&P BSESENSX.BSE - 02/09/15 Trend7

Daily Benchmark share indices ended lower in August, amid weak global cues, as investors booked profits in index heavyweights, while weak rupee also weighed on market sentiments. The BSE Sensex lost 6.51 per cent in August and the Nifty shed 6.58 per cent, their worst monthly performance since November 2011, amid worries over slowdown in the Chinese economy and prospects of a rate rise by the US central bank. Weakness was seen across Asia and Europe, as investors shunned riskier assets.

Key Positives during the month

A gauge of manufacturing activity in India rose to its highest level in six months in July. The seasonally adjusted India Manufacturing Purchasing Managers' Index, prepared by Markit, rose to 52.7 in July from 51.3 in June.

India's industrial production grew by 3.8 percent in June 2015 as compared to the same month of last year, up from 2.7 percent in the previous month. The cumulative growth for the period April-June 2015-16 over the corresponding period of the previous year stood at 3.2%.

India Consumer price index (CPI) for the month of July came in at 3.78 percent, helped by the base effect and a major slump in food prices.

Wholesale price inflation of India contracted for the ninth month in a row on the back of lower food and commodity prices. Wholesale Price Index (WPI)-based inflation rate was minus 4.05% in July against minus 2.4% a month ago, driven by 1.16% drop in food prices and 1.47% fall in prices of manufactured items.

Key Negatives during the month

India's economy expanded 7 per cent in the first quarter, below expectations and slower than the preceding three-month period.

Monthly Strategy Report – September 2015

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Growth in the eight core sectors — coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity — slowed to 1.1 per cent in July after a growth of three per cent in June, mainly on account of low expansion in coal output and contraction in steel, crude oil and natural gas production that hinted at a weak industrial recovery.

Coal imports declined by 11% to 19.30 million tonnes (MT) in July 2015 compared to the same month of the previous year as higher availability of domestic fuel led power generation firms to defer imports.

The financial crisis in Greece has led to a 15.45 per cent fall in India's exports to the European nation during the first quarter of this fiscal.

Global markets:

Fund Activity

Particulars Net Buy / Sell Net Buy / Sell Open Interest Open Interest

Remarks Aug -15 July -15 Aug -15 July -15

FII Activity (Rs. in Cr) FII Activity (Rs. in Cr)

Equities (Cash) -17209.1 5729.6 FIIs were large net sellers in August.

Index Futures -1745.2 1710.1 19091.5 14766.1 FIIs were net sellers with a rise in open interest.

Index Options 13963.3 11009.6 69526.8 61237.6 FIIs were net buyers with a rise in open interest.

Stock Futures 5596.8 -4465.0 44300.3 48654.7 FIIs were net buyers with a fall in open interest.

Stock Options -646.5 -415.4 1161.2 1352.8 FIIs were net sellers with a fall in open interest.

MF Activity (Rs. In Cr) MF Activity (Rs. In Cr)

Equities (Cash) 10532.9 5442.1 MFs were large net buyers in the month of August.

FIIs were net sellers of debt papers selling a net amount of Rs.479.9 cr in August compared to Rs. 266.5 cr worth debt bought in July.

Indices Aug-15 July-15 %

Chg

US - Dow Jones 16528 17690 -6.6

US - Nasdaq 4777 5128 -6.9

UK - FTSE 6248 6696 -6.7

Japan - Nikkei 18890 20585 -8.2

Germany - DAX 10259 11309 -9.3

Brazil - Bovespa 46626 50865 -8.3

Singapore - Strait Times 2921 3203 -8.8

Hong Kong – Hang Seng 21671 24636 -12.0

India - Sensex 26283 28115 -6.5

India - Nifty 7971 8533 -6.6

Indonesia - Jakarta Composite 4510 4803 -6.1

Chinese - Shanghai composite 3206 3664 -12.5

World markets ended the month of August 2015 on a negative note. Chinese - Shanghai composite was the top loser during the month which fell 12.5%. Hong Kong – Hang Seng, Germany - DAX, Singapore - Strait Times, Brazil – Bovespa, Japan – Nikkei, US – Nasdaq, UK – FTSE, India - Nifty, US - Dow Jones, India - Sensex and Indonesia - Jakarta Composite reported loss of 12.0%, 9.3%, 8.8%,8.3%, 8.2%, 6.9%, 6.7%,6.6%, 6.6%, 6.5% and 6.1% respectively.

Average daily volumes on BSE in August 2015 rose by 15.4% M-o-M. (NSE daily average volumes rose by 20.0% M-o-M). The average daily

derivatives volumes on NSE rose by 13.23% to Rs. 280889.23 cr in August.

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The Thomson Reuters/CRB commodity index fell 0.24% in August on PBoC’s devaluation mechanism.

The dollar rose against a basket of currencies as U.S. stocks stabilized and a spate of strong U.S. economic data helped assuage investors’ fears of sustained market turmoil.

Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of August 2015:

USD to: 31-Aug-15 31-Jul-15 % Chg

Pakistani rupee 102.49 101.49 +0.99

Hong Kong dollar 7.75 7.75 -0.02

Chinese yuan 6.38 6.20 +2.88

Indian rupee 66.02 63.91 +3.31

Taiwan dollar 32.76 31.12 +5.27

Singapore dollar 1.41 1.37 +2.56

Commodity 28-Aug-15 31-Jul-15 % Chg

Gold 1131.6 1,094.9 +3.35%

Crude Oil 49.2 47.1 +4.46%

Aluminium 1564 1,625 -3.75%

Copper 5076 5,220 -2.77%

Zinc 1794 1,931 -7.09%

Nickel 9865 10,940 -9.83%

Tin 14245 16,200 -12.07%

Lead 1680 1,701 -1.23%

Currencies

Commodities

Copper prices have hit six-year lows as manufacturing data from top consumer China and a slide in Shanghai equities reinforces concerns about the country's economic growth prospects. London nickel, copper and aluminium jolted to six-year lows as jitters intensified that China’s currency devaluation would corrode demand. Metals subsided on fears that a weaker yuan will make imports more expensive for those paying with the Chinese currency, damaging demand from the top consumer of most metals.

Oil price rose, as recovering equity markets and news of diminished crude supplies set off a short-covering scramble by bearish traders. Snapping back from a deep two-month slump that knocked U.S. crude to 6-1/2 year lows below $40, oil climbed as world stock markets rose on hopes Chinese government measures to stimulate the economy would pay off, while the dollar strengthened as risk aversion eased.

Gold rose as the dollar and European equities slid on concerns over China's devaluation of its currency and also after a gauge of manufacturing in the New York area slumped at the fastest pace since the recession, weakening the case for the Federal Reserve to

raise interest rates next month.

Malaysia’s ringgit fell the most in seven weeks as China’s record weakening in its daily reference rate spurred the biggest decline in the yuan in two decades and triggered losses across Asia. Against the US dollar, the ringgit was at a 17-year low - it’s weakest since Aug 31, 1998.

The rupee fell at a new two-year low against dollar on persistent month-end demand for the American currency from importers. Besides, fresh fall in equity market affected the value of the rupee against the US dollar. Sharp sell-off in global currency and financial markets predominantly pressurized

the rupee.

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Argentine peso 9.29 9.18 +1.22

Euro 0.89 0.91 -2.09

Thai baht 35.71 35.04 +1.91

Malaysian ringgit 4.16 3.82 +8.82

Indonesian rupiah 13908.20 13459.00 +3.34

Japanese yen 121.66 124.19 -2.04

Brazilian real 3.51 3.34 +5.13

Korean won 1178.97 1168.36 +0.91

Russian Rouble 65.30 59.16 10.38

Turkish Lira 2.92 2.78 5.22

South African Rand 13.29 12.64 5.14

Outlook going forward

Global Market Outlook US

Positive newsflow coming out of the US during the month include:

Existing home sales jumped 2% to a seasonally adjusted annual rate of 5.59 million in July, according to the National Association of Realtors. That marked its highest level since February 2007 and a new post-recession high.

The Non-Farm Payrolls report showed that the U.S. gained 215,000 jobs in July. The unemployment rate in July remained steady at 5.3%, as expected,

Construction on U.S. houses in July climbed to the highest level before the recession, up 0.2% to an annual rate of 1.21 million in July, according to the Commerce Department.

Homebuilder confidence hit its highest level in almost 10 years. The National Association of Home Builders/Wells Fargo index increased to 61 from 60 in August, its best reading since November 2005.

The Second-quarter economic growth was revised up to 3.7% from 2.3%. This was much larger than the expected 3.2%.

Consumer confidence in August jumped to its second-highest level since the end of the recession. The Conference Board's index climbed to 101.5 in August, far higher than an expected reading of 94. The index climbed to 92.5 from 82.3 in July, driven primarily by an improving labor market.

The Brazilian real fell against the US dollar as reports suggested negative growth in the Brazilian economy on a quarterly and annual level.

The euro and Japanese yen posted monthly gains against the dollar as both currencies benefited from a global stock-market panic and concerns that the Federal Reserve might wait until the end of the year or longer to raise interest rates.

South Africa’s rand fell to its lowest level against the dollar since 2001; and

the Turkish lira fell to a new record low against the dollar.

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On the other hand,

The Institute for Supply Management said its index fell to 51.1 in August from 52.7 in July, illustrating that manufacturing growth is at its weakest level since mid-2013. Economists had expected a reading of 52.2.

Though the US Federal Reserve has signaled it will raise interest rates gradually, the fear of the impact of the first rate rise and the expectation of subsequent pace still holds back most investors. The humongous amount of liquidity created by series of QE and their deployment need to be reversed. What kind of impact will it have on institutions and Govts across the globe is anybody’s guess. The latest trends emerging out of US point to increasing likelihood of interest rate hike in Sept 2015. The talk by the Fed Chair, the employment numbers for July etc point to the same thing. This has led to some Risk off in most markets. Commodities markets as it is suffering from China related issues have come under more bearish pressure due to this expectation. Gold which should do well in such a situation continues to remain weak but seems to have found some sort of bottom. However it is now more and more expected that the US economy will not come under too much turbulence when the rates start to inch up, but the impact will be felt in a lot of other developed and emerging economies. Global growth numbers could continue to be revised downwards. However the impact of interest rate hikes on economies and companies is too tricky to expect at this point in terms of negative impact. Fed officials have expressed confidence that the domestic economy is on track and that the time is right to raise interest rates after nearly seven years of keeping them near zero. It could make that move at its policy meeting Sept. 16 and 17. If markets remain volatile heading into the next meeting but economic data remains consistent with recent solid readings, that will make for a tough decision. And if the last few weeks have taught anything, it is that global markets will be poised for a big reaction, no matter what the central bank does. China

The Chinese first devalued the Yuan by 1.9% on Tuesday Aug 11, which was supposed to be a onetime measure. It followed it up again Wednesday with a 1.6% drop and Thursday they have further devalued it by 1.01% - a total of 4.4% devaluation over three days. It is now amply clear that it is an ongoing process and further devaluation is possible. This measure could bring turmoil among the bigger trading partners of China (including the US and European countries) and competitive devaluation among its competing countries including those from SE Asia.

As regards impact on India, the INR's sensitivity to the yuan is one of the lowest in the region. Compared to other Asian economies, Indian exports are less reliant on Chinese domestic demand and most products do not compete directly with those from China. India could benefit from cheaper capital goods imports, not just from China but also from the rest of Asia, if expectations of weaker Asian currencies come true. Over the longer term, continued CNY depreciation could have some negative impact on some tradeable sectors. Sectors such as manufacture of base metals, motorcycles and woven cotton fabrics

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are more vulnerable to relative price changes, given that India and China have a similar level of comparative advantage in these areas.

China’s Shanghai Composite kept falling despite the People's Bank of China's efforts to stem capital outflows in light of its weakened currency.

China's official Purchasing Managers' Index slid to 49.7 in August, down from 50 in July, its worst reading in three years. Separately, the Caixin China manufacturing PMI fell to its lowest level since March 2009, dropping to 47.3 in August. China's Shanghai Composite fell more than 1%.

The Peoples Bank of China finally moved on Aug 25 to address the concerns of the economy and markets.

Cut rates by 0.25%. The one year lending rates now will be 4.6%. Slashed bank-reserve requirements by 0.50% to 18%. Dropped a key control on rates for some bank deposits The reserve-rate cut will effectively add about $105.7 billion to the Chinese economy.

Commodities/Emerging Markets

Commodity prices are back to 2004 levels, due to both demand (China weakening earlier than expected), and improving supply. Oil, gas, iron ore, coal, and steel are among the worst affected. This is dramatically changing global trade (and thus capital) flows. Current account surpluses are shifting from oil exporters to the likes of China, Japan and Germany. Current account deficits shrinking in India and the UK but expanding in exporters like Brazil and South Africa.

Earlier oil producers exported capital through SWFs (Sovereign Wealth fund). But their combined current account at current oil price swings by US$0.5 tn to a deficit of US$100 bn: flows from them may be reversing, not just slowing (likely explaining the redemption-type selling seen lately).

China is the world’s largest consumer of commodities. A slowdown in China inadvertently results in a fall in global commodity prices. China imports ~USD 270 bn of Crude and ~USD 104bn of Iron ore. The past year has seen huge falls in commodity prices. Crude prices have fallen ~60% in the last year and copper prices are at a 6 year low. Iron ore & Coal have also fallen ~59% & 26% respectively. China being the world’s 2nd largest economy contributes ~14% to world GDP and ~50% to world GDP growth. Hence a slowdown in such a major economy is likely to have a ripple effect across the globe. For Australia, China accounts for around one-third of all exports and for the Sub-Saharan African region, China is the largest trade partner

Whether it’s sanctions (Russia), corruption at Brazil’s Petrobras, ruinously populist energy policies (South Africa) or social ones (Venezuela), or geopolitical instability (Turkey, Nigeria etc.), the markets–and that means to a large part domestic investors as well as foreign ones–have suddenly become intensely unforgiving.

Emerging markets are arguably facing ―the toughest environment since the Asia Crisis of the late 1990s‖ and they will drag on global growth into next year.

Many analysts expect further global devaluations if the US Federal Reserve, as expected, increases interest rates for the first time since the financial crisis later this year

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Indian Market Outlook Some of the positives emerging out of India during the month include:

The recent IIP (Jun up at 3.8% - a 4 month high vs 2.5% - revised- in May) came in as a positive surprise. This could mean that the economic growth could see an upturn in the coming days. The improving data could slow the RBI from effecting one more rate cut, though we think that the central bank would right now be more worried about monsoons, US interest rates and China rather than growth.

Consumer price index- (CPI) based inflation for July fell to 3.78% - an all time low as per the new series - helped by the base effect and a major slump in food prices vs 5.4% in June.

The Centre’s revenue from excise, customs duty and service tax grew an impressive 37.6 per cent in April-July this year to Rs 2.1 lakh crore, reflecting an uptick in consumption in certain sectors besides the increase in collection from hikes in tax rates, and withdrawal of a stimulus to consumer goods and automobiles. Indirect tax receipts growth of 39.1 per cent seen in July is better than the 33.3 per cent recorded in June, but below the 46.2 per cent recorded in April.

The Employees Provident Fund Organisation (EPFO) entered the stock markets on Aug 06. In FY16, the EPFO will invest around Rs 6,000 crore in ETFs. Labour Ministry had notified new investment pattern for Employees' Provident Fund Organization (EPFO) in April allowing the body to invest minimum of 5% and up to 15% of its funds in equity or equity related schemes. However, the EPFO management has decided to invest 5 % of its incremental deposits in ETFs only during the current fiscal. EPFO has not invested in equity markets so far.

On the other hand,

With global demand not showing any signs of a pickup, India's merchandise exports contracted for the eighth month running in July, registering a 10.3 per cent drop over last year. The trade deficit widened to $12.8 billion in July from $10.8 billion in June. Imports fell 10.3 per cent to $35.95 billion while exports came in at $23.1 billion. Oil imports were 35 per cent lower in July over last year while non-oil imports were higher by 3.80 per cent, suggesting improving domestic demand.

For the country as a whole, cumulative rainfall during monsoon season has so far upto 26 August been 12% below the Long Period Average (LPA). Rainfall activity was near normal in all the broad homogeneous regions of India except south Peninsula

The monsoon session of Parliament ended without conducting much legislative business amidst protests, ruckus and suspension of MPs.

International credit assessor Moody’s Investors Service on Tuesday forecast that India’s growth would slow to 7% in the year to March from 7.3% in the previous year because of below normal monsoon rains. Moody’s lowered its India growth forecast by half a percentage point from the 7.5% it estimated earlier. The government expects gross domestic product (GDP) to expand to 8% in 2015-16. The International Monetary Fund and the Asian Development Bank have forecast growth of 7.5% and 7.8%, respectively

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GDP growth for the first quarter of the financial year came in at 7.0% vs median consensus expectations pinning growth around 7.5%. This came as a clear disappointment to the market. Much of the difference between consensus expectations and the actual outturn is attributable to government spending and investments. The economy is on the mend and pockets of strength are visible such as in construction activity or trade, transportation and communications services. But the recovery is turning out to be slower than anticipated. We expect the RBI to respond to this by cutting policy rates by another 50 bps over the course of FY16 and we do not rule out a policy move before the next scheduled review on September 29th.

The annual infrastructure output growth slowed to a three-month low of 1.1% in July, dragged down by a contraction in steel production and a slowdown in output of coal and refinery products. The output had grown 3 % in June. The infrastructure sector accounts for nearly 38% of the industrial output.

Steel production shrank an annual 2.6% in July as compared with a 4.9% growth in June while coal and refinery production slowed down to 0.3% and 2.9% from 6.3% and 7.5% a month ago respectively. On a flip side, electricity and fertilizer sector did well with a growth of 3.5% and 8.6% respectively.

It’s not just the Land Acquisition Bill, the NDA government has also put on hold proposed amendments to the Seeds Bill, mainly due to a clause on the use of genetically modified (GM) seeds that it fears would portray it as being anti-farmer.

BJP’s preparation for Bihar elections (due later this calendar year) and the ultimate performance will be important. BJP had won 91 of the 243 seats in 2010. However post the re alignment of political forces, whether BJP will be able to maintain or improve its performance in the forthcoming elections will be keenly watched. This is important from the sentiments for BJP as well as its goal of getting a majority in Rajyasabha in 2017. Any slippage in this could impact its ability to carry out wide ranging reform measures. The recent correction in markets was triggered by a culmination of several near term setbacks like the sluggish capex cycle, impatience with slow policy evolution, seemingly overvalued markets in view of the disappointing Q4 earnings, concerns of a weak monsoon, fears of a US Fed rate hike, China market crash and Chinese yuan devaluation (and its impact on other currencies and global growth). The markets were expecting a rate cut, which did not materialize. With the results season over and the Parliament not in session, the markets will pay attention to global markets and the action of the Government domestically. In the meanwhile local issues (like intensity and spread of monsoon and its impact on availability/pricing of foodgrains, impact on rural spending and impact on RBI’s view on interest rates) and international issues (China slowdown and yuan devaluation) cou ld drive the markets. The improvement in India’s macroeconomic position (negligible CAD, lower inflation and improving fiscal position) is yet to translate into a strong economic and earnings recovery. Valuations that were near full till now, earnings outlook remains subdued and there is

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growing uncertainty around US Fed rate lift-off and some amount of disenchantment with emerging markets in general among investors. We like India’s medium-term story given the government’s focus on the right issues— correcting India’s historical structural problems such as high current account deficit, high fiscal deficit and high inflation; some of these parameters have already improved dramatically while others are improving and improving India’s investment climate with focus on establishing a rule-based system for business. There is a clear opportunity for long term investors to participate in India’s much awaited macro recovery. Volatility concerns will, however, persist as global events unfold. Although India remains fundamentally strong, the spread of contagion is always a possibility. As flows reverse, the seller could be price insensitive, and stocks with highest rise in FII ownership of late could have an overhang. In 11 times that the S&P 500 fell by more than 5% in August, it has declined 80% of the times in September and fell an average of nearly 4%. It is not necessary that historic trends should repeat, but the odds favour that. We expect the Nifty markets to trade in the range of 7450-8150 levels in the month of September.

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