ADVICE for the WISE

Newsletter –December’11

2

Economic Update 4

Equity Outlook 8

Debt Outlook 11

Forex 13

Commodities 14

Index Page No.

Contents

Real Estate 15

Dear Investor,

The million dollar (more like Trillion Euro!) question everyone seems tobe asking is “will the Euro survive?” We believe that Euro’s survival hasbecome less certain than it was a month ago. Most of this is owing tothe absence of a Fed-like response in Euro-zone to the present crisis.This goes back to the deep-rooted ideological differences amongst theAnglo-Saxon economies and Germany. While the former believe in theefficacy of monetary policy in managing the fallouts of crises, the latterinsists on fiscal prudence as the primary solution to the present crisis.Hence the western economists and leaders are busy cooking up oneidea after another of how Eurozone can go about fighting the crisiswith monetary policy tools – including Eurobonds, ECB’s Euro-printingand mutualization of sovereign debt within Eurozone. Germangovernment on the other hand is skeptical of fighting debt problemswith more debt as well as continuing with “financialization” whichstarted most of the trouble in the first place. Apparently frustratedwith Germany’s resolve to avoid printing of Euro by ECB, the group of 6central banks went ahead and offered low cost dollar credit lines toEuropean banks. This did prop up equity markets globally towards theend of November – also fuelling speculation that the end might be insight for the debt crisis in Euro-zone.

Some think that having the house on fire is a wrong time to be arguingabout repairing of the fire engine. Others suggest that the mostimportant reforms happen typically during times of crisis (remember1991 in India!)

There seems to be a certain politico-economic brinkmanship thatGermany and rest of the Eurozone countries seem to be engagedin. This is precisely what makes us worry about the future of Euro– and there is that small chance that the Germans may push theirfiscal prudence plans a little too far. This is what might cause thebreak-up of the Euro.

The Indian domestic market sentiment has been less thancheerful due to the political logjam over retail FDI. The volte-faceby the opposition on their stance about retail FDI reminds us ofthe age-old tendency within Indian politics for the opposition tooppose everything nearly blindly. How the government deals withthis set-back and how much of its new-found resolve to continuewith reforms survives this bickering is what will drive themacroeconomic momentum in next couple of quarters. Weexpect a muddle-through scenario to continue for the next fewmonths.

Inflation has fortunately remained out of the limelight – with theRBI governor explicitly predicting a fall in inflation by the end ofFY12. We have now become cautiously positive on long termdebt. In the next 2-3 year horizon it would be a good idea to beton interest rates to fall – this is best done through zero couponlong term quasi-sovereign bonds like NABARD and REC. Theexpected returns can range between 8-10% p.a. if interest ratesdo not fall and 15%-20% p.a. if they do fall by 1%-2% over next 2-3 years.

3

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”

4

As on 30st

Nov 2011 Change over last month

Change over last year

Equity markets

BSE Sensex 16123 (8.9%) (17.4%)

S&P Nifty 4832 (9.3%) (17.6%)

S&P 500 1195 (4.6%) 1.2%

Nikkei 225 8435 (6.2%) (15.1%)

Debt Markets

10-yr G-Sec Yield 8.73% (29 bps) 54 bps

Call Markets 8.55% 0 bps 295 bps

Fixed Deposit* 9.25% 0 bps 225 bps

Commodity markets

RICI Index 3693 (1.2%) 2.0%

Gold (`/10gm) 28841 6.0% 40.7%

Crude Oil ($/bbl) 111.5 3% 29%

Forex

markets

Rupee/Dollar 52.2 (6.3%) (11.7%)

Yen/Dollar 77.9 (2.8%) 8.0%

Economic Update - Snapshot of Key Markets

10 yr Gsec

Gold

* Indicates SBI one-year FD

75

80

85

90

95

100

105

110

115

120Sensex Nifty

S&P 500 Nikkei 225

6.80

7.30

7.80

8.30

8.80

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`/$

5

US

Europe

Japan

Emerging economies

• China’s HSBC PMI Index dropped at 47.7 in November from 51.0 in October, signalling asolid deterioration in manufacturing sector performance. Combined with faster thanexpected easing in inflation implies that growth is set to overtake inflation.

• The Conference Board Consumer Confidence Index, rose to 56.0 in November up from 40.9in October signalling that consumers' apprehension regarding the short-term outlook forbusiness conditions, jobs and income prospects has eased considerably.

• Unemployment rate has fallen to 8.6% for the month of November from 9.0% in October .

• The final Markit Eurozone Manufacturing PMI fell to 46.4 in November, from 47.1 inOctober, its lowest level since July 2009 and unchanged from the earlier flash estimate.The PMI has signalled contraction in each of the past four months.

• Greece's austerity-fuelled recession drove the budget deficit wider in October. The centralgovernment deficit grew by an annual 11 percent to 20.10 billion euros ($27.19 billion) inthe first 10 months of the year

• The seasonally adjusted Markit /JMMA Purchasing Managers’ Index (PMI) posted 49.1 inNovember, down from 50.6 in October, signalling a renewed deterioration inmanufacturing sector operating conditions.

• Unemployment rate increased to 4.5% in October from 4.1% in Sept’11.

Economy Update - Global

6

Economy Outlook - Domestic

• India's economic growth rate slowed down further to 6.9per cent in the second quarter (July-September) of FY12 ascompared to 8.9 per cent achieved in the same quarter ofthe previous financial year. The GDP growth rate for Q1 andQ2 FY11 was revised downwards to 8.1 and 8.4 respectivelyfrom the previous estimates of 9.3 and 8.9%.

• This was attributed largely to the negative growth in‘mining and quarrying’ and steep fall in the growth ofmanufacturing sector, as compared to their levels ofgrowth in Q2 of 2010-11.

• A steady rise in interest rates combined with stubbornlyhigh inflation has impacted demand and credit sensitivesectors. The Reserve Bank has also reduced its forecast forreal GDP growth from 8 to 7.6 per cent. The uncertainty inthe global markets may also impact the exports and theservice sector of the economy hence making the growthtarget difficult to achieve.

IIP monthly data

GDP growth

• IIP figure declined for the third consecutive month to 1.9 per cent in September compared to 4% in the last month. During the April-September period this fiscal, IIP growth stood at 5 per cent-against 8.2 per cent in the same period last year. The mining sector saw negative growth at (5.6%) in September’11 as against the 4.3% growth in output in September’10. Capital goods registered negative growth at (6.8%) in September’11 as against the 7.2% growth in September’10. The steep decline in the capital goods segment highlights the deceleration in the manufacturing sector.

• The Industrial output in September’11 grew at the lowest rate in the last two years, reflecting the slowdown in the country’s pace of economic growth. In addition to the high interest rates that has been impacting economic activity, the weak global demand too has been stated to be intensifying the slowdown in the economy. In addition, persistent high inflation, rising input costs widening deficits and the weakening currency have been contributing in impeding the growth in industrial output.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Sep 10

Oct 10

Nov 10

Dec 10

Jan 11 Feb 11

Mar 11

Apr 11

May 11

Jun 11 Jul 11 Aug 11

Sep 11

Oct 11

6.0

8.68.1 8.4 8.3

7.8 7.7

6.9

4.0

5.0

6.0

7.0

8.0

9.0

FY10(Q3) FY10(Q4) FY11(Q1) FY11(Q2) FY11(Q3) FY11(Q4) FY12(Q1) FY12(Q2)

Economic Outlook - Domestic

• The credit grew 19.6% on a y-o-y basis while deposits grew at ~18% in October.

• Owing to the successive increase in the cost ofborrowing, a moderation has been seen in the creditgrowth and the current estimate for the Fiscal is ~17-19%.

• On account of the slowing growth in the economyand the expected decrease in inflation by December,it is expected that the RBI will pause any interestrate hikes.

• The Wholesale Price Index was reported at 9.73percent in Oct’2011 vis-à-vis 9.72% inSeptember‘11. Food and fuel prices posteddouble-digit growth of 11.06% and 14.79%respectively. The manufacturing WPI steadiedabove 7.66 percent from 7.69% last month

• With the monetary tightening stance by RBI, wedo expect WPI inflation numbers to moderateout eventually.

Growth in credit & deposits of SCBs

7

Wholesale Price Index

* End of period figures

5.0%

10.0%

15.0%

20.0%

25.0%

30.0% Bank Credit Aggregate Deposits

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

8

Equity Outlook

The month of November saw a sharp fall of ten percent in Indian equity markets. There was significant amount of volatility on theback of fresh concerns about the fiscal health of Euro area countries. FIIs sold almost a billion dollars worth of their holdings. Rupeeweakened sharply against the dollar which added to the nervousness.In Europe, sentiment turned for the worse after the German bond auction received a poor response. There were concerns that thefinancial health of peripheral euro area countries has started affecting even the core of Germany and France. The French bond yieldshave continued to spike and the spread between French and German yields in now close to 2%. There is an increasing amount of talkabout French rating being downgraded. The five and ten year Italian bond yields have spiked up and remained above 7%. Italy isfacing an enormous amount to pressure to cut its deficit and saw a new government being sworn in. However, investors continue towait for a definitive move towards the euro bonds barring which volatility in Europe might continue for an elongated period of time.Final number for third quarter GDP data in US came in at 2%, below the earlier estimated 2.5%. Macro-economic indicators in UScontinue to be positive and have eased concerns about US economy moving towards a double-dip recession. US consumer demandhas been holding up so far and the Black Friday retail sales numbers where quite impressive. The ISM manufacturing index forNovember came in at 52.7 which shows robust growth. As of now, there are no indicators of any recessionary trend in US economy.The second quarter GDP growth rate in India came in at 6.9%, lowest in nine quarters. This number has confirmed a significantslowdown in manufacturing and industrial activity in the country. We expect the growth to weaken further in next quarter. RBI haseffectively hiked rates by 500 bps in last sixteen months and that is showing in the growth numbers. We believe that RBI would refrainfrom any further tightening and weak growth numbers would force RBI to start the easing cycle earlier than expected. Considering avery tight liquidity scenario, a CRR cut is a distinct possibility.

The rupee continued its slide to 52.5 before RBI invented to provide some stability. Rupee has been one of the worst performingAsian currency due to high current account deficit that the country is running. We believe that the current rupee levels provide a veryexciting entry opportunity in equity markets for dollar investors. The last set of second quarter earnings were disappointing. Rupeedepreciation has also resulted in forex losses. Several companies have seen a huge hit to bottom lines due to high interest rates andcommodity prices. We expect the softness in earnings to remain for at least one more quarter. However, Markets have alreadydiscounted a lot of potential negatives and further correction in stock prices might be limited.

While interest rate and inflation cycle might turn for the positive in next few months, Global cues will play an important role indeciding the market direction in the short term.

Sector View

9

Sector Stance Remarks

Healthcare Overweight

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. We would bet on the opportunity in Generics and CRAMS space

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.

BFSI Neutral

Financial sector is undeniably the lubricant for economic growth. Whether the growth comes from

consumption or investments, credit growth is inevitable. Being a well regulated sector, BFSI in India has good

asset quality and capital adequacy ratios. Despite the increasing in interest rates, we believe banks will be

able to pass on higher cost of funds to clients as demand remains strong

Automobiles Neutral

Demand outlook remains robust with strong earnings growth. Raw material prices have started coming

down which would boost margins. We are more bullish on two-wheeler and agricultural vehicles segment

due to lesser competition and higher pricing power.

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.

Sector View

10

Sector Stance Remarks

Metals Neutral

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

developed parts of the world. We believe the commodity prices will bounce back once growth recovers

and hence would be positive on industrial metals space.

Power Utilities Neutral

We like the regulated return charteristci of this space. This space provides steady growth in earnings and

decent return on capital.

IT/ITES Underweight

IT space might come under pressure due to continued concerns about growth in developed parts of the

world. While US and European customers of Indian IT companies are in good health, Order inflows might

slow down in 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.

Cement UnderweightCement demand will certainly grow over the next three years. But the issue is on the supply side. We do

see an oversupply situation for the next 3-4 quarters.

E&C Underweight

The USD 1 trillion Infra opportunity is hard to ignore. However, The significant slowdown in order inflow

activity combined with high interest rates has hurt the sector. We will review the stance once the interest

rate cycle gets reversed

11

Debt Outlook

• The 10 year benchmark G–Sec yield decreased by 29 bps in October to close at 8.73%.

• The shorter term papers rallied to close at 8.71 percent for a tenor of one year while medium termpaper yields decreased to 8.68 percent after a sharp rally last month. The one year AAA ratedcorporate bond yields were at 9.8 percent while the ten year bonds traded at 9.89%.

• Though no easing has been seen in the inflation figures, a pause is expected by the RBI and no hikemay be seen in the immediate future though the central bank would monitor the inflation closely.

• Advance tax outflows in December may tighten the liquidity in the system further and the bondmarket may witness temporary hardening of yields.

10-yr G-sec yieldYield curve

(%)

8.2

8.4

8.6

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9.0

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1.8

2.7

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15

.91

6.8

17

.71

8.5

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6.80

7.30

7.80

8.30

8.80

9.30

Debt Strategy

OutlookCategory Details

Long Tenure Debt

RBI hiked the interest rates for the 13th time since march 2010 by25 Bps, the repo rate now stands at 8.5% and reverse repo at7.5%. RBI has shown an intention to pause further rate hikes.Our stance on long term debt remains neutral and we believethat it may be a good time to start looking for interestinginvestment opportunities in the medium term.

Some AA and select A rated securities are very attractive atthe current yields. A similar trend can be seen in the FixedDeposits also. Tight liquidity in the system has alsocontributed to widening of the spreads making entry atcurrent levels attractive.

12

We recommend investment into short term bond funds witha 6-12 month investment horizon as we expect them todeliver superior returns due to high YTM. We have seen theshort term yields harden due to reduced liquidity andconsecutive rate hikes prompted by inflationary pressures. Tillthese factors do not stabilize, we see Short term bond fundsand FMPs as an interesting investment option.

Short Tenure Debt

Credit

13

Forex

• The INR has depreciated across all major currencies inthe month. The Rupee started depreciating against theUSD from August 2011 and settled at Rs 52.10/ USD, ason November 23, 2011. This was a decrease of 18.28%since August 2011.

• The major drivers for the INR to depreciate have been :Withdrawal by FIIs, Strengthening of the USD, wideningcurrent account deficit and lack of other capital inflowslike FDI etc.

• With winter, the demand for oil and consequently dollaris only expected to move further upwards.

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

• India’s exports grew 10.8 percent in October, while importsgrew by 21.7 percent. Impacted by the uncertainty in the globalmarkets, a drastic decrease has been seen in the exports henceincreasing the trade deficit to a four year high of USD 19.6billion.

• Capital account balance was positive throughout FY11 andstood at `273133 Cr. at the end of the year. For FY 12, thecapital account is at `93,621Cr. for Q1.

• We expect factors as higher interest rates to attract moreinvestments to India. Increased limits for investment byFIIs would also help in bringing in more funds thoughuncertainty in the global markets could prove to be adampener.

-10000

40000

90000

140000

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

Capital Account Balance

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

USD GBP EURO YEN

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100Export Import Trade Balance (mn $)

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Commodities

Precious

Metals

Oil & Gas

The recent bout of global uncertainty have pressurizedcrude oil amid concern of double dip recession in the USand global economy slipping into red. We expect crude oilprices have topped out in the interim and can only movedown from here on. We have seen some firmness in theprices post the announcement of Greece bailout package,nevertheless, any such temporary uptick shall not besustained. Expect crude oil prices to be steady.

Crude

GoldThough fundamental concerns still exist in the Eurozone,the group of 6 central banks have offered low cost dollarcredit lines to European banks. In the domestic market, thefundamental factors largely remained unchanged andIndian markets had seen fresh buying demand during thefestive Diwali Season despite prices staying higher. If thecurrent solution paves the way for a solution to the crisisand if globally, the currencies strengthen, we may witness aslight dip in the Gold prices as gold is inversely correlatedto the greenback hence providing a hedge.

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Real Estate Outlook - I

15

Asset Classes Tier-1* Tier-II**

Residential

Strong pre-launch sales still keeps the developers far from

any correction, though sales are down to alsmost 35%

since last quarter, there is no correction visible. The over-

supplied locations are stagnant and would be similar for

the coming 2 quaters. Entry points anywhere from Rs.

3000 - Rs. 6000 per sqft in cities like Pune, NCR,

Hyderabad, Chennai and Bangalore are still considred

lucarative by first time home -buyers depending on their

usage. The retail investors (2nd home buyers) and HNI

investors vary or delaying their decision with expectation

of correction. Mumbai stands still tall with prices on their

peak in over-supplied market also. Correction again are

reported only on media and not on ground level.

The demand is keeping the Tier II cities afloat, the

infrastructure development in these cities have made the

residential development spread across the city limits. On

an average price is still affordable. Key development

developer are seeing demand of 3BHK and luxury

development but are only doing well if the project size is

limited to 100-150 units. The trend seems to be favorable

since there is lot of Investor demand comes from smaller

cities closer to these Tier-II & III cities. Excellent time to

buy anything between Rs. 3000-3500 sqft with known

developers.

Advice Price point entry is the key. Good time to sell. Time right to buy, look at 3-8 acre developments only

Commercial/IT

Still in the shadows of over-supply and cautious expansion

approach by corporate, this segment has gone through

correction. Rates per sqft have seen almost 30% down-

trend and will be stagnant for the coming 2-3 quarters.

Surely, the segment is at the down-tip of the cycle, and is

the best opportunity for companies looking for long term

holding of real estate office space.

Commercial segment not that significant, but unlike Tier-I

the price differentiation is double favoring commercial

since most of them are in CBD areas.

Advice Excellent time to buy smaller office spaces at CBD areas Space not defined well, depends on independent needs.

Real Estate Outlook - II

16

Asset Classes Tier-1* Tier-II**

Retail

The FDI allowance is given lot of impetus to this

sector, its been now almost 3 years since retail has

seen a major transformation on all its business

aspects and have been built to suit Indian way for

consumerism. Low cost, high reach, heavy variety,

less innovation, existence with competition,

maximizing bottom line than top-line approach have

been making the retailers smarter. Revenue share

model with a built in MG is how the deals are done

Retail is slow in these markets; unorganized markets

are still a hot choice. Most high-street locations are

expensive to own thus have a high lease rental and

have witnesses heavy churn. Investment would

always have capital protected due to dearth of

available space..

Land

Most interesting times, traded now more as

commodity, very fastly getting absorbed, locked.

Non-real estate sector see immense opportunity

since it can be used as tangible and most credible

pledge against business

Still available cheaper, plotted development is a hit

since the trend of standalone homes are prevalent.

Advice Hold Land, if Owned Hold Land, if Owned

1. Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta2. Tier II* markets includes all state capitals other than the Tier I markets 3. The IC note is proposed to be presented every quarter

Why Karvy Private Wealth?

We are an open-architecture firm at two levels – asset class level and product level :

• Offering COMPREHENSIVE choice of investing across all asset classes• Offering EXTENSIVE choice of multiple products from different product providers under each asset class

Open Architecture – Widest array of products

Intensive Research

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

When you become a Client of KPW, besides getting intelligent & practicable Investment Advice, you get the benefit of “The KPW 3-S Service Promise” :

• Smooth and Hassle Free – Attention, Service & Convenience• Sharp and proactive – Portfolio monitoring and tracking• Smart –Incisive insights on markets and Investment products

The KPW 3-S Service promise:

Group-wide, we have no Mutual Fund or Insurance products of our own unlike most of the financial services groups (banks orbroking houses), who are doing wealth management. Neither do we have exclusive tie-up with any single insurance company likeall banks do.

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 or other Karvy Group companies. The information containedherein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completenessthereof. 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 decisionsbased on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While actingupon any information or analysis mentioned here, investors may please note that neither Karvy nor any person connected with any associatedcompanies 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 fromtime 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 ofshares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. Allemployees are further 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 consulttheir respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws oncethe new Direct Tax Code is in force – this could change the applicability and incidence of tax on investments

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Mumbai office Address: 702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051

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19

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