ADVICE FOR THE WISE

June 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,

The heat is on. While many of us have been vacationing in cooler climes, the Sensex has kept itself rather busy, gaining another 4% during the month

of May. The up move has come largely on the back of better-than-expected corporate results and expectations of a good monsoon. Markets are also

taking cognisance of various indicators like improved auto sales, higher steel and cement off take, public infrastructure spending, etc. which are

positive signs of an imminent economic recovery.

Crude prices have silently crept up and are currently hovering at the $50 level, almost double from the January lows. So despite the adverse

implications of higher crude prices on the Indian economy, there seems to be some positive correlation between crude prices and the equity markets.

Though this pattern may not have always played out in the last few decades, the first few months of 2016 certainly seem to indicate so. The main

reason for this is the significantly high weight age that the Energy sector has in indices the world over. When oil plummeted to sub-$30 levels, it

seriously impacted the profitability of some of the world’s biggest corporations, not only causing their stock prices to fall sharply, but also impacting the

broader markets in general. It also indicated a global recessionary trend, thus affecting investor sentiment and causing them to become nervous and

risk-averse. The bounce back in crude has brought the price to a level that makes it profitable for companies to drill, creating a sense of well-being for

both, the Energy sector as well as the countries whose economies are dependent solely on oil. Where crude prices go from here remains to be seen.

After several quarters of benign inflation, the WPI rose to 0.34% while retail inflation soared to 5.39% in April 2016. This, coupled with higher oil

prices would make it difficult for Governor Rajan to announce a rate cut at the next RBI policy meeting on 7th June. Across the globe however,

Janet Yellen’s comments on improving economic data in the US has the markets believing that a rate hike by the US Federal Reserve is a high

possibility during its next meeting in mid-June. The outcome of Britain’s referendum on Brexit is also an event that we will be closely watching.

With markets factoring in all the good news for now, conventional logic says that short term investors need to be cautious. But when the stock

market catches momentum, all negative predictions may be proven wrong.

There are of course, many more bulls than bears when it comes to a 1 year plus view. Long term investors may continue their investments and

look to buy into any dips.

Wish all of you a happy monsoon season.

DID YOU KNOW

The size of the world bond markets

is close to US $31.4 trillion which is

nearly equivalent to the total GDP

of all countries in the world.

Indian auto industry currently

employs 19.5 million people both

directly and indirectly

.

The World's First Paper Money

was created in China 1,400 years

ago.

DOMESTIC EQUITY OUTLOOK

For the month, equity markets continued with its positive run. In line with

expectations, large caps out-performed mid and small cap indices.

Economic green shoots, better corporate numbers and expectations of

good rainfall gave strength to the overall markets. Domestic macros had

begun on a tepid note with latest monthly CPI moving up to 5.4%. On

the other hand, March Industrial growth came below expectations at just

0.1%. Wholesale price index at 0.3%, too turned positive after more than

a year of contraction. Higher food inflation pushed up the WPI as well as

retail inflation numbers. On the corporate front, March quarter has been

encouraging. Performance of Banking sector was on expected lines with

higher provisioning requirement denting the profits. Sectors like

Automobiles, Cement and FMCG came out with good numbers. Early

indicators suggest corporate performance to improve further in the

coming year. Since equities have moved up by more than 15% in just

one quarter, near term global events could keep markets range-bound.

Not only investors but RBI too would keenly monitor the probable rate

hike by US Fed in its June meeting. With higher inflation and upcoming

global events, one does not expect RBI to cut the rates in the coming

policy. March quarter GDP at 7.9% re-iterates India as one of the fastest

growing economies; making our equity markets a preferred investment

destination for long term.

As on 25th

May 2016 1 Month Change

1 Year

Change

Equity Markets

BSE Sensex 25,881 -0.48% -5.99%

CNX Nifty 7,934 -0.35% -4.85%

BSE Mid Cap 11,079 -0.09% 4.43%

BSE Small Cap 10,953 -1.42% -1.90%

80

85

90

95

100

105

110

115

120 S & P BSE Sensex CNX Nifty BSE Midcap BSE Smallcap

DOMESTIC EQUITY OUTLOOK

GOVERNMENT POLICY

Passage of Bankruptcy bill by Rajya Sabha during the month is a positive. The move would help lenders to take tougher actions

against the corporate defaulters. Going ahead, all eyes would be on the monsoon session of Parliament where some of the key

bills including the GST bill would be presented.

WHOLESALE PRICE INDEX

• India's wholesale prices index stood in positive territory after

17 Months at 0.34% for April, 2016 as compared to -0.85% for

the month of March.

• Food inflation increased in the month of April by 6.32%.

Vegetables declined by 2.21%. Inflation in the fuel and power

segment was -4.83%%, while that of manufactured products it

was 0.71% in April..

CONSUMER PRICE INDEX

• CPI for the month of April spiked at 5.39% as compared to

4.83% in March.

• Year-on-year, cost of food and beverages rose 6.21 percent

(5.27 percent in March).

• The food prices rose by 6.32% compared to 5.21% in the

previous month.

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16

WPI CPI

Source – Tradingeconomics

IIP

• Industrial output in India fell to 0.1% percent year-on-year in March

of 2016, against 2% in February 2016.

• Manufacturing contracted 1.2%, as against 0.7% in February.

Meanwhile, the mining sector output contracted by 0.1% in March

2016

• The cumulative growth for April – March 2016 stood at 2% as per

CSO.

GDP

• India's Gross Domestic Product (GDP) growth for the fourth

quarter of the current financial year grew at 7.9% versus a

downwardly revised 7.2% for the previous quarter.

• Manufacturing sector continued to show a robust growth of 9.3%,

whereas agricultural growth rebounded and grew at 2.3%. Mining

sector witnessed a growth coming at 2.2% Y-o-Y.

-5.0%

0.0%

5.0%

10.0%

15.0%

Mar 15

Apr 15

May 15

Jun 15

Jul 15

Aug 15

Sep 15

Oct 15

Nov 15

Dec 15

Jan 16

Feb 16

Mar 16

IIP

4.0

5.0

6.0

7.0

8.0

9.0

GDP

Source – Tradingeconomics

DOMESTIC DEBT OUTLOOK

The yields on 10 Yr G sec closed at 7.46% which is 1 bps lower

than the last months close of 7.47%

A report released by Crisil said that while India needs around

Rs 43 lakh crore ($650 bn) for infrastructure build-out over five

fiscals to 2020, the country must look beyond the banks.

Foreign investors pulled out close to Rs 6,000 crore from the

Indian debt market in May after pumping in huge money in the

preceding month.

As on 25th

May 2016

1 Month

Change 1 Year Change

Debt Markets

10-Yr G-Sec-

Yield 7.46 (1bps) (21bps)

Fixed Deposit 7.25 0bps (75bps)

7.20 7.40 7.60 7.80 8.00 8.20 8.40 8.60 8.80 9.00 G-Sec

10 YR Gsec Yield 5 YR Gsec Yield 15 YR Gsec Yield

0

100

200

300

400

AAA AA+ AA AA- A+ A A- BBB+

Corporate Bond Spreads

5 Years 10 Years 15 Years

Source – Reuters

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 (8.5%-11%) 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, 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 only after

studying the macro-economic data such as inflation, movement in crude oil prices and so on 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

With the likelihood of another rate cut being minimal and the uncertainty with regard to the monsoon and global

commodity prices, particularly crude oil, a rally in G-Sec yields is unlikely. Investors should start exiting their

investments in Gilt Funds and Long Term Income Funds and go for accrual based short term funds.

GLOBAL EQUITY OUTLOOK

As on 25th

May 2016

1 Month

Change

1 Year

Change

Equity Markets

MSCI World 1668 -1.00% -6.30%

Hang Seng 20368 -4.85% -27.90%

S&P 500 2090 -0.06% -0.65%

Nikkei 16757 -3.43% -18.01%

GLOBAL INDICES

70

80

90

100

110

120

130

140 MSCI World Hang Seng S&P 500 Nikkei

GLOBAL EQUITY OUTLOOK

•All eyes would be on the forthcoming US Fed meeting in June. Better employment data and uptick in consumption suggests a higher probability

of rate hike in this meet.

•”Brexit” would be another important event to watch out for, that can potentially lead to volatility in global currency and equity markets

GLOBAL ECONOMY UPDATE

UNITED STATES U.S. economic growth slowed in the first quarter although not as sharply as initially thought, as a surge in

home building and steady inventory accumulation partially offset the drag from a steep decline in business

investment.

The Federal Reserve sent a sharp, simple message to financial markets. The Fed is thinking seriously

about raising its benchmark interest rate at its next meeting, in June. Fed’s April meeting, which said

explicitly that most officials thought “it likely would be appropriate” to raise rates in June if the economy

shows clear signs of a rebound from a weak winter.

JAPAN

Japanese capital expenditure accelerated in the first quarter from the prior three-month period, suggesting

gross domestic product growth could be revised up, but analysts remain wary about the outlook given

growing pressure on corporate earnings.

Japanese Prime Minister Shinzo Abe is expected to announce that the government will delay a scheduled

sales tax hike by two-and-a-half years, but will likely bow to pressure from his coalition partner not to call a

snap general election.

Source – Reuters

GLOBAL ECONOMY UPDATE

EUROPE Greece and its international lenders are inching towards an accord over a set of extra measures

demanded from Athens to qualify for vital rescue funds.

A vote by Britain to leave the European Union in a referendum next month would create "a negative

dynamic" among the bloc's member states, German Foreign Minister Frank-Walter Steinmeier said.

EMERGING

ECONOMIES

Indian manufacturers increased activity for a fifth consecutive month in May but the pace of expansion

was weak as output growth softened for the second month in a row, a business survey showed.

Activity in China's manufacturing sector expanded marginally in May, an official survey showed. The

official Purchasing Managers' Index (PMI) stood at 50.1 in May, compared with the previous month's

reading of 50.1 and just above the 50-point mark that separates growth from contraction on a monthly

basis..

Source – Reuters

GLOBAL DEBT OUTLOOK

China is reopening its securitised bad debt market with two deals

worth Rmb534m ($81.6m) this month, eight years after regulators

shuttered the market at the onset of the global financial crisis.

Global fixed-income ETFs, which track bond indexes and trade like

stocks, attracted $60 billion of inflows this year through May 25,

according to data compiled by BlackRock Inc. That’s the most for

the period since the funds were created 14 years ago and on pace

to top last year’s record total of $93.5 billion.

Russia on 24th May sold its first bond since the country was placed

under international sanctions over Ukraine, but its pricing was

delayed and the bond was almost half the size that had been

expected. Part of the problem for many potential buyers was linked

to the role of market utilities which help settle bond transactions.

Ratings Country 10 Yr G-Sec Yield 1 Month

Change

AAA

Germany 0.14% (11 bps)

Hong Kong 1.33% 1 bps

Sweden 0.81% 18 bps

Switzerland -0.32% (6 bps)

AA+ USA 1.84% 2 bps

AA-

China 2.95% 5 bps

Japan -0.12% 1 bps

Source – Reuters

SECTOR OUTLOOK

SECTOR OUTLOOK

SECTOR STANCE REMARKS

Automobiles

Passenger vehicles and CVs will continue to outperform two-wheeler segment. Tractors to 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.

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

BFSI Private sector banks continue to deliver earnings in line with expectations. However, PSBs delivering poor numbers on

higher slippages and lower credit growth. We expect this trend to continue for next few quarters.

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 saw uptick in South region. Early signs of recovery, specifically hopes of bounce back

in North and West region due to pick up in infrastructure. Cost benefits would continue to drive earnings.

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.

SECTOR OUTLOOK

SECTOR STANCE REMARKS

Energy Crude prices at 6 month high though at substantially lower on annual basis. Nil subsidy in FY16 for OMC’s is a positive.

Trend expected to continue.

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 Q2FY17 will have negative implications.

Metals Lower global growth and Chinese slowdown has kept the growth subdued. Some recovery seen over past few months

with Chinese economy stabilizing. Long term prospects continue to remain weak.

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

Gold, in line with expectations, corrected ~6% after peaking near $1300 during the month. Strengthening of dollar on back of probable rate hike by US Fed led to the fall. For near to medium term, the larger band of $1100-1300 remains.

• As on 25th May, 2016 : 28,980 per 10gm

• 1 month change : -0.28%

• 1 year change : 7.21%

24000 25000 26000 27000 28000 29000 30000 31000

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Gold

COMMODITIES

CRUDE OIL

Crude oil prices have been hovering around $50 mark. Both

Nymex and Brent crude, from decade lows, are at a six

month high mainly on account of signs that global surplus is

easing amid declining output.

• As on 25th May, 2016 : $47.77 per bbl

• 1 month change : 11.20%

• 1 year change : -22.50%

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Crude

Currency As on 25th

May 2015 1 Month Change 1 Year Change

USD/INR 67.44 1.07% -5.34%

GBP/INR 98.56 1.85% -0.18%

Euro/INR 75.21 0.04% -7.40%

Yen/INR 61.32 1.83% -15.02%

USD/Euro 0.89 1.21% -1.48%

FOREIGN EXCHANGE

• A body of global standards-setters Thursday laid out new

principles for the safer and more transparent functioning of

the world’s foreign-exchange markets, aiming to restore

trust in currency trading following incidents of misconduct

in recent years.

• The Bank of Jamaica (BOJ) will be maintaining a presence

in the foreign exchange market until it settles.

• India's foreign exchange reserves went down to $360.90

billion as on May 20, the Reserve Bank of India (RBI) said.

• Nigeria's central bank is adopting a flexible foreign

exchange rate regime, Governor Godwin Emefiele said, in

a policy U-turn designed to boost exports and stave off a

recession in Africa's biggest economy.

1.07%

1.85%

0.04%

1.83%

0.00%

0.50%

1.00%

1.50%

2.00%

USD GBP EURO YEN

WHAT’S TRENDING

VENEZUELA CRISIS

What is it?

Supermarket shelves in Venezuela are chronically bare, and power shortages are so severe that government offices are now open only two days a week. The

health care system has collapsed, the crime rate is one of the world’s worst, and inflation is rapidly eroding what remains of the currency’s value..

Causes

• The price of oil, Venezuela’s only significant export, has plummeted, which means revenue could fall by 40 percent this year. The government’s huge

borrowing, has helped bring the crisis to a head because Venezuela now has far less money to repay its foreign debt, forcing Mr. Maduro to slash imports

in order to avoid default.

• On top of that are the consequences of a drought, which has shriveled the country’s hydropower generation, a critical source of electricity.

• The country owes roughly $120 billion to foreign creditors and must make a payment of nearly $7 billion this year, most of it in the final quarter.

• Its foreign debt is partly owed by the state-owned oil company, PDVSA, the country’s principal generator of revenue. Venezuelan officials fear that a default

would bring bondholder lawsuits. That could severely disrupt PDVSA’s operations and result in seizures of the company’s overseas assets, which includes

Citgo , which is vital for Venezuela because it generates much of the oil revenue that the country is still receiving.

• The cost of foreign goods has soared in Venezuela, which is importing far less as part of Mr. Maduro’s effort to conserve dwindling central bank reserves

which has led to a steep rise in inflation.

Source – www.nytimes.com/

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

the offer documents provided by the Issuers/ Product Providers to understand the risks associated before making investments in the products mentioned. Recipients are cautioned that any forward-looking statements are not

predictions and may be subject to change without notice. KIASL operates from within India and is subject to Indian regulations. This newsletter is not directed or intended for distribution to, or use by, any person or entity who is a

citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject KIASL and affiliates to any

registration or licensing requirement within such jurisdiction. Certain category of investors in certain jurisdictions may or may not be eligible to invest in securities mentioned in the newsletter. Persons in whose possession this

document may come are required to inform themselves of and to observe such restriction. Entities of the Karvy Group provide execution services in the capacity of being stock broker, depository participant, portfolio managers

and the like. Recipients may choose to execute their transactions through entities of the Karvy group and pay applicable charge for the same.

Registered office Address: Karvy Investment Advisory Services Limited, ‘Karvy House’, 46, Avenue 4, Street No. 1, Banjara Hills, Hyderabad – 500034

SEBI Registration No: INA200001959