advice for the wise - november, 2015
TRANSCRIPT
Advice for the Wise November 2015
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,
Market movements are usually a result of mix of global and domestic cues. In the third quarter, United States saw a fall in the GDP after a formidable growth in the previous quarter, adding to the dilemma of the Fed whether to increase rates or not. After the Fed meeting in October, it resulted in status quo on interest rates. Due to continuing global uncertainties, a slightly lower inflation path and mixed macroeconomic data, the Fed once again refrained from entering into a tightening policy. In another part of the world, China’s six year low GDP growth added to concerns of a continuing slower growth path.
During the tenth month of the calendar year in the absence of major negative global cues, government policies and domestic green shoots drove up the equity markets back home. Due to a panic of devaluation of emerging market currencies in August-September, markets had faced a knee-jerk reaction then. However, October finally witnessed stabilization in emerging markets. India was no exception. This was mainly because of two reasons. Firstly, the stabilization led to a rebound in global markets and thus investor sentiments. Secondly, a domino effect of the former led to the reversal of FII outflows that added to the recovery.
Green shoots such as IIP and inflation indicated that economic revival is on the way, leading to the RBI front loading the rate cuts in September. The trade deficit came in lower during the month. Though exports contracted, imports contracted even further. An appreciation in the domestic currency and strong indirect taxes numbers added to the cheer and pushed markets further up rebound of the markets.
Going forward, one can expect markets to move in the sideways range with a quieter Diwali and no major fireworks. However, this period of consolidation continues to provide good opportunities for long-term investors. May the “Diyas” bring light into your lives, while you pray to the Goddess of wealth during Diawli. We wish you growth in your wealth through positive market movements in the remaining part of 2015.
Did You Know?
#Source: huffingtonpost
The weight of a standard gold bar is approximately 400 ounces, or 27.5 pounds.
Greece has a history of financial troubles — the country's first default occurred way back in the fourth century B.C.
One of the smallest economies to have its own U.S.-listed ETF is Israel. The ETF trades under the ticker symbol EIS.
Domestic Equity Outlook
As on 25th Oct 2015
1 month change
1 year change
Equity Markets
BSE Sensex 27471 6.21% 2.31%
CNX Nifty 8295 5.43% 3.50%
BSE Midcap 11138 5.10% 16.12%
BSE Smallcap 11519 5.37% 8.03%
Equity markets turned out to be volatile in October eventually ending at the lowest point. Earnings of interest rate sensitive sectors have been weaker than expected. However investors remained hopeful as the banks started transmitting lower interest rates. In the broader market, lower inflation has led to sharp decline in sales growth while margins have improved leading to single digit growth in profits. Long term investors are advised to take advantage of the volatility and accumulate blue chips in sectors such as IT, FMCG and private banks. Bihar election outcome is the joker in the pack that would decide the long term direction and resolve of the government on sticky issues like fertilizer subsidy, land acquisition, labor reforms, etc. The nature and the undertone of the mandate would decide the direction of policy making apart from dictating investor sentiment.
90
95
100
105
110
115
120
125 S & P BSE Sensex CNX Nifty
BSE Midcap BSE Smallcap
Domestic Equity Outlook
India's wholesale prices fell for the 11th straight month in September, to lower levels of (4.54%) compared to a (4.95% ) drop in August.
Overall, food inflation turned into positive zone to 0.69% as compared to (1.13%) in August. For vegetables, it was (9.45%). Inflation in the fuel and power segment was (17.71%), while that of manufactured products was
(1.73%) in August.
CPI for the month of September came in at 4.41% due to impact of base year as compared to 3.66% in August.
Food inflation for the month of September has come in
at 3.88% versus 2.20% month-on-month (MoM), Cereals and products inflation stands at 1.38% versus 1.22% in August.
Wholesale Price Index Consumer Price Index
#Source: Moneycontrol, Zee news
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00% WPI CPI
Domestic Equity Outlook
Industrial output growing at 6.4% in August, indicates a revival in industrial activity. It had grown by 0.5% in August last year.
The manufacturing sector, which constitutes over 75% of the index, grew by 6.9% in August 2015. Meanwhile, the mining sector output rose by 3.8% in August 2015.
Industrial output was at 4.1% in the April – August period, compared with 3% a year earlier.
India's Gross Domestic Product (GDP) growth for the first quarter of the current financial year grew at 7%
versus 6.7% YoY .
Manufacturing growth slowed down to 7.2% versus 8.4% YoY, whereas agricultural growth also slowed to 1.9% versus 2.6% YoY. With the change method, India's growth topped that of China in the first quarter this year
#Source: Business today
4.0
5.0
6.0
7.0
8.0
GDP
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Aug 14
Sep 14
Oct 14
Nov 14
Dec 14
Jan 15
Feb 15
Mar 15
Apr 15
May 15
Jun 15
Jul 15
Aug 15
IIP
Sector Outlook
Sector Stance Remarks
IT/ITES Select verticals displaying better growth. Long term outlook to improve once global
uncertainties come down.
Automobiles Passenger vehicles and CVs to outperform two-wheeler segment. Tractors to continue weak
show. Auto-ancillaries expected to do well due to revival of demand.
Healthcare Huge global opportunity as a generic and bulk drug supplier. Better placed against peers in
terms of technology and labor cost arbitrage. To continue to gain global share and thus
generate strong earnings growth.
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 continue.
Power Utilities Lack of fuel linkages , poor SEB health, adverse CERC guidelines have compromised the ROE’s
leading to de-rating in near term. In long run, they are core to India’s infra story.
Cement Cement volumes witnessing pressure. Going ahead pricing and realizations would be key for
sector valuations.
Sector Outlook
Sector Stance Remarks
BFSI Private sector banks continue to deliver healthy earnings in line with expectations. However,
we expect PSUs to deliver muted numbers on asset quality concerns.
E&C Order inflows expected to improve as spending and capital expenditure likely to move up on
economic recovery.
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 .
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.
Telecom Regulatory uncertainties have come down. However, aggressive bids for spectrum has revived
fears of sub-optimal returns on capital.
Global Equity Outlook
As on 25th Oct 2015
1 month change
1 year change
Equity Markets
MSCI World 1705 6.92% 2.22%
Hang Seng 23152 9.28% (0.64%)
S&P 500 2075 7.45% 5.63%
Nikkie 18825 5.28% 23.11%
Prospects of an increase in interest rates by the US Fed have gripped the global markets leading them to shed most of their annual gains. Sharp correction in Chinese markets and lower growth rates is another matter of worry on the global front.
80
90
100
110
120
130
140
150 MSCI World Hang Seng S&P 500 Nikkie
Global Economy Update
United States •U.S. economic growth braked sharply in the third quarter as businesses cut back on restocking warehouses, but solid domestic demand could encourage the rate hike by US Fed in December. GDP increased at a 1.5 percent annual rate after expanding at a 3.9 percent clip in the second quarter. •U.S. jobless claims rise, four-week average lowest since 1973.
Emerging Economies
• Growth in India's manufacturing sector cooled to its slowest in 22 months in October as domestic demand softened, a private survey showed.
• Activity in China's manufacturing sector unexpectedly contracted in October for a third straight month, an official survey showed on Sunday.
Japan
• Japanese manufacturing activity in October expanded at the fastest pace in a year as new domestic and export orders increased, a private business survey showed on Monday.
• The Bank of Japan is expected to hold monetary policy steady even while diluting its rosy inflation forecasts.
Europe
• British consumer morale slipped to its lowest in four months in October, a survey showed on Friday, adding to signs that domestically driven growth is continuing to ease in the final three months of the year.
• Euro zone inflation zero in October, pressure on for more ECB easing
#Source: Reuters
Domestic Debt Outlook
•The yields on 10 Yr G sec closed at 7.59% which is 13 bps lower than the last months close of 7.72%. •The central bank conducted reverse repo auctions in almost all sessions, providing banks with opportunities to park funds to the
tune of Rs 70,000 cr. •Banks’ net average borrowings under the RBI’s LAF (Liquidity Adjustment Facility stood at 11481.42 crore.) •Month-end inflows from government spending and reversals of reverse repo auctions held in earlier sessions, prevented the liquidity deficit from widening.
As on 25th Oct 2015
1 month change
1 year change
Debt Markets 10-Yr G-Sec Yield 7.59 (13bps) (84bps)
Fixed Deposit 7.25 (25bps) (150bps)
0
50
100
150
200
250
300
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 (9.0%-10.7%) 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
• US 10 years yields appreciated marginally to trade at 2.133 as markets remained weak on Friday and debate about a rate hike from the US still remains on the table. • Japanese authorities are trying to bring greater transparency to corporate bonds with new price data, but with new rules extending to only a part of the market few see the changes having an immediate impact. • China's corporate debt-to-GDP ratio has risen to 140%-150% and is expected to get worse, sparking concerns over a potential rise in defaults in the corporate bond market. •The European Central Bank is right to consider stepping up its bond buying to boost inflation but should think very carefully before doing so.
#Source: Reuters
Ratings Country 10 Yr G-Sec
Yield 1 month change
AAA
Germany 0.44% (15bps)
Hong Kong 1.48% (23bps)
Sweden 0.64% 5bps
Switzerland (0.33%) (21bps)
AA+ USA 2.08% 1bp
AA-
China 3.01% (32bps)
Japan 0.31% (4bps)
Commodities
Gold has been sideways with a mild positive bias as it remains the primary tool of speculation against the prospects of US dollar in the backdrop of a global currency upheaval. .
As on 25th Oct, 2015 : `26,764 per 10gm 1 month change : 1.29% 1 year change : (1.99%)
Crude oil prices are expected to be binging below $50 for the forceable future.
As on 25th Oct, 2015 : $46.30per bbl 1 month change : (2.10%) 1 year change : (45.90%)
*RICI: Rogers International Commodity Index – Tracks 38 commodity futures from 13 international exchanges.
24000
25000
26000
27000
28000
29000 Gold
2,000
2,500
3,000
3,500
RICI
0.00 20.00 40.00 60.00 80.00
100.00
Crude
Foreign Exchange
• The Indian rupee has depreciated against all the major currencies. It has depreciated by 2.56% against the EURO, 1.84% against GBP, 2.34% against YEN and 0.99% against USD.
• The rupee weakened against the US dollar owing to intermittent weakness in equities and demand for the greenback from importers.
• Domestic wholesale price inflation figures, however, aided sentiment for the local currency and prevented further
decline.
• However periodic demand for the dollar from state-owned banks on behalf of oil companies and other importers
prevented gains in the rupee.
Currency As on 25th Oct 2015
1 month change
1 year change
USD/INR 64.88 (1.84%) (5.63%)
GBP/INR 99.88 (0.99%) (1.36%)
Euro/INR 72.06 (2.56%) 7.90%
Yen/INR 53.79 (2.34%) 5.43%
USD/Euro 0.90 1.77% 14.89%
-1.84%
-0.99%
-2.56%
-2.34%
-3.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
USD GBP EURO YEN
Real Estate Outlook
Tier I
RBI has exceeded expectations with a 50 bps rate cut in
September. SBI has followed suit and cut lending rates by 40 bps
for home, car and other retail loans. The home loan rates are
among the lowest in recent times. Developers have unsold
inventory and are constantly innovating lower down payment and
large back ended payment schemes with/without requirement of
a home loan . New launches have reduced and focus has been on
completing projects on hand.
Tier II
Larger demand is being seen in Bangalore, Hyderabad and Pune
by E commerce and consulting firms. Rentals are expected to
largely remain stable in 2015–16 as supply pipeline is still strong.
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.
Not much has changed for retail market in the last few months
and capital values and rentals remain flaccid. The absorption is
low and vacancy remains high.
Land in Tier II and III cities along upcoming / established
growth corridors have seen good %age 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
Ease of Doing Business Index • What is it? The ease of doing business index is an index created by the World Bank Group. Higher rankings indicate better, usually simpler, regulations for businesses and stronger protections of property rights. • Parameters considered for evaluating countries? A nation's ranking on the index is based on the average of 10 sub indices and they are as follows, Starting a business, Getting electricity, Dealing with construction permits, Getting credit, Protecting minority investors, Registering property, Paying taxes, Trading across borders, Enforcing contracts and Resolving insolvency. • Ranking of India? India now ranks 130 out of 189 countries in the ease of doing business, moving up 12 places from last year, according to a World Bank report.
What’s Trending?
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