2. Contents
Index Page No.
Economic Update 4
Equity Outlook 8
Debt Outlook 12
Forex 14
Commodities 15
Real Estate 16
2
3. From the Desk of the CIO…
Dear Investor,
2012 is likely to be better than 2011 – partially because how bad 2011 has The longer term problems of deleveraging, the tight-rope-walk
been but definitely because the causes of panic in 2011 are likely to be between fiscal austerity and pro-growth fiscal policies and challenges
less daunting in 2012. Sovereign debt crisis in Europe, fragility of European to productivity remain in the west while China will continue to
banks, worries of hard landing in China on the global front and policy struggle with its bridges-to-nowhere leading to NPAs in banking
paralysis and pushback of even halfhearted reforms on the domestic front sector and over-dependence on exports. The likeliest scenario hence
kept most investors nervous. Continued high incidence of domestic is things chugging along without major improvements or accidents.
inflation clearly did not help, nor did the marked slowdown in domestic The risk appetite of global investors hence is likely to stay moderate.
industrial activity during the second half of 2011. This was a good enough In the light of the above expectations, our ideas for 2012 are to
recipe for a cautious investor sentiment for all risk assets and a general invest in Indian equities, long term Indian debt and multi-asset
preference for debt – especially when, thanks to RBI, debt instruments portfolios. We also recommend taking some exposure to select
were routinely returning 9% to 12% per annum. emerging market equities – especially the ones which are fiscally
sound and have a neutral to positive current account viz. Indonesia,
This is likely to change. Inflation looks set to go sub-8% and stay there Turkey and Brazil. On the equity front, US equities are a good hedge
through 2012. On the back of that monetary policy is likely to loosen – as to emerging market equities if the muddle-through dragging on for
stated explicitly by RBI governor in his last policy speech and also implied too long bothers investors just enough to reduce exposure to
in the bond market rally in the closing weeks of 2011. The direct effect of emerging markets while staying in the risk-on trade.
this on corporate earnings will be positive. Revenue growth had continued
to be robust in 2011 but increased interest cost ate away most of the Multi-asset portfolios are likely to do well on the back of exposure to
profits. Now as interest rates ease, especially in the second half of 2012, crude oil and USD besides equities. Commodities will bounce if global
we are likely to witness the reversal of that trend i.e. profits are likely to growth outlook brightens while USD will do well if growth falters and
grow faster than revenues in India Inc. The global growth or lack of it is risk-off trade is triggered. Hence having exposure to both crude oil
likely to be more or less neutral in its impact on corporate earnings in and USD besides equities is prudent.
India. If the global growth is robust, commodities might rally leading to
higher input costs – but on the other hand better exports might do well Our outlook on gold (denominated in rupees) is not particularly
too leading to better demand albeit in a different section of the economy. bullish in the first half of the year. An overdue correction might
continue. Also since rupee is more stable now than last few months,
Globally, matters seem finely balanced in Europe and positively biased in a fall in gold price in dollar terms will push rupee price down as well.
US and China. Our expectations are mostly those of muddling through We recommend buying on dips in gold.
across all three. We expect no major accidents in either of these
economies. 3
“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.19”
5. Economy Update - Global
• The Conference Board Consumer Confidence Index rose almost 10 points to 64.5 in December,
up from a revised 55.2 in November.
• In the week ending December 24, the advance figure for seasonally adjusted initial claims was
US 381,000, an increase of 15,000 from the previous week's revised figure of 366,000.
• Real GDP increased at an annual rate of 1.8 percent in the third quarter of 2011 (that is, from the
second quarter to the third quarter), according to the "third" estimate released by the Bureau of
Economic analysis. In the second quarter, real GDP increased 1.3 percent.
• The Eurozone unemployment rate edged up to 10.3% in October, a figure that encompasses very
high levels of joblessness in peripheral countries such as Spain and Greece with relatively firm
labor markets in France and Germany.
Europe • Eurozone Manufacturing Purchasing Managers' Index (PMI) rose slightly in December to 46.9
from November's 46.4, but marked its fifth month below the 50 mark that divides growth from
contraction
• The seasonally adjusted Markit /JMMA Purchasing Managers’ Index (PMI) posted 50.2 in
December, up from 49.1 in November, signalling a marginal improvement in manufacturing
sector operating conditions. The level holds higher significance with a number being above 50
Japan signifying an expansion.
• Japan's jobless rate was unchanged in November which was 4.5% in October, and consumer
prices fell by 0.5% in November from last year, 0.3 point lower than in October.
• HSBC preliminary PMI, a gauge of nationwide manufacturing activity, edged up to 49.0 in
December from November's final reading of 47.7. This, though higher, was still in contractionary
territory.
Emerging
• Inflation slowed to 4.2% in Nov’11 & Early in December, China cut the reserve requirement for
economies commercial lenders for the first time in 3 years.
• The subindex for new export orders fell to 49.7 in December from 52.1 in November. The
employment subindex also fell, to 49.2 from 50.1. 5
6. Economy Outlook - Domestic
12.0% • The fall in production at factories and mines is clear evidence
10.0%
that the Reserve Bank of India's prolonged interest rate
8.0%
increases, as well as tepid export demand due to global
6.0%
growth worries, are strangling manufacturing activity in Asia's
4.0%
third-largest economy.
2.0%
0.0% • India's economic growth rate slowed down further to 6.9 per
-2.0% Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct cent in the second quarter (July-September) of FY12 as
-4.0% 10 10 10 10 11 11 11 11 11 11 11 11 11 11
compared to 8.9 per cent achieved in the same quarter of the
-6.0% previous financial year. The GDP growth rate for Q1 and Q2
FY11 was revised downwards to 8.1 and 8.4 respectively from
the previous estimates of 9.3 and 8.9%.
• India's industrial output shrunk by 5.1% in October after
• This was attributed largely to the negative growth in ‘mining
witnessing a sustained slowdown over the past few
months, led by a steep fall in production of almost sectors, and quarrying’ and steep fall in the growth of manufacturing
particularly manufacturing, mining and capital goods. sector, as compared to their levels of growth in Q2 of 2010-
11.
• Factory output, as measured by the Index of Industrial
Production (IIP), had grown by 11.3% in October last year. • The burgeoning fiscal deficit situation, high inflation rate
As per data released by the government , industrial output scenario and slowdown in corporate earnings growth have
grew by 3.5% in the April-October period this fiscal, as stalled India's growth story to some extent in 2011
against 8.7% in the same period last year.
• This is the lowest number over a-28 month horizon. This is 10.0 GDP growth
due to the manufacturing sector which contracted by 9.0
(6.0)%, along with mining activities banned across key
8.0
mines in India, de-growth in mining sector is not surprising.
Electricity, which was growing smartly until now, has 7.0
slowed to 5.6% YoY. On the user side, slowdown in 6.0
consumer goods (0.8)% YoY shows that consumers are
postponing their expenditures. No surprises in the capital 5.0
goods sector either, showing volatile growth yet again at 4.0
(25.5)% YoY. FY10(Q2) FY10(Q3) FY10(Q4) FY11(Q1) FY11(Q2) FY11(Q3) FY11(Q4) FY12(Q1)
6
7. Economic Outlook - Domestic
Growth in credit & deposits of SCBs • India’s inflation slowed to the lowest level in a year,
30.0%
boosting the central bank’s scope to support
25.0%
Bank Credit Aggregate Deposits growth by pausing its record interest-rate increases.
Inflation, as measured by the wholesale price index
20.0%
(WPI), eased slightly to 9.11% in November 2011, as
15.0%
against 9.73% in October 2011 and 8.20% during
10.0% the corresponding month of the previous year.
• The modest decline in wholesale inflation was
• As on December 16, bank credit grew 17.8% and driven by a drop in food inflation. In November,
deposits 18% annually. This is the lowest rate of food inflation was just eight-and-a-half percent
growth since March 2010. Credit growth has been compared to more than 11% in October. There was
below the central bank’s projection of 18 per cent since a dip seen in the weekly food inflation, which has
the last two months. been lowest since 2005 at 1.81% for the week
ended Dec 10, 2011.
• Due to the high rate of inflation and inflationary
10.0%
expectations, RBI had raised policy rates by 375 basis
9.5%
points in 13 tranches since March 2010. This took a toll
on credit off-take, as banks reacted by increasing 9.0%
lending rates by around 250 basis points in the same 8.5%
period. Wholesale Price Index
8.0%
• On account of the slowing growth in the economy and 7.5%
the expected decrease in inflation, a pause is expected
in the interest rate hikes. 7
* End of period figures
8. Equity Outlook
CY12 turned out to be the second worst year for Sensex since 1980. India also turned out to be the 2nd worst performing
country amongst large Emerging markets in 2011. This was a year when the resilience of the Indian economy got challenged
by both internal and external factors.
Bulk of the pain was self-inflicted. Correction in markets in the last quarter was more due to India Specific Issues like lack of
policy measures, corruption and monetary tightening. GDP growth continues to come down. In foreign investors mind, there
were concerns about the mid-term direction this country is taking with increasing subsidies and populist measures.
We believe that going forward markets will reconcile to the fact 2011 - second worst yearly performance for BSE - Sensex
that trend growth rate is coming down, and could settle at 6.5-7%.
Returns (%)
This could be the new normal for growth and is by global
standards, not a bad number at all. We expect growth to bottom -20 & Below -20 & 0 0 & +20 20 to 50 50 & above
out in Q1 CY12 at 6%. Corporate earnings should also bottom out 2008 2001 2002 1980 1988
around this time. We expect inflation would come down this year
and could average around 7% leading to nominal growth of 13- 2011 1998 1982 1993 1981
14%. That would lead to corporate earnings growth of 15%. 1995 1987 1983 1990 1999
2000 1986 1984 1992 2003
We expect RBI is to start easing monetary policy on the back of
slowing growth and easing inflation. There could be a total of 50- 1997 2005 2009
100bps reduction in interest rates during the year. Rupee has 2004 2006 1991
weakened significantly this year on the back of high current
2010 2007 1985
account deficit. Rupee was overvalued on trade weighted data
and is now reaching fair valuation levels. We expect 50 to be the 1989
new normal for rupee and expect it to stay around these levels in 1994
CY12. Exporters will benefit big time from this rupee weakness.
8
9. Equity Outlook
Globally, things are not as bad as perceived in August. In US, there is no double-dip recession. Fourth quarter GDP growth is
expected to be around 3.5%. The consumer spending, retail sales, ISM data and unemployment numbers have all been
resilient for last two months. We expect US growth to stay around 2% for 2012. In Europe, situation is slightly trickier.
Eurozone will see very low or negative growth for most of this year. The European central bank has started to provide long
tenor funding to European banks which could result in easing of liquidity in the European banking system. We believe the
situation in Europe will stay difficult but eventually all countries would move towards a more closer union. We don’t expect
any catastrophic event or a disorderly break-up of euro and any emergence of stress will see European central bank taking a
more proactive role.
Sensex
22500
17500
12500
7500
02/Jan/07 02/Jan/08 02/Jan/09 02/Jan/10 02/Jan/11
The market correction in the last quarter in India has brought the equity valuation down to very attractive levels. The
markets are trading at a valuation of 12 times one year forward earnings. As the graph shows, in 2008, sensex went to 8000
levels and within six months, was back to 16,000. This time also, we expect the recovery to be very sharp once the global
volatility subsides and domestic growth bounces back.
We expect equity market returns of 20-25% in CY12 backed by 10-15% earnings growth and a P/E rerating of India from 12
to 14-15 once growth bounces back to 7%. We believe that markets are very close to the bottom and it is a great time to go
out and start building a long term equity portfolio. 9
10. Sector View
Sector Stance Remarks
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
Healthcare Overweight 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
We prefer “discretionary consumption” beneficiaries such as Cigarettes and branded garments,
FMCG Overweight as the growth in this segment will be disproportionately higher vis-à-vis the increase in
disposable incomes.
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
BFSI Neutral 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
The regulatory hurdles, competitive pressures and leverage prevent any return to high
Telecom Neutral 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.
While US and European customers of Indian IT companies are in good health, Order inflows
IT/ITES Neutral might slow down in near term. However, in the next few quarters big rupee depreciation will
provide cushion to IT companies earnings .
10
11. Sector View
Sector Stance Remarks
Demand outlook remains robust with strong earnings growth. Raw material prices have
Automobiles Neutral 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.
Commodity prices have corrected significantly over the last few months due to concerns
Metals Neutral 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.
We like the regulated return characteristic of this space. This space provides steady growth
Power Utilities Neutral
in earnings and decent return on capital.
Cement demand will certainly grow over the next three years. But the issue is on the supply
Cement Underweight
side. We do see an oversupply situation for the next 3-4 quarters.
The USD 1 trillion Infra opportunity is hard to ignore. However, The significant slowdown in
E&C Underweight order inflow activity combined with high interest rates has hurt the sector. We will review
the stance once the interest rate cycle gets reversed
We would stay away from oil PSUs, due to issues of cross subsidization distorting the
Energy Underweight
underlying economics of oil exploration and refinery businesses.
11
12. Debt Outlook
9.10
9.2 Yield curve 10-yr G-sec yield
8.90
9.0
8.8 8.70
8.6 8.50
8.4 8.30
8.2 8.10
(%)
8.0 7.90
7.8 7.70
7.6
7.50
0.0
0.8
1.5
2.3
3.0
3.8
4.5
5.3
6.0
6.8
7.5
8.2
9.0
9.7
10.5
11.2
12.0
12.7
13.5
14.2
15.0
15.7
16.5
17.2
18.0
18.7
19.5
• The 10 year benchmark G–Sec yield decreased by 19 bps in December to close at 8.54%.
• There has been a slight easing in the inflation figures, a pause is expected by the RBI and no hike may
be seen in the immediate future though the central bank would monitor the inflation closely.
• In the month of December Moody’s upgraded the credit rating of the Indian government's bonds
from the speculative to investment grade which would in turn help attract Foreign Institutional
investors (FIIs) to the Indian bond market and boost the gloomy economic outlook.
• The AAA rated corporate bonds are giving an yield of around 9.3%.
12
13. Debt Strategy
Category Outlook Details
With the pause by RBI and the expected trend reversal of the
interest rates, we would not recommend investment in Shorter
Short Tenure term debt funds unless money necessarily needs to be parked for
Debt the shorter term by the investor. The ST funds still have high YTMs
(9.5% – 10%) providing interesting investment opportunities to
clients for the shorter term.
Some AA and select A rated securities are very attractive at the
current yields. A similar trend can be seen in the Fixed Deposits
Credit also. Tight liquidity in the system has also contributed to widening
of the spreads making entry at current levels attractive.
With the expected trend reversal in the interest rates, we would
strongly recommend investment in Longer term papers. These, while
Long Tenure being available at attractive yields, also provide an opportunity for
Capital appreciation due to a decrease in interest rates. Hence, these
Debt
would be suitable for both - investors who may want to stay invested
for the medium term (exiting when prices appreciate) and those who
would want to lock in high yields for the longer term.
13
14. Forex
Rupee movement vis-à-vis other currencies (M-o-M) 100 Trade balance and export-import data 0
Export Import Trade Balance (mn $) -2000
80
1.50% -4000
60 -6000
1.00%
40 -8000
0.50% -10000
20
0.00% -12000
0 -14000
-0.50% -20 -16000
-1.00%
-1.50% • India’s exports grew 3.87% to $22.3 billion in November,
-2.00% 2011, compared to $21.49 billion in the same year-ago
-2.50% month, while imports were up 24.5% at $35.92 billion
-3.00% translating into a trade deficit of $13.6 billion. In
USD GBP EURO YEN November, 2010, imports aggregated $28.84 billion.
140000
Capital Account Balance
• INR depreciated by about 2% against USD during the month. Also,
during the month it did witness a low of 54.24, but recovered after 90000
some stability was sensed in the International markets. It closed at
40000
53.27 at the end of the month.
• The Indian rupee that remained strong in the early part of 2011
-10000
due to expected inflows, collapsed since August, losing 16.1% in FY 10 (Q2) FY 10 (Q3) FY 10 (Q4) FY 11 (Q1) FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1)
2011. High cost of oil and gold imports and flagging exports led to
disproportionately higher demand for the US dollar. Also, the • Capital account balance was positive throughout FY11 and
central bank's reluctance to intervene aggravated the fall. stood at `273133 Cr. at the end of the year. For FY 12, the
• Measures taken by RBI to try and end the speculative trading capital account is at `93,621Cr. for Q1.
actually helped in gaining some control over INR depreciation and • We expect factors as higher interest rates to attract more
the day after the announcement, the rupee saw one of its biggest investments to India. Increased limits for investment by
ever gains when it surged by 140 paise in intra-day trade and FIIs would also help in bringing in more funds though
ended over 100 paise higher from the previous close.
uncertainty in the global markets could prove to be a
dampener.
14
15. Commodities
Gold gained 10% in 2011, rallying for an 11th year, as 31000
investors bought gold to protect their wealth from market 29000 Gold
volatility due to the Euro zone debt crisis. The yellow metal 27000
couldn’t move up in the recent times despite of bullish 25000
Precious news; triggering concerns of safe haven investments and 23000
21000
Metals momentum selling from the hedge funds as it was the only 19000
profitable investments among other asset classes. We 17000
expect gold to exhibit weakness this calendar quarter and 15000
may correct in the near term. Nevertheless, the recent Iran
tensions and rupee depreciation should support domestic
gold prices.
135.0
125.0
Crude
Oil is likely to be supported until first half of this calendar
115.0
year on renewed tensions over Iran. The economic data
from US in December further support prices on the back 105.0
Oil & Gas of expected recovery amid manufacturing activity in China 95.0
and India expanded, while concern persisted that further
85.0
sanctions against Iran may disrupt supply. Expect oil to
trade firmer in the first quarter. 75.0
15
16. Real Estate Outlook - I
Asset Classes Outlook
In the residential space, low sales volumes have led to a sharp decline in the absorption rate from 21.4% in Q1
2011 to 11.5% in Q3 2011. However, strong pre-launch sales have kept the developers far from any correction.
Though sales have gone down to almost 35% as compared to last year, no correction has been witnessed in the
prices. The over-supplied locations remain stagnant and are expected to remain so for the next two quarters. In
cities like Pune, NCR, Hyderabad, Chennai and Bangalore entry points in the range of Rs. 3000 – Rs. 4600 per
Residential
Sqft are still valued by first time home -buyers. Infrastructure development and the new airports in these cities
have supported the residential development. On an average, prices in this segment still remain affordable.
Mumbai stands tall with prices at the peak in an over-supplied market also. Corrections are being reported by
media, however not being witnessed on ground level. The retail investors (second home buyers) and HNI
investors are postponing their decision due to expectations of price correction.
Average q-o-q rental growth in 3Q11 was recorded at 2.5%. Mumbai SBD BKC was among the most expensive
markets and Bangalore and Chennai among the least expensive in Asia Pacific, on the basis of Net Effective
Rents. Among the fastest growing office market in the world, India is constructing 100 million Sqft every 7-10
quarters. Office stock is expected to become 500 million Sqft by 2015. The Net Absorption is expected to grow
from 30.5 million Sqft in 2010 to 39.1 million Sqft in 2013. Absorption rate has been recorded at 13.3% in 3Q11.
8.5 million Sqft of office space was absorbed in 3Q11 compared to 10.5 million sq ft in 2Q11.
Commercial/IT Still in the shadows of over-supply and cautious expansion approach by corporates, this segment has gone
through a correction. Rates per Sqft have seen almost 30% down-trend and is expected to be stagnant for the
coming 2-3 quarters. After this correction we believe the segment is bottoming out and is the best time to buy
for companies looking at long term holding of real estate office space. With signs of recovery in the global
economy, the Indian office markets are expected to be nearing the end of the downturn. Despite improving
demand conditions, vacancies are rising in the short term due to massive infusion of office space. Markets of
Bangalore, Mumbai and NCR-Delhi are leading the property cycle as rentals have started to increase in these
markets.
16
17. Real Estate Outlook - II
Asset Classes Outlook
The FDI allowance has given lot of impetus to this sector. Since 2009 retail has seen a major transformation in all
its business aspects and has been built to suit Indian way of consumerism. Low cost, wide reach, more variety,
less innovation, close existence with competition, maximizing bottom line than top-line approach have been
making the retailers smarter. In the retail space, unorganized markets are still a preferred choice. Most high-
street locations are still expensive. Investors prefer Hi-street locations than malls since they would always have
capital appreciation due to dearth of available space.
Retail
Of 9.9 mn sq ft forecasted for absorption in 2011, 7.1 mn sq ft has already been absorbed till 3Q11 and another
1.3 mn sq ft is pre-committed. The northern regions of India rate high on propensity to consume followed by the
western, eastern and southern regions. Industrial towns are similar to each other in consumer preferences and
socio-economic & demographic profiles. Most of them remain equally under-served despite recent mall
developments in the last couple of years.
The trend of investment in land is still nascent since lack of transparency and unclear national land acquisition
policy/rules makes it tough for the organized players/investors to transact. However this seems to be a very
interesting time to buy land which is being traded more as a commodity now. It is getting absorbed fast. Land
Land sees immense opportunity since it can be used as a tangible asset and is the most credible pledge against
business. With the growing commitment of the Government in improving infrastructure (roads, bridges,
airports, rail metros), in the last 5 years many far flung areas now have very good connectivity to the CBD
locations.
The IC note is proposed to be presented every quarter
17
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Intensive Research
We closely track the historical performance across asset classes, sub-asset classes and product providers to identify, evaluate and
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Honest, unbiased advise
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19. Disclaimer
The information and views presented here are prepared by Karvy Private Wealth or other Karvy Group companies. The information contained
herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness
thereof. 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 decisions
based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting
upon any information or analysis mentioned here, investors may please note that neither Karvy nor any person connected with any associated
companies of Karvy accepts any liability arising from the use of this information and views mentioned here.
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