2. Market and economic outlook reportMarket and economic outlook report
June 2013

3. Summary: Positive factors affecting
the markets
Strong FII inflows in May due to QE by Japan
and US.
GDP growth has bottomed out.
Improving growth-inflation dynamics.
Rate cuts likely to continue.Rate cuts likely to continue.
Declining commodity prices.
CCI pushes through projects
Monsoon on schedule.
Reliance’s KG-D6 find.

4. Summary: Negative factors
affecting the markets
◌ः Talk of withdrawal of QE spooks Indian markets.
◌ः Developed markets now getting more inflows than EMs.
◌ः Strong supply of paper caps possibility of upside gains.
◌ः Weak corporate earnings.◌ः Weak corporate earnings.
◌ः Revival of private capex still distant.
◌ः Weakening rupee.
◌ः Political stagnation.
◌ः Other negatives.

5. Market outlook
Asset Class Current
Levels( as on May 31,
2013)
Summary
View
Why Risk to our
View
Equity Nifty: 5,985.95
Sensex: 19,760.30
Markets will
be under
pressure.
High supply of paper.
Sensex PE stretched at
17.55 (May 31, 12-
month trailing).
High inflows
due to high
global liquidity.
month trailing).
Gilts G Sec ( 8.15% 2022) –
7.35
G Sec ( 7.16% 2023) –
7.15
Likely to
soften
Easing Inflation
RBI to focus on Growth
RBI likely to announce
25 bps cut in
forthcoming policy
Sharp Rupee
Depreciation

6. Index Watch
Index Name %age change in May YTD (%)
S&P BSE SENSEX 1.31 1.72
S&P BSE Mid-Cap 0.72 -10.17
S&P BSE Small-Cap -1.29 -19.46
S&P BSE TECk Index 3.69 5.09
S&P BSE Consumer Durables 3.53 -0.31
S&P BSE FMCG 3.41 14.47
S&P BSE AUTO Index 1.90 -2.27S&P BSE AUTO Index 1.90 -2.27
S&P BSE Health Care 1.79 8.79
S&P BSE Power Index -0.39 -11.84
S&P BSE OIL & GAS Index -0.65 1.60
S&P BSE BANKEX -0.71 -0.58
S&P BSE METAL Index -1.71 -23.19
S&P BSE PSU -3.04 -9.26
S&P BSE Capital Goods -3.20 -13.44
S&P BSE Realty Index -11.38 -20.18
YTD figures
are till May
31, 2013

7. P: Strong FIIs flows during the
month
Month
FII investment (Rs-
cr)
MF investment (Rs-
cr)
Jan 22,059.2 -5,212.4
Feb 24,439.3 -847.9
March 9,124.3 -1,613.6
April 5,414.1 -1,422.9
May 22,168.6 -3,490.1
Cumulative YTD 83,205.5 -12,586.9
P indicates positive factor

8. P: Strong FII inflows in May
◌ः The Bank of Japan (BoJ) announced a massive balance sheet
expansion (bond buying program), by 1% each month, in the first
week of April.
◌ः With Japan also joining the queue of central banks engaging in
quantitative easing (QE), a lot more QE is happening now than a
few months ago.few months ago.
◌ः The central banks of US, Europe and Japan are determined to get
growth back on track and have consumer price inflation of around
2%.
◌ः High liquidity will drive asset prices, including that of equities,
higher in developed markets (which are now receiving more
inflows) but also in emerging markets.

9. P: GDP growth has bottomed out
GDP growth-Sector wise
Sector FY12 H1FY13
Q3FY1
3
Q4FY1
3 H2FY13 FY13
FY14
*
Agriculture 3.6 2.3 1.8 1.4 1.6 1.9 3.5
Industry 3.5 1.5 2.5 2.6 2.6 2.1 4
Mining and quarrying -0.6 1 -0.7 -3.1 -1.9 -0.6
Manufacturing 2.7 -0.5 2.5 2.6 2.5 1Manufacturing 2.7 -0.5 2.5 2.6 2.5 1
Electricity, gas and water 6.5 4.7 4.5 2.8 3.6 4.2
Construction 5.6 5.1 2.9 4.4 3.6 4.3
Services 8.2 7.7 6.7 6.6 6.6 7.1 7.2
Trade, hotels, transport and
communication 7 6.4 6.4 6.2 6.3 6.4
Financing, real estate and
business services 11.7 8.8 7.8 9.1 8.5 8.6
Community, social and personal
services 6 8.6 5.6 4 4.7 6.6
GDP at factor cost 6.2 5.3 4.7 4.8 4.7 5 5.8
*These are estimates by HDFC Bank

10. P: GDP growth has bottomed out
◌ःThe Q4FY13 GDP growth figure, which was
published on May 31, came in at 4.8%, which
was in line with market expectations.
◌ःQ3FY13 GDP growth was revised upward to◌ःQ3FY13 GDP growth was revised upward to
4.7%. This confirms the belief that the
economy bottomed out in the third quarter.
◌ःGDP growth for the whole of FY13 came in
at a 10-year low of 5%.

11. P: GDP growth has bottomed out
◌ः Private services held up well: trade, hotels,
transportation and communication came in at 6.2%,
while financial services came in at a rather high 9.1%.
◌ः It remains to be seen whether these figures will be
sustainable in the light of slowdown in industrialsustainable in the light of slowdown in industrial
activity.
◌ः Industrial growth in Q4FY13 was lower than expected,
chiefly due to lower-than-expected growth in
construction (4.4%). With many road projects getting
bunched up in Q4 FY 13, the uptick in construction was
expected to be sharper.

12. P: GDP growth has bottomed out
◌ःThe winter crop was good. Nonetheless,
agricultural growth came in lower at 1.4% in
Q4 compared to 1.8% in Q3. This figure may
get revised upward in future.get revised upward in future.
◌ःLooking at these numbers, the green shoots
of recovery, which are talked about so
much, are not evident, says HDFC chief
economist Abheek Barua in a recent report.

13. P: GDP growth has bottomed out
◌ः Next, let's look at the GDP growth figures from the
demand side.
◌ः Consumption is weakening: private consumption fell from
4.2% in Q3FY13 to 3.8% in Q4 FY 13.
◌ः So is investment: gross fixed capital formation slowed
from 4.5% in Q3 to 3.4% in Q4 FY 13.from 4.5% in Q3 to 3.4% in Q4 FY 13.
◌ः Exports might revive in future but their impact will be
limited.
◌ः The pullback in government expenditure, which has been
sharp over the last couple of quarters, has affected GDP
growth.

14. P: GDP growth has bottomed out
◌ःAccording to Indranil Sen Gupta, India
Economist, DSP Merrill Lynch, India might see a
shallow recovery in the second half of 2014
based on a normal monsoon and interest rate
cuts.
◌ः
cuts.
◌ःBut the liquidity situation remains tight and
that has prevented lending rates from falling.
◌ःGupta has revised his FY14 growth projection
from 6% to 5.8%. His FY15 growth projection is
6.8%.

15. P: Improving growth-inflation
dynamics
◌ः India’s fundamentals are improving.
◌ः Currently growth is low and corporate profitability is
poor. Expectations from India on the policy front are
also low.
◌ः But fiscal deficit is being reduced through measures◌ः But fiscal deficit is being reduced through measures
such as reduction in diesel subsidy.
◌ः Now lower growth is also resulting in lower inflation.
◌ः India’s ratio of inflation to growth is 1.2, which is
better than Brazil's 2.8 and Russia's 1.7.
◌ः The central bank now has more room to cut rates.

16. P: Rate cuts likely to continue
◌ः The sharp depreciation of the rupee and the possibility
of another large trade deficit in May could weigh on
Governor Subbarao's mind.
◌ः There could be a pause in the policy easing cycle in
June.
◌ः◌ः But weak growth prospects and falling inflation could
create conditions for further easing in July with a 25
basis points rate cut.
◌ः Most experts expect incremental cuts of 50-75 basis
points between now and March 2014.
◌ः Rate cuts, if passed through by banks, could spur
consumption and investment.

17. P: Declining commodity prices
◌ः Commodities may be divided into four groups: agriculture, energy,
industrial metals and gold.
◌ः All four did well between 2002 and 2008.
◌ः Commodities faltered in 2011 and fell further in H22012.
◌ः Between 2002 and 2008 industrial metals did well because of the
global growth boom. The Chinese economy was doing well andglobal growth boom. The Chinese economy was doing well and
demand for industrial metals was high.
◌ः Industrial metals are suffering now because of excessive supply
caused by heavy investments in mining, based on anticipation of
Chinese demand. But the Chinese boom has faltered.
◌ः With the global economy doing relatively well now (Europe has not
imploded and the US economy is on the path of recovery), the safe
haven demand for gold has also declined.

18. P: Declining commodity prices
◌ः Investors have gone back to investing in financial assets.
◌ः Moreover, the anticipated supply risk did not materialise.
◌ः The Arab Spring or the Iran-Israel stand-off did not lead to
disruption in supply of oil.
◌ः The US has reduced its dependence on imported oil◌ः The US has reduced its dependence on imported oil
because it has discovered its own oil and gas reserves.
◌ः Despite bad weather, supply of agricultural commodities
did not fall off precipitously.
◌ः Lower commodity prices offer India, which is a heavy
importer of oil, gold and coal, a temporary reprieve.

19. P: CCI pushes through projects
◌ः There has been some pickup in public-sector capex.
◌ः The Cabinet Committee on Investment (CCI) has◌ः The Cabinet Committee on Investment (CCI) has
cleared projects worth about Rs. 70,000 crore over the
last three months.

20. P: Monsoon on schedule
◌ः A bad monsoon this year will truly harm India's cause.
While the rivers in the east and north of the country
are well stocked, those in the west and south have
dried to drought levels.
◌ः Only if the monsoon is normal will agricultural inflation◌ः Only if the monsoon is normal will agricultural inflation
(especially food inflation) decline, creating room for
RBI to cut rates more.
◌ः The monsoon hit the coast of Kerala on June 1.
◌ः India's meteorological department has forecast a
normal monsoon (98% of long-term average).

21. P: Monsoon on schedule
◌ः The Australian Met also expects the Pacific to remain
neutral between the La Nina (which brings rain clouds to
India) and El Niño (which drives them away).
◌ः India usually experiences normal rainfall in such years .
◌ः But it may be too early to say anything about the◌ः But it may be too early to say anything about the
monsoon.
◌ः It lasts for four months from June to September. Usually
there is a dry spell in July and August. How long it lasts
and how much area it affects is difficult to predict.
◌ः Besides the overall quantum of rainfall, its distribution
across the country also matters.

22. P: Reliance’s KG-D6 find
◌ःIn May several brokerage houses such as
Goldman Sachs and Deutsche Bank upgraded
Reliance Industries after it reported a
significant gas find in the KG-D6 basin.significant gas find in the KG-D6 basin.
◌ःReliance Industries is India's biggest company by
market capitalisation with a weightage of 8.62%
in the Sensex.

23. N: Talk of withdrawal of QE spooks
Indian markets
◌ः In May the markets took a beating due to fears of an early
withdrawal of the US Fed’s QE program.
◌ः In his testimony before the Congressional Joint Economic
Committee, US Fed chairman Ben Bernanke said that he
needs to see more signs of improvement before he rolls back
the stimulus program.the stimulus program.
◌ः What spooked the markets was the minutes of the Federal
Open Market Committee (FOMC) meeting held on 30 April
and 1 May.
◌ः Many committee members expressed willingness to reduce
asset purchases as the economy recovered.
◌ः In the Bank of Japan (BoJ) meeting held on 26 April,
members expressed doubts about the efficacy of QE.

24. N: Talk of withdrawal of QE spooks
Indian markets
◌ःThe Bank of Japan is targeting a 2% inflation
rate. Some members voiced concern that if the
rate turns out to be lower than projected, it
would affect the bank's credibility.would affect the bank's credibility.
◌ःIf inflation rises to 2%, people will want higher
yields on their debt investments.
◌ःRising yields could damage the financial
sector’s balance sheet and chances of recovery.
N stands for negative factor

25. N: Talk of withdrawal of QE spooks
Indian markets
◌ः What is likely?
◌ः The likelihood of an early withdrawal of QE is small. The Fed
won’t act until the US unemployment rate falls to 6.5%.
◌ः Reduction in bond buying by the Fed may begin by December
this year, according to Adrian Mowat, Chief Emerging Market
and Asian Equity Strategist at JP Morgan. The reduction willand Asian Equity Strategist at JP Morgan. The reduction will
be moderate rather than sharp.
◌ः Impact on India
◌ः In the near term, prospects of liquidity flows remain sound.
◌ः If the US Fed withdraws QE, it will definitely affect fund
flows into emerging markets.

26. N: Talk of withdrawal of QE spooks
Indian markets
◌ः Though the withdrawal of QE will be very gradual so as
not to have a destabilising effect, some negative impact
on the financial markets will definitely be there. All
financial instruments have gained from low interest rates.
◌ः Why are Indian markets worried?
◌ः India is especially vulnerable as it runs a high current◌ः India is especially vulnerable as it runs a high current
account deficit. It needs $ 100 million of annual capital
inflows to fund its current account.
◌ः The rupee could take a severe beating. In the worst case
scenario, there could even be capital outflows from the
country. Both equity and real estate prices would come
under pressure.

27. N: Developed markets now getting
more inflows than EMs
◌ःCurrently inflows into developed market equities
are increasing compared to the inflows into
developing markets, due to the improvement in the
US economy.
◌ःIn emerging market equities exchange traded funds
are seeing outflows since the EM index is not going
◌ःIn emerging market equities exchange traded funds
are seeing outflows since the EM index is not going
anywhere. Investors are taking EM exposure
through active funds.
◌ःWhile EMs may continue to receive some inflows,
more funds are now likely to go into developed
markets.

28. N: Strong supply of paper caps
possibility of upside gains
◌ः According to Sebi’s stipulation, listed companies must
ensure that 25% of their shares are held publicly.
◌ः A lot of companies are coming into the markets with
their papers.
◌ः There have been offers for sale (OFS) where stocks are◌ः There have been offers for sale (OFS) where stocks are
being offered at a discount ranging from 10-40%.
◌ः Rs 13,500 crore worth of OFS to flood the market over
the next few weeks.

29. N: Strong supply of paper caps
possibility of upside gains
◌ः70 odd private companies have to sell at least 25%
of their equity capital worth Rs 9,500 crore till
June 3.
◌ःPSU companies have to divest shares worth Rs.◌ःPSU companies have to divest shares worth Rs.
4,000 crore by August 8.
◌ःFIIs have pumped in about Rs 83,205 crore so far,
yet the Sensex is up only 1.72% year to date.
◌ःThe deluge of OFS is likely to cap any upside gains
for the markets.

30. N: Weak corporate earnings
◌ः Nirmal Jain, chairman of India Infoline, said in a recent
interview that almost half of the 180-odd companies covered
by his firm have disappointed.
◌ः Sectors like consumer, pharma, IT, telecom and private banks
have done well.
◌ः But sectors like capital goods, infrastructure, cement, utilities,◌ः But sectors like capital goods, infrastructure, cement, utilities,
energy and PSU banks have disappointed.
◌ः Consensus estimate for year-on-year earnings growth in FY14 is
currently 16%. This is optimistic in view of the fact that it is
twice the likely y-o-y growth for FY13.
◌ः Downgrades of FY14 earnings estimates are likely to continue.
◌ः No upgrades are expected in the near term.

31. N: Revival of private capex still distant
◌ः In India it is conventional wisdom to blame the growth
slowdown on local factors, such as lack of environment
clearances, lack of reforms in land acquisition, etc.
◌ः But capex has slowed down across all BRIC countries due to
the global business downturn.the global business downturn.
◌ः The capex cycle will not turn until the general elections in
May 2014 are over and the global business cycle bottoms out
(by 2015).
◌ः Private capex will also not happen so long as capacity
utilisation remains subdued. Many companies also have to
reduce their level of debt.

32. N: Weakening rupee
◌ः The rupee has weakened against the dollar.
◌ः But the euro, yen, Brazilian real, South African rand
and Korean won have also weakened against the dollar.
◌ः We are entering a strong dollar environment which will
be difficult on all emerging market currencies.
◌ः
be difficult on all emerging market currencies.
◌ः A weakening rupee makes imports more expensive for
India.
◌ः It also affects FIIs’ returns adversely and could
potentially lead to a pull-out of funds.

33. N: Political stagnation
◌ःSeveral state elections are scheduled in the
near term, culminating in the general elections
in May 2014.
◌ःProgress on critical reforms like land acquisition
is unlikely in the near term.
◌ः
is unlikely in the near term.
◌ःMining and infrastructure will continue to suffer
due to lack of decision-making.
◌ःMarket volatility will be high in the run-up to
the general elections.

34. Other negatives
◌ःConsumption is moderating, as is evident
from declining retail sales.
◌ःAuto sales, credit card usage, and domestic◌ःAuto sales, credit card usage, and domestic
travel are all declining.
◌ःThese factors limit the likely upside gains
for the Indian equity markets.

35. Thank youThank you