Transcript LIQUIDITY, VALUATIONS AND EVENTS

LIQUIDITY,
VALUATIONS
AND
EVENTS
Jul – Sep
2012
MOVEMENTS OF MAJOR
INDICES
Index
30-Jun-11 2-Apr-12 30-Jun-12
BSE SENSEX 18,846
17,478
17,430
S&P CNX Nifty 5,647
Dow Jones
12,414
Dow Jones
Composite
Index
4,310
S&P 500
1,321
Nikkei 225
9,816
Shanghai
Composite
2,762
Bovespa
62,404
3-month
Returns
-0.3%
1-Year
Returns
-8%
-7%
4%
5,318
5,279
13,264
12,880
-0.7%
-3%
4,487
1,419
10,110
4,427
1,362
9,007
-1%
-4%
-11%
3%
3%
-8%
2,302
65,216
2,225
54.355
-3%
-17%
-19%
-13%
MOVEMENT OF SECTORAL INDICES
Sectoral indexes
BSE AUTO
BSE BANKEX
BSE Capital Goods
BSE Consumer Durables
BSE FMCG
BSE Health Care
BSE IT
BSE METAL
BSE OIL & GAS
BSE Power
BSE PSU
BSE Realty
BSE TECk
3-month 1-Year
30-Jun-11 2-Apr-12 30-Jun-12 Returns Returns
8,747
12,821
13,906
6,654
4,045
6,398
6,100
15,062
9,208
2,612
8,543
2,020
3,694
10,108
11,871
10,202
6,651
4,502
6,617
6,117
11,316
8,064
2,131
7,379
1,805
3,588
9,378
11,909
10,025
6,209
4,992
6,884
5,765
10,785
8,076
1,988
7,258
1,668
3,344
* Our predictions from the last study regarding Banking, Pharma,
and Metals turned out to be correct while those regarding Auto,
IT and FMCG turned out to be incorrect.
-7%
0.3%
-2%
-7%
11%
4%
-6%
-5%
0.1%
-7%
-2%
-8%
-7%
7%
-7%
-28%
-7%
23%
8%
-5%
-28%
-12%
-24%
-15%
-17%
-9%
CHANGE IN COMMODITY PRICES
30th June
2011
2nd April
2012
29th June
2012
3 Month
Returns
1 Year
Returns
9,414
8,674.5
7,691.75
-11%
-18%
Crude ($/MT)
Aluminium
($/MT)
111.68
123.81
95.42
-23%
-15%
2,509
2,081.5
1,834.5
-12%
-27%
Zinc ($/MT)
Silver
($/ounce)
2,342
2,003.25
1,880.5
-6%
-20%
34.69
32.9725
27.4813
-17%
-21%
Gold($/ounce)
1,505.5
1,662.5
1,598.5
-4%
6%
Steel ($/MT)
788
822
658.19
-20%
-16%
Lead ($/MT)
2,671
2,060
1,847.75
-10%
-31%
Copper
($/MT)
COMMENT
• The flattish performance of Sensex is deceptive
– It is actually made up of 2 major moves
• From 21st February to 23rd May: -13.46%
• From 23rd May to 30th June: +9.29%
• Between 21st February to 30th June 2012: -4%
– Peak to bottom and retracement was a move of 22.75%
in absolute terms
MAJOR SECTORS ON THE WAY DOWN
(21st February to 23rd May)
• Sectors which led during the downward phase
SECTOR
RETURNS (%)
FMCG
Health Care
Consumer Durables
Auto
IT
SENSEX
10
4
-8
-12
-12
-13
• Defensives like FMCG, Healthcare, Consumer durables
outperformed
• The trend was triggered by heavy FII selling, confusion linked
to GAAR and concerns on fiscal and current account
deficits
LEADERS ON THE WAY UP
(23rd May to 30th June)
• Sectors which led during the upward phase
SECTOR
RETURNS (%)
Capital Goods
Power
Media
Metal
BSE SENSEX
15
12
12
9
9
• This strong performance of Infrastructure related sectors
was in line with our March’12 outlook
FII FLOWS
• FII Flows in Equity
(in Rs. Million)
Apr-12
May-12
Jun-12
41,09,190
4,24,433
4,07,176
4,22,005
4,27,907
4,05,239
-11,091
-3,471
1,936
(in Rs. Million)
Apr-12
May-12
Jun-12
Gross Purchases
93,334
1,73,565
1,78,435
1,31,211
1,37,872
1,44,570
-37,875
35,691
33,867
Gross Purchases
Gross Sales
Net
Purchase/Sale
• FII Flows in Debt
Gross Sales
Net
Purchase/Sale
Total Net FII Flows in
Apr-June
Rs. 19,507 Million
NOTES ON EVENTS
DECLINING COMMODITY PRICES
-Our prediction from previous quarterly study
comes true
• Global commodity prices as measured by the S&P GSCI
Commodity Index fell 14% during the April-June 2012 quarter.
One of the major losses have been reported by Brent crude
(-21%).
• Causes:
– Economic slowdown: The biggest consumer of commodities, China
is showing signs of slowdown because of the Eurozone crisis and
slowdown in the US as both the regions account for the bulk of
exports from China.
DECLINING COMMODITY PRICES
• Impact:
– Reduction in inflationary pressures in China
– The impact was less evident in India as it was offset by a
depreciating rupee.
– Countries like Brazil, Malaysia, Thailand and Indonesia
are likely to get impacted negatively as they are net
exporters of commodities.
ELECTION RESULTS IN EUROPE
• GREEK NATIONAL ELECTIONS: The election was seen as a vote
on whether Greece should stay in Eurozone.
– Impact: Fears of ‘Grexit receded after the conservative New
Democracy party came first and pro-bailout parties won enough seats
to form a joint government. The crisis may resurface later
• FRENCH PRESIDENTIAL ELECTIONS: Socialist François Hollande
received 51.62% of the votes, while Nicholas Sarkozy got
48.38% of the votes.
– Impact: Hollande has been inclined to renegotiate a hard-won
European treaty on budget cuts that Germany's Angela Merkel and
Sarkozy had championed. He is a supporter of more government
stimulus, and more government spending in general despite concerns
from markets that France needs to urgently trim its huge debts.
SPANISH BOND YIELDS
• The Spanish sovereign bond yields have remained elevated and
increased by 18% from 5.35% to 6.33% in the April-June quarter.
It touched a high of 7.16% on June 18.
• On June 7, Fitch downgraded Spain by three notches to BBB
which is just two notches above junk status following a
downgrade to BBB+ by S&P in May.
• On June 9 Spain sought a European bailout of 100 billion euros
($125 billion) to support ailing lenders, the fourth euro member
to seek a rescue since the debt crisis started almost three years
ago. Following this Moody's lowered Spain's grade from A3 to
Baa3 which is just one notch above junk on its scale.
WEAK US RECOVERY
• The first quarter GDP growth stood at 1.9% compared to 3%
growth in the previous quarter.
• Markit's US Manufacturing PMI fell from 54 in May to 52.5 in June
– the lowest in 18 months.
• There has been a decline in consumer spending as reflected in the
retail sales data (excludes services) which declined for three
straight months in the Apr-June quarter.
– Spending in June fell in nearly every major category — from autos,
furniture and appliances to building, garden supplies and department
stores.
• The US monthly employment data has become an increasingly
important barometer of the progress in US.
– U.S. companies added 115000, 69000 and 80000 jobs in April, May and
June respectively with June being the third straight month
of tepid job growth. Unemployment stood steady at 8.2%.
INDIAN GDP
• GDP growth for the last quarter of FY12 was seen at 5.3% (y-oy) which was much below market expectations of 6.1%. Last
quarter growth remained considerably weak with the industry
segment witnessing weak growth of 0.7%, while the services
sector growth remained strong at 7.5%. The full year GDP
growth thus decelerated to 6.5%.
• IIP data: Industrial production growth rate slowed down
sharply to 0.1 per cent in April following a 3.2% fall in March
• In April, S&P lowered the outlook on India's BBB-minus rating
to negative from stable and had said there was a one-in-three
chance of a downgrade over the following 24 months. Fitch
followed in June citing the same reasons – absence of reforms
and corruption
RBI RATE CUTS & LIQUIDITY
MEASURES
• RBI cut repo rate by 50 bps in its annual monetary policy
statement 2012-13 in April
• In a move aimed at arresting the unrelenting fall of Indian
rupee, RBI on 25th June hiked the limit of foreign investment in
government bonds by $5 billion to $20 billion. Of the $20 billion
threshold, FIIs can now invest $10 billion with no residual
maturity restrictions and another $10 billion subject to a
residual maturity of three years.
• RBI also raised limit of external commercial borrowing (ECB) to
$10 billion.
RBI RATE CUTS & LIQUIDITY
MEASURES
• Qualified foreign investors (QFIs) will be allowed to invest in
mutual fund schemes that hold at least 25% of their assets
(either in debt or equity or both) in infrastructure sector,
under the current $3 billion sub-limit for investment in MFs
related to infrastructure.
• RBI increased the limit of export credit refinance for banks
to 50% of outstanding export credit from 15% expecting
such a move to infuse Rs. 30,000 crore of additional
liquidity
OTHER EVENTS
• FUEL PRICES
– In the steepest ever increase, petrol rates were raised by
a massive Rs 7.54 per litre in May.
• INDIAN MONSOONS
– POOR START- India’s monsoon rainfall, which accounts
for 70 percent of the nation’s total rains, was 29 percent
below normal in June according to the weather
department. Showers in June, which account for 18
percent of season’s total, have been the least since 2009
when they were 47.2 % below a 50-year average
EVENTS TO LOOK
FORWARD TO - GLOBAL
EUROPE: WHAT NEEDS
TO BE DONE
• To prevent a collapse, Germany will have to agree to share
the liabilities of peripheral European nations.
• Germany wants them to adopt fiscal austerity and bring
their budgets in balance. It also wants a tighter fiscal union.
• Austerity measures are causing a rise in unemployment and
reduction in government benefits. They are also reducing
growth, and hence governments’ revenues in peripheral
nations.
• To solve Europe’s problems, some large open-ended
commitment will have to be made, either in the form of
ECB standing behind government debt or a mutualisation
of debt by governments (issue of euro bonds).
• Piecemeal solutions will not work and the region will lurch
from one crisis to another.
USA ECONOMIC DATA & FOMC
• In June when the Federal Open Market Committee (FOMC)
met, it expanded Operation Twist by $267 billion. Minutes
from the meeting reveal most members felt that the risk of
slowing growth and higher unemployment had increased.
• If growth falls further, the Fed may have to launch a third
round of quantitative easing.
• The US government needs to shelve its budget deficit
reduction program temporarily until growth is on a sound
footing and undertake some stimulus spending (especially
on infrastructure).
CHINA: WHAT NEEDS TO BE DONE
• After growing at an average rate of 10 per cent for the last
decade, GDP growth in China is slowing down – to 8.1 per
cent in Q1 2012 and to 7.6 per cent in Q2 2012.
• China has cut interest rates twice. In May it reduced banks’
reserve requirements, which will allow them to lend more.
• According to Credit Suisse, this may not be of much help
since the private sector is not interested in investing in real
businesses amidst the current slowdown.
• The government is likely to encourage infrastructure
investment. But local governments, which implement these
projects, are heavily indebted and don’t have the capital to
bear their share of the burden.
CHINA: WHAT NEEDS TO BE DONE
• Credit Suisse argues that every 10 years China has
undergone structural reforms that have boosted its
productivity. Now it needs to undertake more reforms.
• Some of the reforms it suggests are opening up the service
sector, doing away with monopolies in banking and utilities,
and deregulating interest rates and the exchange rate.
• In recent times, China has allowed the yuan to trade within
a broader range.
• Moreover, the Chinese government’s debt is only 22 per
cent of GDP, so it does have a lot of fiscal ammunition for
stimulating demand (unlike India).
EVENTS TO LOOK FORWARD TO DOMESTIC
•
•
•
•
•
•
Progress of Indian monsoons
Progress on key reforms – GAAR, FDI in multi brand retail
Economic data – inflation, industrial output, Fiscal deficit
Who is chosen as Finance Minister
Rate cuts by RBI
Q1FY13 results to be declared in July/Aug
OUTLOOK FOR ASSET CLASSES
Asset Class Performance in Q2CY12
Debt
Equity
Range of
movement
Outlook for
Q3CY12
10-Year Gilt: Down
4.22%
5-Year Gilt: Down 4.88%
AAA 10 Year:
Down1.58%
3-M T Bill: Down 7.46%
3-M CD: Down 16.67%
1-Year CD: Down 7.92%
8.04 – 8.78
Stable
8.13 – 8.72
Stable
Sensex : Down 0.3%
15948 – 17597
Nifty : Down 0.7%
4836 – 5359
8.14 – 8.81
Downwards
Positive
Our prediction from the previous quarterly study comes true – yields softened across the
board this quarter
Remarks
More rate cuts
expected by RBI
Liquidity in the
system may
improve.
However, poor
monsoons may
be a spoilsport
Quantitative
easing should
drive portfolio
flows to India.
Economic
reforms will
create the right
climate
OUTLOOK FOR KEY SECTORS
Sectoral Indices
Auto
Banking
Pharma
IT
Q2CY12
Returns
-7%
0.3%
11%
-6%
12 month
returns
7%
-7%
23%
-5%
Outlook for Q3CY12
Remarks
Neutral
Intense competition and slow
progress of monsoon can be a
dampener
Positive
Positive sentiments should lift
the outlook on bad assets.
Valuations attractive
Neutral
Rally last quarter attributable
to rush for defensives.
Negative
Headwinds of global
slowdown and currency
outlook to keep interest low
Infra push should supportive
Capital Goods
-2%
-28%
Positive
Rally last quarter attributable
to rush for defensives.
FMCG
11%
23%
Neutral
Metals
-5%
-28%
Negative
NIFTY
-0.7%
-7%
Positive
Global slowdown and
particularly China likely to
keep commodity prices in
check
ANNEXURE: EUROPE’S FESTERING
CRISIS
• After Greece, Spain has emerged as the new epicentre of
the European crisis.
• Spain’s banks are in trouble with bad loans rising in the
wake of a bust in its property market after the global
financial crisis. (See annexure: Europe: What has been
done)
•
•
•
•
•
ANNEXURE: EUROPE: WHAT HAS
BEEN
DONE
On June 21, European leaders met in Rome and agreed to
take steps towards a banking union.
On June 30, European leaders reached a breakthrough deal
on recapitalisation of banks.
They agreed to create a single supervisory body to oversee
euro zone banks. This body will use the area’s rescue fund,
the European Financial Stability Fund (EFSF) or its successor,
the European Stability Mechanism (ESM), to aid banks
directly.
Thus banks in trouble will be able to receive capital without
adding to the country’s sovereign debt.
On July 9, European Commission leaders extended the
deadline for Spain’s deficit reduction targets. They also
promised that Spain’s banking sector would be recapitalised
to the extent of 30 billion euros.
ANNEXURE: CHINA: WHAT IS
CAUSING THE SLOWDOWN
• The Chinese economy is export driven (exports constitute
39.7 per cent of its GDP). With demand in Western markets
weakening, China’s exports, and hence economic growth,
has been affected.
• The massive stimulus package launched after 2008’s
financial crisis led to inflation, and to a property bubble
which has priced middle-class families out of the property
market. It has also led to bad loans in the banking sector
and to indebtedness among local governments. So China is
wary of launching another stimulus program this time.
• Moreover, a few structural factors are also at play, which
suggest that double-digit growth may be difficult to achieve
in future.
ANNEXURE: WHAT IS CAUSING THE
SLOWDOWN
• Per capita income in China has crossed the $5000 mark. It is
after crossing this level that growth in other Asian miracle
economies – such as Japan, Korea and Taiwan – also slowed
down.
• In the recent past, China’s growth has been predominantly
investment driven. Last year investment accounted for 50
per cent of China’s GDP. Last year it spent more on
infrastructure than US and Europe combined. Such a rate of
investment is unsustainable. Besides, the infrastructure
that China needs has already been built, so it can’t keep on
adding to capacity.
ANNEXURE: WHAT IS CAUSING THE
SLOWDOWN
• Productivity increase in the Chinese economy occurred due
to rural to urban migration as workers found more
productive jobs in cities. Now the pool of under-employed
workers in rural areas who can migrate to cities has been
nearly exhausted.
• Demographic factors. The strict implementation of the onechild policy since 1979 means that fewer workers will enter
the working population henceforth, compared to 1990s and
2000s.
• Wage inflation in China is now running at 15 per cent.
• The above two factors mean that China’s advantage of lowwage workers will get eroded in future.
ANNEXURE: WHAT IS CAUSING THE
SLOWDOWN
• Real estate bubble. To fight the financial crisis of 2008,
China expanded credit. A lot of this money went into the
property market.
• Switch to consumption. It is argued that China needs to
shift from being an export and investment-driven economy
to a consumption driven economy. But as Ruchir Sharma of
Morgan Stanley argues in a recent article in ET,
consumption in China has already been growing at 9 per
cent for the past decade. The scope for increasing that rate
further is small.
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