BofAML: India Economic Watch: 3 reasons why yields are peaking

Bottom line: RBI OMO, eventual July roll back triggers
Are gilt yields really peaking? clients ask. Yes, in our view, panic sell offs apart.
We think the 10y should come off to about 8% by March 2014. The RBI will likely
OMO about Rs1600bn by March 2014 to support 15% loan demand. RBI OMO,
since April, has been almost entirely neutralized by FX intervention. Second, we
expect Governor designate Raghuram Rajan – and we wish him all the very best -
to eventually roll back the July 15 tightening measures if the INR settles down
about Rs65/USD. As it is, we have cut FY14 growth down 120bp to 4.6% since
July 15. Finally, FX intervention to support the INR should create greater scope
for OMO to offset fiscal slippage (of Rs200bn BAMLe) due to depreciation. And
what about INR impact on inflation? Depreciation poses 50-75bp risk to our 6%
March inflation forecast. This is why we do not expect the 10y to back rally to preJuly 15 sub-7.5% levels. Do read our Rupee Dilemma report here.
#1. Rs1600bn RBI OMO to support gilts; 10y ~8% by March
We expect RBI OMO to support gilts in 2HFY14. Our liquidity model estimates
that the RBI will need to buy about Rs1600bn of gilts to fund 15% loan demand
(Table 1). The RBI's OMO (and auction cancellations) of around Rs320bn, since
April, have been almost entirely neutralized by FX intervention. Against this
backdrop, we are relieved that the RBI has resumed OMO purchases reversing
the July 15 announcement of OMO sales. Its initiative to soften the impact on
bank balance sheets is doubly welcome. Do read our RBI OMO report here.
We do not think that the RBI has a lot of time. After all, a Re1 of OMO injected
today will take about 6 months to generate about Rs5 of deposits. This will take
us almost to the end of the busy season of October-March. As it is, M3 growth, at
12.2%, is running way below optimal 15-16% levels. Not surprisingly, India is that
rare economy in which lending rates are still close to their 2008 peak. It is for this
reason we have cut FY14 growth down by 120bp after the July 15 measures were
announced.
#2. July tightening roll back if INR stabilizes ~Rs65/USD
Will the RBI roll back the July 15 measures? clients ask. Yes, if the INR stabilizes
about Rs65/USD for now, in our view. After all, they have pushed back lending
rate cuts and led us to slash FY14 growth to 4.6% from 5.8% before July 15 (and
FY15 to 5.5%). Do lead our last growth report here.
In any case, we have always argued that the INR will stabilize only when the RBI
begins rebuilding FX reserves - rather than hiking rates. In fact, Chart 1 shows
that the INR has typically appreciated when the RBI has cut rates to support
growth. This is because FII equity inflows, that respond to growth, are, at about
US$220bn, far larger than FII debt inflows, at about US$30bn, that may respond
to higher rates. Higher rates actually have - expectedly - not been able to attract
back FII debt flows as the outflows were driven by the on-going EM debt sell off

India: Downgrading our GDP and INR forecasts; more near-term momentum in China ::Goldman Sachs

Cutting growth forecasts for South and Southeast Asia; more near-term momentum in China
We are cutting our growth forecasts for India and most of Southeast Asia,
reflecting more difficult external funding conditions for the region as
markets increasingly anticipate US Fed “tapering” and eventual exit from
unconventional monetary policies. The largest downward revisions are in
India, followed by Indonesia, then Thailand and Malaysia. This reflects the
principle that countries with larger macro imbalances (particularly external
deficits) have faced greater financing pressures and consequently more
growth headwinds.
In India, we have cut our FY14 real GDP growth forecast to 4.0%, from 6.0%
previously, and our FY15 forecast to 5.4%, from 6.8% previously. Inflation
is likely to be temporarily higher given the effects of a weaker currency on
domestic prices. We expect the rupee to reach 72 per US dollar in 6
months’ time, recovering to 70 over a 12-month horizon.
In Southeast Asia, we have cut growth forecasts for Indonesia, Thailand,
and Malaysia between 40-70 bp each in 2013 and 2014, with a smaller
adjustment in Singapore. We reflect a stronger trajectory for the
Philippines in the first half of 2013, but also expect it to slow somewhat
next year.
Given external pressures and high inflation, we expect a further 75 bp of
policy rate hikes by Bank Indonesia before the end of the year. Inflation
and funding pressures look significantly milder outside Indonesia, and
should allow other central banks in the region to wait until mid-2014 before
hiking rates.
In contrast, the near-term outlook for China has brightened somewhat.
Growth appears to have accelerated in Q3, with signs of a pickup in
external demand and supportive domestic policies (as government policy
announcements help boost sentiment and investment) combining to drive
a turn in the inventory cycle. We now expect sequential growth of over 8%
in the second half of the year, pushing full-year growth just above the
government’s policy target.

Monetary stability is RBI's prime role: Rajan

“This is not an easy time as economy faces challenges. Our actions will be at measured pace given the current market turmoil,” Raghuram Rajan said after he took charge as the new RBI Governor.

There is good reason to believe medium rung future of India is strong; gloom and doom is overdone, Rajan said. He said positive developments like good monsoon will help going forward.

Following are the highlights from the inaugural speech delivered by Raghuram Govind Rajan who took over as the 23rd Governor of the Reserve Bank.

* New bank licences by January 2014 or soon after

 * Bimal Jalan to head the external committee to screen banking licence applicants

 * RBI wants more regulatory and supervisory control over the domestic operations of foreign banks

 * Banks need not require RBI nod to open new branches

 * Hints at reducing the SLR in a calibrated way

 * Mid-quarter review of monetary policy postponed by 2 days to Sept 20 as more time required to consider all developments

 * To steadily liberalise markets, and lift restrictions on investment and position taking, together with Sebi

 * Says primary role of RBI as maintaining monetary stability but generating growth is also important

Rupee has lost 1/5th of its value against dollar: PM

Setting the tone on a key issue of concern for India at the G20 summit, Prime Minister Manmohan Singh on wednesday pushed for an "orderly exit" from unconventional monetary policies being pursued by the developed world to avoid "damaging" growth prospects of the developing world.

With India hit by a declining value of rupee, widening Current Account Deficit (CAD) and stunted growth, the country's anxiety over imminent phasing out of the fiscal stimulus by US Federal Reserve was reflected by the prime minister on the eve of the eighth summit of the group of industrialised and major emerging economies.

Singh arrived here this evening to participate in the two-day summit which is expected to focus on current market volatility and currency concerns in the emerging economies including the five-nation BRICS bloc.

Besides India, the other member countries are Brazil, Russia, China and South Africa.

"I will emphasise in St Petersburg the need for an orderly exit from the unconventional monetary policies being pursued by the developed world for the last few years so as to avoid damaging the growth prospects of the developing world," Singh said in a statement ahead of the summit.

He also underscored the importance of G20 to promote policy coordination among major economies in a manner that provides for a broad-based and sustained global economic recovery and growth.

The prime minister made a reference to orderly exit from unconventional monetary policies in the backdrop of splits between emerging markets and the US over its winding down of stimulus and the slowing growth of BRICS nations.

1QFY14 results recap - The good, the bad and the ugly : Antique

India's corporate sector posted dismal performance in 1QFY14. While a large
part of it was on expected lines, earnings decline in a few sectors was alarming.
Though companies under Antique coverage (ex-oil) posted revenue growth of
7.3%, which was in line with expectations, and similar to growth registered in
3QFY13 (9%) and 4QFY13 (7%), PAT grew by 3.6%, against our expectation of
growth of 6.2% YoY. Earnings growth is pulled down by autos, cement,
industrials and utilities. We see earnings trajectory to worsen in remainder of
the year, with rising costs and falling demand. We are cutting down our FY14
Sensex EPS estimate by 5% to INR 1295 (earlier INR 1365) and Sensex target to
19425 (15 x FY14e EPS). We remain defensive and believe that bottom-up
approach is the best strategy for beating market return. Among sectors, prefer
IT, pharmaceuticals, media, energy and auto.
Sharp earnings moderation across sectors
􀂄 Only Media and Financials posted 15%+ revenue growth during the quarter.
Pharmaceuticals, FMCG and IT posted reasonable growth of 11%, 12% and 13%, but
growth rates have been moderating meaningfully. Moderation is revenue growth is more
pronounced in FMCG sector, from around 17-18% a couple of quarters ago to 12% now.
With respect to our estimates, media and oil & gas sectors beat our revenue estimates
by over 5%, while industrials fell short by 10%. Most other sectors grew in line with estimates.
􀂄 Cement and industrials witnessed sharp compression in margins during the quarter, YoY,
while automobiles and oil & gas sectors saw margin expansion.
􀂄 Sectors that posted strong YoY earnings growth during the quarter are: FMCG (12%), IT
(15%), Media (18%), Pharma (13%) and Financials (11%). Oil & Gas sector performed
better than expected as a refineries cut down their losses during the quarter. Industrials
disappointed the most with 25% miss in earnings, as L&T and BHEL missed earnings
expectations by 24% and 40%, respectively. Utilities were another sector with 16% miss in
earnings. Auto, Cement, FMCG, IT, Pharma and Financials sectors performed in line on
aggregate basis, but with significant variations within respective sectors.
􀂄 Key large cap earnings beaters: Bosch, Sun Pharma, Zee, Bank of Baroda, HCL
Tech, BPCL.
􀂄 Key large cap earnings disappointments: Tata Power, Coal India, L&T, BHEL,
United Spirits, ACC, Asian Paints, Godrej Consumer, Dr. Reddys, Ranbaxy, Oil India, ONGC.

􀂄 Key mid-cap earnings beaters: Shree Cement, Jyothy Labs, IL&FS Transportation,
Spicejet, Gujarat Pipavav, Hexaware, Hathway, GSPL, Bank of India, HPCL.
􀂄 Key mid cap earnings disappointments: ABB, Voltas, KEC, Dish TV, Petronet, Union
Bank of India, Mahindra Finance.
Worsening economic outlook!
The Indian markets, after outperforming most of its peers in CY12, have declined 5.8%
since the beginning of CY13. Against expectations earlier that the Indian economy will start
showing signs of improvement, growth outlook has worsened in past 3 months. The Index of
Industrial Production remains depressed, and capex cycle refuses to pick up. While the
Government has tried its best to bring about certain substantial reforms, such as increasing
diesel prices and raising FDI limits in several key sectors, the impact of these have been
limited on the industry and the economy. Another big worry is high current account deficit,
which is playing havoc with the currency. Currency at INR 63 / $ is at all time low, and has
fallen by 15% in the year so far. Rising oil prices and falling INR will significantly impact the
Indian industry in the next few quarter, thereby putting a lot of pressure on profitability of
Indian corporate sector, which are staying away from making fresh investments. On the
other hand, interest rates have started showing signs of rising yet again. Yields on the 10-
year benchmark bond hit a five-year high of 9.24 percent. A clear political landscape,
sharp focus on reform and concerted effort to stem fall in INR are key requisites for reviving
sentiments going forward.
Sensex to grow 8%: Prefer bottom-up, balanced approach
We cut our FY14 Sensex EPS targets by 5.1% to INR 1295, on the back of 3.5% cut in
4QFY13. This implies 8% YoY Sensex earnings growth in FY14. Given meaningful slowdown
in industrial output, possible demand moderation in the consumer space, and likely cost
push due to falling INR, a farther downside to current estimates cannot be ruled out. We set
out Sensex target at 19425 based on 15x FY14e Sensex EPS. We continue to believe that
India will remain bottom-up market in CY13 - 14.
We broadly maintain our sectoral preferences. Our preferred sectors include IT,
Pharmaceuticals, Media, automobiles, energy and select private sector banks. We remain
cautious on PSU banks, Industrials, infrastructure, metals, cement and select oil refineries.

JP Morgan US Value Equity Offshore - NFO:: Yet another fund for US bluechips :: Business Line

JP Morgan US Value Equity Offshore - NFO

There is not much good news for corporate India currently, with low growth rates, ballooning deficits, high inflation and slowing corporate earnings.

A possible shift in investor interest globally from the emerging markets to the developed ones, is also a possible risk. Indian investors can thus examine the possibility of owning 5-10 per cent of their portfolio in US focussed funds.

This apart, a weak rupee vis-à-vis the US dollar also might bolster returns for domestic investors.

In this backdrop, JP Morgan has launched the JP Morgan US Value Equity Offshore (JP Morgan US Value), a fund-of-fund which invests in the parent’s US-based scheme.

Pros and cons

The parent fund has delivered a compounded annual return of 28.4 per cent over the past three years.

Stocks trading at valuations that are much lower than domestic companies, corporate America sitting on piles of cash — along with reasonable growth prospects for cyclical sectors — argue in favour of US stocks.

Improvement in indicators such as housing starts, household debt and profits as a proportion of GDP, also point to a revival in the US economy.

JP Morgan US Value is benchmarked to the Russell 1000 value index. This will make for a broader portfolio.

Across sectors such as financial services, technology, telecom, industrials, utilities, consumer staples, pharmaceuticals and oil & gas, there are US companies that are global in reach and size but are still trading at reasonable valuations.

The fund fact sheet indicates that the Russell value index trades at 13.3 times forward earnings, while its own portfolio is valued at a marginally lower price-earnings multiple. Exxon Mobil, Wells Fargo, AT&T, Pfizer and Johnson & Johnson are some of the fund’s top holdings.

Return on equity of the scheme’s portfolio is a healthy 14.5 per cent, which is better than its benchmark. The portfolio appears firmly anchored by value.

JP Morgan’s other fund-of-funds focused on the Asean region and China have done quite well.

However, investors considering this fund must note here are older funds with a similar focus already available in the market. FT India Feeder – Franklin US Opportunities, DSP BlackRock US Flexible Equity and ICICI US Bluechip are other options.

It must be noted that investments overseas must be considered only for the purpose of diversification, where small amounts of surplus cash can be deployed at periodic intervals. A moderate to high risk appetite is required.

Risk related to currency movement also has to be factored in. Another point to note is that investments in overseas funds or fund of funds are treated as debt schemes for taxation purposes.

Don’t mix investment with tax planning :: Business Line

I am 24 years old and have started investing Rs 1,000 in Reliance Equity Opportunities through the SIP mode, for the next three years. Also, I would be investing Rs 500 in the Tata Balanced Fund for one year. I wish to invest another Rs 1,000. Kindly suggest schemes where I can park the same and let me know if my investments are on the right track.

Trupti Bolke

Starting off early in investing is a good move that will help you achieve long-term goals.

But if your investment horizon is for just three years for the equity fund and one year for the balanced scheme, you may not be able to achieve any meaningful returns. Even five years is not sufficient to gain inflation-beating returns, if the returns of equity funds over the past five years are anything to go by.

Since you are young, continue SIPs for at least 7-10 years and increase investments when your surplus improves. You have chosen a multi-cap fund in Reliance Equity Opportunities. It has a good track record over the past four-five years. Invest Rs 1,500 in it. In Tata Balanced, you can park Rs 1,000. As for assessing whether your portfolio is on the ‘right’ track, we need to know your goals and the timelines in which you wish to reach them.

***I am a 19-year old college student and have been investing Rs 6,000 through monthly SIPs in HDFC TOP 200. I aim to accumulate Rs 30 lakh in 10 years. The fund’s underperformance in the last few quarters makes me anxious. Should I switch to a better fund?

Bhaskar Jha

It is heartening to note that you have started saving prudently even while still pursuing your education. But your goal of accumulating Rs 30 lakh in 10 years appears quite ambitious. If you invest Rs 6,000 every month for a period of 10 years, the annual returns must be nearly 25 per cent for you to achieve the target. A more realistic return expectation of 12 per cent would leave you with a corpus of close to Rs 14 lakh. Coming to your investment, yes, HDFC Top 200 has underperformed over the past year or so. But it has an exceptional track record over the past 10 years. The scheme does lag peers in short phases, but rebounds well over the long term. Nonetheless, you must invest in more funds to diversify rather than put all your money in a single scheme. Split Rs 6,000 as follows: Invest Rs 2,500 each in HDFC Top 200 and ICICI Focused Bluechip Equity. Park the balance Rs 1,000 in IDFC Premier Equity.

Since you are young, we presume you can take moderate to high risk in your investments.

***I am 26 and work for a private company. I wish to invest Rs 5,000 every month for one year. My requirement is assured capital appreciation of 15-18 per cent. Please suggest schemes where I can invest to generate such returns.

Rajarshi Dasgupta

There are no schemes available that can offer you assured returns in the range of 15-18 per cent, that too, within a year. In fact, no market-linked product can ever give you assured returns. The best fixed deposit can give you a return of 9.5 per cent, while a fixed maturity plan may offer 10 per cent. Both these returns are pre-tax. So, you need to drastically temper your returns expectation.

***I am 31 years old and started investing Rs 16,000 in mutual funds through the SIP mode from April 2010. I would like your views on my portfolio as to whether it would help me reach my target of Rs 2 crore in 20 years.

Large-cap: ICICI Pru Focused Bluechip – Rs 2,000; Large and mid-cap: Quantum Long Term Equity – Rs 2,000; Mid and small cap: IDFC Premier Equity Plan A – Rs 5,000; HDFC Mid-Cap Opportunities – Rs 3,000; Tax-Saving: Canara Robeco Equity Tax Saver – Rs 4,000; Debt: BSL Dynamic Bond – Rs 50,000

Susnata

With regular investments, you appear to be well-placed to reach your targeted corpus. If the Rs 16,000 that you invest every month is able to earn a return of 12 per cent annually, you should be able to reach Rs 2 crore in the next 19-20 years.

You have chosen a set of quality funds in your portfolio. But some minor rearrangement with respect to allocation of amounts needs to be done. Split Rs 16,000 as follows: Invest Rs 4,000 each in ICICI Focused Bluechip and Quantum Long Term Equity. Invest Rs 2,500 each in IDFC Premier Equity and HDFC Midcap Opportunities.

With reference to tax saving funds, you need to note that you must not mix investment and tax saving. For a very long-term goal you can invest in regular diversified equity funds instead of tax saving schemes. So, stop SIPs in Canara Robeco Equity Tax Saver and start investments in Canara Robeco Equity Diversified, a multi-cap scheme with a strong long-term track record. Invest the balance Rs 3,000 in this scheme. You can retain investments in Birla Sun Life Dynamic Bond.

Apart from mutual funds, you must also invest in debt (FDs, RDs, FMPs, PPF and NSC), gold and real estate over the long term in order to build a balanced portfolio.

Review the performance of your schemes once every year and take corrective action, if necessary. Book profits or move proceeds to safer debt avenues, in case you achieve your target ahead of time.

Investing for women: Making the most of markets :: Business Line

The stock market has not traditionally been a women’s forte, but that is changing with increasing awareness about equities among women.

“The number of women who attend investor seminars at the Madras Stock Exchange has increased from around two per cent in 2008 to around 8 per cent now,” says Venkateswaran, former Director of the Madras Stock Exchange.

Yet many women shy away due to factors such as lack of knowledge on markets and finance and an overtly conservative approach to investing.

A few simple steps can help you enter the market with your right foot forward.

INVEST IN LEARNING

Heard of a company with hot prospects on TV or got a sure-fire tip from a friend? Don’t give in to the temptation and buy.

Invest time to learn about the market. Get familiar with industries and companies, factors that affect the market and how the market operates.

This may be daunting, but there are many sources for guidance. For instance, Geojit Financial Services operates all-women branches in cities such as Kochi and Chennai where you can walk in to get advice from women financial advisors.

Asa C R, who heads the Kochi branch, says financial education classes are offered at various colleges and women’s forums, such as Lioness Club.

The internet has a lot to offer, but note that you should only rely on trusted sources for information and knowledge. The websites of the BSE and NSE are good tutors, too.

BUY QUALITY

The lure of quick profit may spur you to action, especially if you are overwhelmed by the process of learning and analysis. For instance, one may not appreciate liquidity and governance risks when buying shares of a small company, compared with buying a blue-chip.

“Look for companies with strong fundamentals and less price volatility,” says Murali of India Cements Investment Services. He says many women tend to buy new issues or stocks covered in the media with a short-term view, rather than investing in stable growth companies with long term returns in mind.

“Start with the 30 companies in the BSE index or the 50 companies in the NSE,” suggests Dharini Sampathkumar, an independent consultant who runs training programmes in finance.

SMALL STEPS

Before you enter the market, it may be advisable to start trading with a mock portfolio on paper. Track a handful of stocks and buy them virtually. Follow the price movements, news and analyses to see if your pick is paying off. This way, when you start investing real money, you are already comfortable with the process.

When buying for the real portfolio, you can reduce risks by limiting the amount invested in individual stocks as well as the overall amount set aside.Invest a small portion of your overall savings and stick to cash trades instead of trading on margin.

STOP LOSS

What if you make a loss despite due diligence? Don’t panic, it is quite normal!The strategy to follow is to be rational, look at what has changed since the time of purchase and re-evaluate options in the light of new facts.

There are simple methods you can follow to contain losses. When Rama Ganesan, a housewife in Mumbai, started trading in 2005, she would be afraid when her trades ran a loss. She now sets stop-loss limits for every stock purchased, helping avoid emotional decisions and thus limiting losses.

BE ACCOUNTABLE

Thinking of switch your advisor over recommendations that backfired? Financial service providers we spoke to say that women, more than men, blame their professional advisors more and shirk responsibility for their trades.

While faulting others may save you from guilt, you cannot walk away from the fact that the decision to buy is ultimately yours. Look at how price levels suggested and analyst reasoning have come about. Also, look at information that offers advice to the contrary to see if there are merits in that argument.

Kotak India Daily: Change in Reco - Glenmark Pharmaceuticals; Updates - Automobiles, Industrials

Glenmark Pharmaceuticals: US launches and cash generation remain key triggers; upgrade to ADD from REDUCE

l Stock turns attractive on a relative basis l US generics - dermatology launches hold the key l US Dollar-denominated debt appears manageable

Sector alerts

Automobiles: Sluggish sales signify weak start to the festive season

l Hero Motocorp performs better than peers l Maruti Suzuki volumes in line with estimates l M&M UV volumes continue to post steep decline l Tata Motors standalone business remains under pressure l Key themes to play in the sector

Industrials: Land acquisition bill - clarity in process; industry to fend for itself

l Key highlights - markedly different form old law in terms of scope, consent, price, rehabilitation l Parliamentary standing committee (broader political opinion) had stricter suggestions l State Governments have a strong leeway in setting price, thresholds for R&R in private acquisition l Defined process is a positive; industry has to fend for itself

Getting a home loan will be tougher now

The Reserve Bank of India said on Tuesday housing loans from banks to individuals should be closely linked to the stages of construction.

The central bank said such loan products, popularly called 80:20 or 75:25 schemes, are likely to expose the banks as well as their home loan borrowers to additional risks. 

Upfront disbursals of lump sum loans should not be made in case of incomplete or under-construction housing projects, the central bank added.