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LIQUIDITY, VALUATIONS AND EVENTS Apr – Jun 2012. MOVEMENTS OF MAJOR INDICES Index1-Apr-112-Jan-1230-Mar-12 3-month Returns 1-Year Returns BSE SENSEX19420155181740412%-10%

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Presentation on theme: "LIQUIDITY, VALUATIONS AND EVENTS Apr – Jun 2012. MOVEMENTS OF MAJOR INDICES Index1-Apr-112-Jan-1230-Mar-12 3-month Returns 1-Year Returns BSE SENSEX19420155181740412%-10%"— Presentation transcript:


2 MOVEMENTS OF MAJOR INDICES Index1-Apr-112-Jan-1230-Mar-12 3-month Returns 1-Year Returns BSE SENSEX %-10% S&P CNX Nifty %-9% Dow Jones % Dow Jones Composite Index % S&P %6% Nikkei %4% Shanghai Composite %-24% Bovespa %-7%

3 MOVEMENT OF SECTORAL INDICES Sectoral indexes1-Apr-111-Jan-1230-Mar-12 3-Month Returns 1-Year Returns BSE AUTO %8% BSE BANKEX %-11% BSE Capital Goods %-25% BSE Consumer Durables %2% BSE FMCG %24% BSE Health Care %9% BSE IT %-7% BSE METAL %-31% BSE OIL & GAS %-21% BSE Power %-24% BSE PSU %-19% BSE Realty %-26% BSE TECk %-7%

4 CHANGE IN COMMODITY PRICES Commodity 2/4/20113/1/201230/03/ Month Returns 1-Year Returns Aluminium ($/tonne) %-19% Copper($/tonne) %-9% Zinc ($/tonne) %-14% Gold ($/OZ) %17% Crude - Brent (US$/barrel) %3%

5 Recap of Jan – Mar 2012 Flows FII Flows into equities FII flows into debt Month JanuaryFebruaryMarch Gross Purchase Gross Sales Net investment Month JanuaryFebruaryMarch Gross Purchase Gross Sales Net investment Total net purchase/sale during Q12012 Rs. 633,493 Million (in Rs. Million)

6 Flows from Domestic Institutional Investors MonthJanuaryFebruaryMarch Purchase Sale Net purchase/sale Total net purchase/sale during Q12012 Rs. -220,863 Million (in Rs. Million)

7 Recap of Jan – Mar 2012 Major Events that drove the market Monetary easing – fuelled liquidity – Prime driver of the rally in asset prices – both stocks and commodities – during Q1 was the ECBs twin LTRO programs (December 21 and February 29) worth 1.02 trillion Euros. Rising Global uncertainty – Rising Spain bond yields – Greece came on the borderline of default US recovery Surprised currency market worldwide Domestic – Cut in cash reserve ratio (CRR) – Outcome of election in 5 states, particularly UP and its impact on policy paralysis – Union Budget


9 LTRO-2 Feb. 29, 2012: The ECB held a second 36- month auction, known as LTRO2, that provided 800 euro zone banks with billion Euros in low-interest loans. This flood of liquidity boosted asset prices across the world during Q1.

10 SPAIN BOND YIELDS Rising yields of Spanish bonds signalled that problems in the euro zone flaring up again. During March yield on 10-year bond rose 93 basis points to 5.8 per cent. A Spanish bond auction on April 4 barely managed to raise the minimum amount sought. Will Spain follow Greece, Ireland and Portugal in seeking a bailout? Unemployment level in Spain at a very high 23%.

11 US RECOVERY News flow from US has improved. GDP grew at an annual pace of 3 per cent in Q Unemployment rate down to 8.2%. But recovery in jobs stalled in March. Only 120,000 jobs added compared to 240,000 in Feb. Strong growth in the US could lead to slowdown in fund flows to EMs owing to home-country bias of institutional investors.

12 RATE CUTS Inflation has abated but is not yet in RBIs comfort zone. High oil prices due to Israel-Iran stand-off pose a risk. Reining in of government expenditure, as announced in the budget, was inadequate. Government will have to rein in fiscal deficit (read, raise fuel prices) to create comfort zone for RBI to proceed with further rate cuts. CRR was cut by 50 bp

13 IMPACT OF UNION BUDGET -1 Budget contained no major reforms and evoked mixed reactions from the market. Rajiv Gandhi Equity Saving Scheme introduced which will give tax incentive for investing in equity markets. First-time investors with annual income less than Rs 10 lakh may invest up to Rs 50,000 in equities and get a tax deduction of 50%. Scheme carries lock-in of 3 years. Security Transaction Tax (STT) reduced by 20 per cent on delivery-based trades from 0.125% to 0.1%. GAAR, which will tax FIIs that dont have a substantial presence but merely route investments through tax havens, has created uncertainty. Disinvestment target reduced from Rs 40,000 crore in FY12 to Rs 30,000 crore in FY13 in the light of large slippage last year.

14 IMPACT OF RECENT STATE ELECTIONS The Congress Party performed poorly in the recent state elections, losing in UP, Punjab and Goa. Had it done well in UP, it could have offered support to the Samajwadi Party in the state and received reciprocal support at the centre. This would have enabled it to pass reform-related bills in Parliament. Now the party is likely to grow more cautious and not undertake any reforms. Many allies oppose key reforms, and the UPA does not have a majority in the Rajya Sabha. Only reforms that dont require Parliamentary approval are likely. Later this year elections are scheduled in Gujarat and Karnataka. More dole-outs prior to them would have adverse implications. If Congress fares badly in them too, calls for mid-term elections could become more strident. Political uncertainty would be negative for the markets.

15 LIQUIDITY FLOWS What factors will impact global portfolio flows? – Impact of GAAR – LTRO – QE3 – Slowing Chinese economy


17 IMPACT OF GAAR General Anti-Avoidance Rules (GAAR) announced in budget spooked many FIIs. Entities investing in India via a tax haven such as Mauritius or Singapore must have "substance" in those tax havens. Funds being invested in India must have been pooled in that tax haven or at least one senior investment manager must be present there.

18 GAAR – WHO WILL BE AFFECTED? P-note issuers able to demonstrate substantial presence in Mauritius or Singapore wont be affected. FIIs whose funds are pooled elsewhere (say, US or UK) and who route funds via Mauritius will be affected. From April 1 will become liable to pay taxes in India. May relocate to Singapore to avail of double taxation avoidance agreement (DTAA ) between Singapore and India. But to avail of that benefit, fund has to demonstrate that it has had operations in Singapore and has incurred expenses of around $200,000 per year for last two years. GAAR could affect short-run FII inflows. Long-term impact unlikely to be significant, given Indias importance. Only when more clarity on GAAR emerges can impact be gauged.

19 MORE MONETARY EASING: LTRO The most prominent sign of problems in the euro zone flaring up again comes from the yields of Spanish sovereign bonds rising once again. This could force the ECB to undertake further rounds of monetary easing.

20 QUANTITATIVE EASING-3 Operation Twist scheduled to close at end of June. Once it ends, Fed Chairman Bernanke could launch another dose of bond purchase program (despite signs of recovery). Would get required alibi if euro zone deteriorates. November presidential election might make it difficult for him to launch new initiative in second half of May do it in Q2-Q3 2012, or in January 2013, when effect of the recent fiscal tightening shows up. Both forms of QE (LTRO and QE3) would drive risky assets in EMs like India up.

21 SLOWDOWN IN CHINESE ECONOMY Chinas growth rate expected to slow down from 9-10 per cent in recent past to per cent in 2012 due to monetary tightening. If worlds biggest consumer of commodities slows down, commodity prices could soften. Would be a big positive for a commodity importer like India.

22 OUTLOOK FOR ASSET CLASSES Asset ClassPerformance in Q1CY12Range of movement Outlook for Q2CY12 Remarks Debt10-Year Gilt: Up 1.67% 5-Year Gilt: Up 2.63% AAA 5 Year: Up 1.70% AAA 10 Year: Up 2.04% 3-M T Bill: Up 5.87% 3-M CD: Up 14.89% 1-Year CD: Up 6.26% 8.13 – – – – – 9.07 Yields to soften across the board. Short terms yields to moderate with better liquidity Crude prices likely to correct. Commodity prices also to soften. FII flows, if intact, will also keep liquidity position good EquitySensex : Up 12.16% Nifty : Up 14.21% – – 5629 Markets likely to stay range- bound. May edge past the Q1 peak towards the end of Q2 Require impetus to move up: QE3, rate cuts, policy action, positive FII flows

23 OUTLOOK FOR KEY SECTORS Sectoral IndicesQ1CY12 Returns 12 month returns Outlook for Q2CY12Remarks Auto 26%8% Positive Reduction in interest rates, affordability, new launches Banking 28%-11% Positive Macro environment positivity to reduce NPA threat Pharma 13%9% PositiveStrong domestic growth IT 4%-7% Neutral Mixed bag of results to keep outlook on the sector confused Capital Goods 24%-25% Positive Resumption of order flows, lower interest rates FMCG 13%24% NeutralStrong growth priced in Metals 21%-31% NegativeChina slowdown NIFTY 14%-9%

24 ANNEXURE – UNION BUDGET On subsidies, we got a target – it will be kept under 2 per cent of GDP in FY13 and reduced to 1.75 per cent in 3 yrs. FM has projected a fiscal deficit of 5.1%, a more credible target than last years 4.6%. Both excise duty and service tax rate hiked by 2 percentage points, which could prove inflationary. Move to a negative service tax list to increase its coverage. Boost to infrastructure development by increasing the limit of infra tax-free bonds from Rs 30,000 crore to Rs 60,000 crore. ECB allowed for road construction and power. Budget doubled custom duty on gold and platinum from 2 to 4 per cent to curb consumption.

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