Presentation on theme: "LIQUIDITY, VALUATIONS AND EVENTS Jul – Sep 2012. MOVEMENTS OF MAJOR INDICES Index30-Jun-112-Apr-1230-Jun-12 3-month Returns 1-Year Returns BSE SENSEX18,84617,47817,430-0.3%-8%"— Presentation transcript:
LIQUIDITY, VALUATIONS AND EVENTS Jul – Sep 2012
MOVEMENTS OF MAJOR INDICES Index30-Jun-112-Apr-1230-Jun-12 3-month Returns 1-Year Returns BSE SENSEX18,84617,47817, %-8% S&P CNX Nifty5,647 5,3185, %-7% Dow Jones12,41413,26412,880-3%4% Dow Jones Composite Index4,3104,4874,427-1%3% S&P 5001,3211,4191,362-4%3% Nikkei 2259,81610,1109,007-11%-8% Shanghai Composite2,7622,3022,225-3%-19% Bovespa62,40465, %-13%
MOVEMENT OF SECTORAL INDICES Sectoral indexes 30-Jun-112-Apr-1230-Jun-12 3-month Returns 1-Year Returns BSE AUTO8,74710,1089,378-7%7% BSE BANKEX12,82111,87111,9090.3%-7% BSE Capital Goods13,90610,20210,025-2%-28% BSE Consumer Durables6,6546,6516,209-7% BSE FMCG4,0454,5024,99211%23% BSE Health Care6,3986,6176,8844%8% BSE IT6,1006,1175,765-6%-5% BSE METAL15,06211,31610,785-5%-28% BSE OIL & GAS9,2088,0648,0760.1%-12% BSE Power2,6122,1311,988-7%-24% BSE PSU8,5437,3797,258-2%-15% BSE Realty2,0201,8051,668-8%-17% BSE TECk3,6943,5883,344-7%-9% * 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.
CHANGE IN COMMODITY PRICES 30th June nd April th June Month Returns 1 Year Returns Copper ($/MT)9,4148,674.57, %-18% Crude ($/MT) %-15% Aluminium ($/MT)2,5092,081.51, %-27% Zinc ($/MT)2,3422, , %-20% Silver ($/ounce) %-21% Gold($/ounce)1,505.51,662.51, %6% Steel ($/MT) %-16% Lead ($/MT)2,6712,0601, %-31%
COMMENT The flattish performance of Sensex is deceptive – It is actually made up of 2 major moves From 21 st February to 23 rd May: % From 23 rd May to 30 th June: +9.29% Between 21 st February to 30 th 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 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 SECTORRETURNS (%) FMCG10 Health Care4 Consumer Durables-8 Auto-12 IT-12 SENSEX-13
LEADERS ON THE WAY UP (23 rd May to 30 th June) Sectors which led during the upward phase This strong performance of Infrastructure related sectors was in line with our March12 outlook SECTORRETURNS (%) Capital Goods15 Power12 Media12 Metal9 BSE SENSEX9
FII FLOWS FII Flows in Equity FII Flows in Debt (in Rs. Million)Apr-12May-12Jun-12 Gross Purchases41,09,1904,24,4334,07,176 Gross Sales4,22,0054,27,9074,05,239 Net Purchase/Sale-11,091-3,4711,936 (in Rs. Million)Apr-12May-12Jun-12 Gross Purchases93,3341,73,5651,78,435 Gross Sales1,31,2111,37,8721,44,570 Net Purchase/Sale-37,87535,69133,867 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 , and 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-o- y) 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 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- Indias monsoon rainfall, which accounts for 70 percent of the nations total rains, was 29 percent below normal in June according to the weather department. Showers in June, which account for 18 percent of seasons 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 Europes 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 Q and to 7.6 per cent in Q 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 dont 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 governments 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 ClassPerformance in Q2CY12Range of movement Outlook for Q3CY12 Remarks Debt10-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 – – – 8.81 Stable Downwards More rate cuts expected by RBI Liquidity in the system may improve. However, poor monsoons may be a spoilsport EquitySensex : Down 0.3% Nifty : Down 0.7% – – 5359 PositiveQuantitative easing should drive portfolio flows to India. Economic reforms will create the right climate Our prediction from the previous quarterly study comes true – yields softened across the board this quarter
OUTLOOK FOR KEY SECTORS Sectoral IndicesQ2CY12 Returns 12 month returns Outlook for Q3CY12Remarks Auto -7%7% Neutral Intense competition and slow progress of monsoon can be a dampener Banking 0.3%-7% Positive Positive sentiments should lift the outlook on bad assets. Valuations attractive Pharma 11%23% Neutral Rally last quarter attributable to rush for defensives. IT -6%-5% Negative Headwinds of global slowdown and currency outlook to keep interest low Capital Goods -2%-28% Positive Infra push should supportive FMCG 11%23% Neutral Rally last quarter attributable to rush for defensives. Metals -5%-28% Negative Global slowdown and particularly China likely to keep commodity prices in check NIFTY -0.7%-7% Positive
ANNEXURE: EUROPES FESTERING CRISIS After Greece, Spain has emerged as the new epicentre of the European crisis. Spains 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 areas 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 countrys sovereign debt. On July 9, European Commission leaders extended the deadline for Spains deficit reduction targets. They also promised that Spains 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, Chinas exports, and hence economic growth, has been affected. The massive stimulus package launched after 2008s 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, Chinas growth has been predominantly investment driven. Last year investment accounted for 50 per cent of Chinas 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 cant 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 one- child 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 Chinas advantage of low- wage 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.
Disclaimer This presentation is intended for internal use and may contain confidential information that belongs to the sender and/or legally privileged information that is protected by the attorney-client privilege. If you are not the intended recipient of this communication, you must not disseminate copy or take any reliance on it. If you have received this message in error please notify the sender immediately, to arrange the return of the document. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. No person associated with Citrus Advisors is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon. Neither Citrus Advisors., nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. We and our affiliates, officers, directors, and employees world wide, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or may perform or seek to perform investment banking services for such company(ies)or act as advisor or lender / borrower to such company(ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. No part of this material may be duplicated in any form and/or redistributed without Citrus Advisors' prior written consent. No part of this document may be distributed in Canada or used by private customers in the United Kingdom. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed