Advice for the Wise February 2016

Contents

From the desk of the CEO

Did you know?

Domestic Equity

Outlook

Global Equity Outlook

Domestic Debt Outlook

Domestic Debt Strategy

Global Debt Outlook

Global Economy Update

Foreign Exchange

Commodities

Real Estate Outlook

What’s Trending?

From the desk of the CEO

Dear Investors,

Barely had we gotten over the revelry of the New Year, we were jolted by a sharp correction in the global equity markets in early January this year. Led by a steep fall in crude prices, the Nifty breached the 7500 support level to touch a 52-week low of 7241. It is easier to do a post-mortem of the events that led to the fall than to actually anticipate them. With fresh supply coming in from Iran and a further fall in demand from China, crude prices dropped to a 12-yr low of $27.8/barrel; and analysts are not ruling out lower levels sometime later this year. Though this may be good news for oil-importing countries like India, it could seriously cripple the economies of several countries that are dependent on oil exports like Venezuela, Brazil & Russia. The other fallout has of course been the huge redemptions from Indian equity markets of sovereign funds from the Middle East.

The free fall in equity markets was somewhat contained following comments on further monetary easing by the ECB President Mario Draghi after their recent policy meeting. Amidst the global volatility, the US Federal Reserve also kept rates unchanged for the time being. The World Bank has projected a growth of 2.9% in global GDP in 2016, slightly higher than the 2015 figure of 2.5%. The U.S. is estimated to grow at about 2.5%, the highest annual rate since the Global financial crisis. Though emerging markets as a whole continue to be a pocket of concern, India stands out with an estimated growth forecast of 7.9%.

Back home, the third quarter results have been a mixed bag so

far. While some companies have shown improved revenues and better margins on the back of lower commodity prices, others (noticeably banks) may need a couple of quarters more to come out of the woods.

While the indices have seen a significant price correction (down 20% from the all-time high), the negative bias may last a little longer. So how does one approach his/her investments in this environment? The market is currently at fairly attractive valuations. With the recent correction in midcaps, the midcap indices have also given up some of their froth. It is always a good idea to strictly follow one’s asset allocation based on risk profile, at all times. It is certainly a good idea to continue with SIP’s and also start new ones in equity mutual funds; they will give the double benefit of rupee cost averaging as well as the power of compounding in the long run. The risk-reward ratio at this point of time appears favourable, and long term investors could even consider lumpsum investments in equity while more conservative investors could look at balanced funds.

The next major event is the Annual Budget of the Central Government, where the fiscal numbers will be keenly watched. It will also be interesting to see how the Government intends to take its reforms agenda forward. The investor sentiment has been so weak that expectations of a pre-budget rally seem to be low, but one can never rule out that possibility. Equity markets have always rewarded those who invest with a positive outlook and for the long term.

Did You Know?

#Source: investinganswers

The U.S. takes the top spot in the foreign direct investment confidence index from last 3

years.

India has overtaken Thailand as the world’s largest rice exporter in 2015.

Switzerland has been the most globally competitive country in terms of innovation, R & D and stable macro environment.

Domestic Equity Outlook

As on 25th Jan 2016

1 month change

1 year change

Equity Markets

BSE Sensex 24486 -5.24% -16.37%

CNX Nifty 7436 5.41% -15.84%

BSE Mid cap 10217 -7.27% -4.47%

BSE Small cap 10698 -8.80% -5.88%

Equity markets corrected further as concerns on China slowdown and devaluation of Yuan gained momentum. Indian markets, during January, though down fared somewhat better compared to other key global markets. Keeping global scene in mind, US Fed avoided any monetary tightening during the month. Domestic macros too did not lend any help to the Indian equities. Retail inflation during the month inched up higher to 5.6%. To add woes, Industrial production showed a contraction of 3.2%. Corporate results for December quarter till now have largely been in line with expectations. Revenues continue to remain subdued with volume pressure seen in segments related to commodities or rural growth. However soft commodity and crude prices have led to gross margin expansion; also improving the bottom line. Recent initiatives and reform measures taken by the government should translate into higher growth over next couple of years. However till that time arrives, focus should remain on domestic driven growth sectors which have a better visibility of earnings. We believe themes like consumer discretionary and sectors like Automobiles, FMCG and select financials should out-beat the overall markets over long term.

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110 S & P BSE Sensex CNX Nifty

BSE Midcap BSE Smallcap

Domestic Equity Outlook

Government Policy With no great progress in the winter session of Parliament, focus would now be on the forthcoming budget session. Market participants would keenly monitor how the government plans various strategies related to rural boost, Make In

India theme and re-working of the fiscal math.

Domestic Equity Outlook

India's wholesale prices index stood at -1.07% for December, 2015 as compared to -1.99% for the month of November.

Food inflation in the month of December for food articles was 8.17%. Inflation in the fuel and power segment was -9.15%, while that of manufactured products it was -1.36% in December.

CPI for the month of December came in at 5.61% as compared to 5.41% in November.

The food and beverages inflation rose to 6.3% from

6.1% in December, vegetables rose by 4.6% as compared to 4% and pulses and products stood at 45.9% versus 46% on M-O-M basis.

Wholesale Price Index Consumer Price Index

#Source: Business standard

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00% WPI CPI

Domestic Equity Outlook

Index for Industrial Production (IIP) fell down to the levels of -3.2% in November as compared to 9.8% in October.

The manufacturing sector, which constitutes over 75% of the index, fell by 4.4% in November 2015. Meanwhile, the mining sector output down by 2.3% in November 2015.

The cumulative growth for April –November 2015 grew at 3.9% .

India's Gross Domestic Product (GDP) growth for the second quarter of the current financial year grew at

7.4% versus 7% for the previous quarter.

Manufacturing sector showed a robust growth of 9.3%, whereas agricultural growth came in at 2.2% exceeding expectations. Mining sector witnessed a slowdown with growth coming at 3.4%.

#Source: Business today

4.0

5.0

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GDP

-5.0%

0.0%

5.0%

10.0%

15.0%

Nov 14

Dec 14

Jan 15

Feb 15

Mar 15

Apr 15

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IIP

Sector Outlook

Sector Stance Remarks

Automobiles Passenger vehicles and CVs to outperform two-wheeler segment. Tractors could benefit on

base effect. Auto-ancillaries expected to do well due to revival of demand.

IT/ITES Select verticals displaying better growth. Long term outlook to improve once global

uncertainties come down.

FMCG

We prefer “discretionary consumption” theme within FMCG. Key beneficiaries such as

durables and branded garments, as the growth in this segment will be disproportionately

higher vis-à-vis the increase in disposable incomes. Gross margin expansion to tone down as

cos will be expected to share the benefits.

Energy With the price deregulation of diesel, we believe the total subsidy burden on Oil PSU’s will

come down significantly this year. Govt. has decided to pay full subsidy to OMC’s .

Power Utilities Lack of fuel linkages , poor SEB health, adverse CERC guidelines have compromised the ROE’s

leading to de-rating in near term. Reform initiatives through UDAY can improve sector

prospects in long run.

Cement Cement volumes and realizations continue to witness pressure. Cost benefits would drive

earnings. Pricing would be key for sector valuations.

Sector Outlook

Sector Stance Remarks

Healthcare Regulatory risks have become more evident and frequent with FDA inspections for pharma sector. Additionally, M&A and currency movements poses additional risk to earnings of cos.

E&C Order inflows expected to improve as spending and capital expenditure likely to move up on

economic recovery.

BFSI

Retail focused Private sector banks continued to deliver stable earnings in line with expectations. However, PSUs to deliver muted numbers on asset quality concerns and lower credit growth. We

expect this trend to continue going forward.

Telecom Regulatory uncertainties have come down. However, aggressive bids for spectrum has revived

fears of sub-optimal returns on capital. Further, expected launch of R-Jio at competitive prices in 4QFY16 will have negative implications.

Metals Lower global growth and Chinese slowdown has kept the growth subdued. Absence of US

monetary stimulus will lead to further downward pressure on prices.

Global Equity Outlook

As on 25th Jan 2016

1 month change

1 year change

Equity Markets

MSCI World 1521 -9.00% -11.07%

Hang Seng 19340 -12.25% -21.13%

S&P 500 1877 -9.07% -9.02%

Nikkei 16708 -11.07% -3.58%

US Fed kept the key policy rates unchanged during the month. However the medium term path seems fine and based on the commentary, a small rate hike could be expected during March quarter. China continues to slow down and fear of further Yuan devaluation remains. However, loose monetary policy by Japan and Europe could support global markets in the near term.

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MSCI World Hang Seng S&P 500 Nikkie

Global Economy Update

United States

•U.S. economic growth likely braked sharply in the fourth quarter as businesses doubled down on efforts to reduce an inventory glut and unseasonably mild weather cut into consumer spending on utilities and apparel. •The U.S. central bank has now put the world on notice that the slide in oil prices and sharp slowdown in global growth may rank as one of those very shocks.

Emerging Economies •China’s central bank will inject 20 billion yuan (2.36 billion pounds) into the money markets through seven-day reverse bond repurchase agreements and an additional 80 billion yuan through 28-day reverse repos •India's fiscal deficit was 4.88 trillion rupees ($71.90 billion) during April-December, or 87.9 percent of the full-year target, government data showed on Friday.

a year ago

Japan

• The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to revive the economy as volatile markets and slowing global growth threaten its efforts to beat deflation.

• Japan's seasonally adjusted unemployment rate held steady in December at 3.3 percent,

Europe

• Banks that mis-sold complex financial products to shield companies from interest rate hikes that never happened have paid 2.1 billion pounds ($3 billion) in compensation so far, with reviews of customers completed,

• German economic output probably increased only slightly in the fourth quarter of 2015, but leading indicators suggest Europe's largest economy will soon recover.

#Source: Reuters

Domestic Debt Outlook

•The yields on 10 Yr G sec closed at 7.80% which is 5 bps higher than the last months close of 7.75%. •The latest inflow comes following a net investment of Rs 45,856 crore (USD 7.4 billion) by overseas investor in the debt markets in 2015. •Raghuram Rajan seen buying extra $4 billion of India bonds after outflows •Indian companies raised the lowest amount via both onshore and offshore debt markets in six years last year owing to subdued domestic investment climate and volatile global markets.

As on 25th Jan 2016

1 month change

1 year change

Debt Markets 10-Yr G-Sec Yield 7.80 5bps 9bps

Fixed Deposit 7.25 0bp (100bps)

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AAA AA+ AA AA- A+ A A- BBB+

Corporate Bond Spreads

5 Years 10 Years 15 Years

7.40 7.60 7.80 8.00 8.20 8.40 8.60 8.80 9.00 9.20 9.40

G-Sec

10 YR Gsec Yield 5 YR Gsec Yield 15 YR Gsec Yield

Domestic Debt Strategy

Our recommendations regarding short term debt is that investors with the time horizon of 1 year to 2 years can look for short term debt funds. Even though, most of the short term fund’s YTMs have fallen to sub-9%, our recommended short term debt funds still have high YTMs (8%-11%) providing interesting investment opportunities.

The corporate bond market segment continues to be attractive over the medium term, especially with expectations of an improvement in corporate profitability; an improved economic outlook and due to the benefits of credit easing. With credit easing, there are chances that the companies’ rating will be upgraded that would further cause a rally in bonds, which in turn will benefit corporate bond funds.

As RBI has reduced the key policy rates, dynamic bond funds have benefited a lot as most of them have a mix of gilt and long term bonds in their portfolio. A rally caused by easing yields could lead to capital appreciation in gilts as well as corporate bonds, which means over medium to long term we could see more gains coming from these funds.

As RBI has done the front loading of rate cut, we expect it to halt it for some time and go for further rate cuts over medium to long term as inflation comes down. Long term debt and Gilt funds looks attractive over medium to long term and is advisable for aggressive investors only.

Short Term Debt

Corporate Bond Funds

Dynamic Bond Funds

Long Term Debt Funds

Global Debt Outlook

•German 10-year yields -- the euro zone's benchmark -- fell 2 basis points to 0.35 percent, their lowest since April 2015. U.S. Treasury yields dropped 6 bps from their day's high of 2.05 percent. •Investors are deserting emerging market bonds at the fastest rate on record, withdrawing more money than they did at the height of the global financial crisis. • Europe and Africa and the Middle East recorded net outflows. However, Latin America had net inflows of an estimated $4.2bn. •Shrugging off economic weakness in China, Japan and Europe, the Fed last month raised its key overnight lending rate by a quarter point to a range of 0.25 percent to 0.50 percent and issued upbeat economic forecasts that suggested four additional hikes this year.

#Source: Reuters

Ratings Country 10 Yr G-Sec

Yield 1 month change

AAA

Germany 0.40% (19bps)

Hong Kong 1.65% 10bps

Sweden 0.71% (34bps)

Switzerland -0.22% 12bps

AA+ USA 1.99% (24bps)

AA-

China 2.91% 3bps

Japan 0.23% (3bps)

Commodities

Gold prices jumped up almost 5% during January. Flight to safety and fragile currency globally were primary reasons for upward movement in Gold. For near to medium term, the larger band of $1000-1200 remains.. . . As on 25th Jan, 2016: `26,269 per 10gm

1 month change : 4.46% 1 year change : -6.24%

The expectation of crude oil prices going ahead would be around $30 per barrel in then first quarter of the year, and $38 by the end of 2016.

As on 25th Jan, 2016 : $29.89per bbl 1 month change : -20.5% 1 year change : -37.2%

*RICI: Rogers International Commodity Index – Tracks 38 commodity futures from 13 international exchanges, Business Insider

24000

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29000 Gold

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RICI

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Crude

Foreign Exchange

• The Indian rupee has appreciated by 1.09% against the EURO, 4.11% against YEN, 2.04% against USD and depreciated by 1.99% against GBP.

• The BOJ said it would apply a negative interest rate of minus 0.1 percent on selected current account deposits that financial institutions hold with it, effectively charging banks interest for parking excess deposits at the central bank.

• Global investors are keeping faith in India’s rupee bonds, even as the currency inches toward the record low reached

in 2013, saying the nation’s finances have improved over the past two-and-a-half years.

Currency As on 25th Jan 2016

1 month change

1 year change

USD/INR 67.20 2.04% -9.13%

GBP/INR 96.74 -1.99% -4.10%

Euro/INR 73.12 1.09% -5.60%

Yen/INR 56.93 4.11% -8.66%

USD/Euro 0.9243 1.35% 3.61%

2.04%

-1.99%

1.09%

4.11%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

USD GBP EURO YEN

Real Estate Outlook

Tier I

The Central Government has eased FDI norms and lifted

restrictions on ticket size, Project size and stage of entry of

capital thus paving the way for virtually any project to

receive Foreign equity funds. Residential Prices have been

Stable to Stagnant across Tier I markets. All Tier I markets

have continued to witness moderate decrease in demand

with sluggish market sentiments.

Tier II

Bangalore NCR and Hyderabad have seen strong demand in

the commercial segment and even Mumbai has picked up in

the later half of the year. The capital values have also been

on rise in major markets except in NCR where values have

remained stable. Absorption volumes have been surpassing

new completions consistently since H1 2014, as a result of

which, the vacancy levels in India have been dwindling

Low unit sizes have played an important role in

maintaining the absorption levels in these markets.

Lease rentals as well as capital values continue to be

stable at their current levels in the commercial asset

class.

With improvements in infrastructure across cities like

Chandigarh, Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur,

Patna and Cochin and quality products being offered the end

users /investors are being spoilt for choice. The Demand

drivers remain increasing nuclearization, rising disposable

incomes and easier availability of credit.

Residential

Commercial

Tier I Tier II

The Mall concept is new to Tier II cities and High Street

retail is still popular. Anecdotal evidence suggests that

rentals have remained stagnant in this space.

In Mumbai demand for space in successful malls continued to be

on the rise and categories such as F&B, premium apparel and

entertainment dominated leasing activity. International brands

were seen increasing their footprints . Hyderabad has seen a

steady growth in demand while markets like NCR, Bangalore and

Chennai remain stagnant.

Land in Tier II and III cities along upcoming / established

growth corridors have seen good percentage

appreciation due to low investment base in such areas.

Fringe areas with improving connectivity to Metro cities and

other top 8 to 10 cities in India have seen interest in

purchase of Plotted / Villa developments due to lower ticket

size and better marketing by developers /aggregators. There

is an uptick in demand for warehousing with the growth of

E commerce.

Retail

Land

Real Estate Outlook

Crude Reality: What is it? Oil is a vital source of energy for the world and will likely remain so for many decades to come, even under the most optimistic assumptions about the growth in alternative energy sources. Most countries are significantly affected by developments in the oil market, either as producers, consumers, or both. the decline has been dramatic since last year as crude cracked during this period. The reasons attributed to this crash in oil prices are, first, increased production in non-OPEC (Organization of the Petroleum Exporting Countries) countries, Slowing economic activity in regions such as Europe, Japan and China is also said to be contributing to the decline. Impact of Rate Hike? Simply put, at the country level, fall in oil prices will benefit net importers, while exporters would be worse off. However, at the aggregate level, fall in oil prices is said to be a positive for the global economy. Oil importers will benefit from a falling oil price because the value of their oil imports will drop. This will reduce the current account deficit of oil importers; this is important for a country like India who imports 75% of oil consumption and currently has a large current account deficit.

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What’s Trending?

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