HSBC Mid-month Equity Investment Strategy Release Date: 23 March 2012 For distributor / broker use only
2 Market Performance Market remained broadly flat awaiting cues from the monetary policy and the Union Budget The markets remained broadly flat during the first fortnight of March 2012, possibly in anticipation of the Union Budget 2012-13, as well as the monetary policy. The budget, presented on 16 March 2012, disappointed the markets as it was devoid of any bold policy measures or reforms. On the other hand, the Reserve Bank of India (RBI) surprised the market by announcing a cut of 75 bps in the Cash Reserve Ratio (CRR) on 9 March 2012, well before the slated policy day. BSE Mid Cap Index was the best performing index, delivering 0.29% for the fortnight. The large cap indices - BSE Sensex & Nifty on the other hand generated returns of -0.43% & - 0.09% respectively. BSE Sectoral Indices Performance 0.40% 0.29% 0.20% 0.00% 0.01% 0.00% % Return -0.20% -0.40% -0.60% -0.80% BSE Mid Cap BSE 500 BSE 200 Nifty -0.09% BSE Sensex -0.43% BSE Small Cap -1.00% -1.20% -1.40% -1.16% BSE Healthcare and Bankex were the best performing sectoral indices generating returns of 2.35% and 1.91% respectively. BSE Realty and Metals were the worst performing sectoral indices generating returns of -6.86% and -2.29% respectively. Performance of key indices Healthcare & Banks outshine, while Realty underperforms % Return 4.00% 2.00% 0.00% -2.00% -4.00% 2.35% Healthcare 1.91% Bankex 1.38% Auto 1.25% Capital Goods 0.95% FMCG -0.59% Consumer Durables IT -1.30% Oil & Gas -2.16% Metal -2.29% Realty -6.00% -8.00% -6.86% Portfolio Strategy Consumer discretionary: Neutral. The Year on Year (YoY) growth rates for various Auto segments during February 2012 are as follows - Domestic Passenger Vehicle sales witnessed a growth of 16.1%, 2-wheeler sales grew by 11.9%, Light Commercial Vehicle sales grew by 32.5% and Medium & Heavy Commercial Vehicle sales grew by 6%. Consumer staples: Underweight. We maintain an underweight stance given the defensive nature of this sector on one hand and high valuations on the other.
Energy: Overweight. We believe reforms in this sector are inevitable. While further demand concerns in the Western world could lead to crude oil prices lowering, the Middle East crisis looms as a large risk. We prefer to take exposure to the sector through upstream/e&p companies. Healthcare: Underweight. Valuations and regulatory issues (increased FDA inspection) remain headwinds. Financials: Neutral. We have moved to a neutral position in expectation of further monetary easing as indicated by the CRR cuts in January & March 2012. While we expect the credit growth to pick up in the interest rate reversal cycle, but concerns on asset quality remain. We maintain preference for high quality private sector banks over PSU banks. Industrials: Neutral. We have moved to a neutral position in lieu of the fact that the expected reversal in interest rate cycle will aid capex plans and further improve the prospects for this sector. Information Technology: Neutral. We have trimmed our overweight exposure and moved to a neutral position after the recent outperformance by this sector. Also, we would keep a close watch on any deterioration in the global outlook which could impact IT spends. Materials: Neutral. We prefer to play the sector through companies having exposure to base/non-ferrous, precious metals and domestic cyclicals (like cement). Telecommunication: Neutral. We keep a neutral stance on this sector on account of its defensive nature, but will keep a close tab on any material regulatory changes which could negatively impact the sector. Utilities: Underweight. While we maintain an underweight stance on this sector, we have added gas utilities on account of a steady earnings profile and reasonable valuations. 3 Market Outlook IIP growth picks up Markets to be driven by global situation in the near term Skewed by a robust growth in the Consumer Non-durables segment, the Index of Industrial Production (IIP) growth stood at 6.8% on YoY basis for January 2012. Though, this was well above the 1.8% growth recorded during December 2011, the January 2012 figure was primarily bolstered by a 42% growth in the Consumer Non-durables segment. While Manufacturing growth picked up (8.5% as against 1.8% for the last month), Electricity as a segment slowed down (3.2% as against 9.1% for December 2011). Mining as a segment meanwhile continued to de-grow at -2.7% (sixth consecutive month of negative growth). Given the lack of any reform measures in the Union Budget 2012-13, it failed to inspire the market and was largely a non event. We expect that in the near-term, the market sentiments will be driven by the global situation. Domestically, the stability of the UPA government at the Centre, the RBI s stance on rate cuts and trends in 4QFY12 earnings for corporate India, would set the tone for the direction of equity markets over the medium term. We continue to remain positive on the India growth story from a long term perspective with strong intrinsic fundamental drivers favorable demographics, strong consumption growth, massive infrastructure spending requirement and a sound central banking system. We would thus advise investors to continue to invest in equities in a systematic & staggered manner and take advantage of sharp market corrections to increase exposure. Market data sources: Reuters, Bloomberg, and Telerate
HSBC Mid-month Fixed Income Investment Strategy Release Date: 23 March 2012 For distributor / broker use only
Market Assessment During the first fortnight of March 2012, the domestic bond markets remained bearish. Mixed set of macro data prints, tight liquidity, status quo maintained by the Reserve Bank of India (RBI) in the mid-quarter policy and the higher than expected borrowing announced by the government for next fiscal, all contributed towards the upward movement of yields across the curve. Economic Data Union Budget 2012-13 Borrowing numbers higher than last year In the Union Budget for FY 2012 13 presented by the Honourable Finance Minister, the key takeaway for the fixed income markets was the increase in the government borrowing to INR 479,000 crores at the net level in-spite of lower provisions for subsidies. Other key highlights of the budget in context to the fiscal front are as follows: Tax revenue projected up 20% from 2011 12 (RE) on the back of anticipated buoyancy in GDP growth at nominal rate of 14% and an increase in Indirect Tax rates Target for disinvestment pegged at INR 30,000 crores and from the sale of spectrum at INR 40,000 crores Unlike last year, expenditure is budgeted to increase while non-planned expenditure is up 8.7%, planned expenditure is up 22% Overall fiscal deficit projected at INR 513,591 crores (5.1% of GDP), as against a revised figure of INR 521,981 crores (5.9% of GDP) for 2011-12 5 Borrowing numbers higher than last year Some key observations are as follows: Market borrowing forms 93% of the total budgeted fiscal deficit, signifying pressure going forward Expenditure is expected to be lowered by the means of a lower subsidy estimate. This remains dependent on international crude oil prices, for fuel and fertilizer subsidy. Government s focus is back on charting out the road map for fiscal consolidation No change in Policy rate Inflation the key determinant going forward While the budget estimates are more realistic than last year, however the subsidy budget continues to be optimistic. By targeting a lower than anticipated deficit, the government has signaled its commitment to fiscal consolidation and its intent to help the RBI contain inflatinary pressures. RBI Mid - Quarter Monetary Policy Review: March 2012 The RBI kept both, CRR as well as the policy rates, unchanged and provided guidance on the intent to balance inflation and growth dynamics through timing and magnitude of future rate cuts. To address persistent structural liquidity deficit beyond its comfort level on 10 March 2012, the Reserve Bank of India (RBI) had reduced the Cash Reserve Ratio (CRR) by 75 bps. This reduction, coming in as it did, prior to the policy, reduced the expectation of any substantial action from the monetary policy. RBI has pointed to three factors - inflation, fiscal deficit and level of rupee as primary factors which will determine the future course of action. Overall, the RBI maintained that inflation risk will be the key guiding factor for the timing and magnitude of rate action going forward.
6 Core inflation eased in February 2012 Market Activity G-Sec yields inched higher Liquidity factor continues Wholesale Price Inflation (WPI) for February 2012 at 6.95% YoY, was not only higher than market expectations of 6.7%, but was also higher than it was in January 2012 (6.55%). Meanwhile, the headline inflation for December 2011 was revised up by about 20bps to 7.7%. Core inflation eased to a 15-month low of 5.5% against 6.6% in January 2012. However, this improvement is partly related to last year s high base and no pass-through of the high retail fuel prices despite sharp increase in the price of Brent crude over the last couple of months. IIP for the month of January 2012 improved to 6.8% as against 1.8% in December 2011. This was primarily led by Non-durable Consumer Goods, which registered a growth of 42.1% as against 14% in the previous month. Sovereign yields increased during the first fortnight of March 2012 on the back of tight liquidity and expectations of higher borrowing announcement for the next fiscal year. Post the reduction by 75 bps in the CRR on 9 March 2012, expectations of any further cut in the policy rates were lower. However, this bearishness was countered by the continued buying back by RBI by the means of Open Market Operations (OMO) and bond positive macro data prints. Short term corporate bond yields remained range bound on the back of negative system liquidity. However, long term yields hardened in line with sovereign curve, maintaining the corporate spreads. No impact from CRR cut Global Economic Scenario Central banks across the globe keep key rates unchanged Money market rates continued at elevated levels, negating the entire benefit arising from the 75 bps cut in the CRR. Liquidity is expected to slide further in to the negative domain due to the advance tax payments. However, we expect liquidity to hit reasonable range by April 2012. The Federal Reserve kept key policy rates unchanged. The results of the latest round of stress tests were positive for most large US banks. Meanwhile the European Central Bank (ECB) also left the refinancing rate unchanged as it awaits the impact of the recently announced LTRO 2. Crude oil prices remained range bound and continue to be a cause of concern for Indian policy makers. Going Forward We expect some upward bias in bond yields as the market gears up to absorb the fresh auction calendar in April 2012. Benign GDP numbers coupled with other macro data pointers such as falling core inflation rates make a case for reduction in policy rates by the RBI. Overall, we expect duration assets to remain in flavor in the long-term with the interest rate cycle expected to reverse. However, in the short-term, the lowering of the elevated money market rates provide for an attractive opportunity to earn better returns. We continue to remain positive on bond funds as the benefits of downward interest rate movement will accrue to longer duration funds in a larger magnitude. The short end funds should benefit due to the steepening of the yield curve due to the easing liquidity scenario. The focus on selective duration building continues as the market remains volatile. Market data sources: Reuters, Bloomberg, and Telerate
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