Monthly Strategy Monthly Monthly Strategy Strategy August 13, 212 July 8, 215 13 August 212
Monthly Strategy Monthly Monthly Strategy Strategy Table of Content July 8, 215 House View... 2 Global economy and markets... 3 Greece: No vote raises Grexit concerns... 4 India: Normal monsoon crucial but proactive government measures may prevent volatility in inflation... 6 Equity markets: Volatility to remain high utilise it to build portfolio... 7 Fixed income: Investment opportunity amid volatility... 8 Gold: Medium-term outlook remain benign... 9 Research Analysts Sachin Jain sachin.ja@icicisecurities.com Sheetal Ashar sheetal.ashar@icicisecurites.com
House View Volatility is likely to increase but investors should utilise any sharp correction to build their equity portfolio The recent correction in G-Sec yields provides an investment opportunity. However, the risk-return profile needs to be kept in mind We expect prices of most commodities, including gold, to remain subdued in the near term the Indian currency is expected to remain stable Equity Worries over monsoons have receded with rainfall so far being satisfactory and near its long term average. Sowing domestically has also been upbeat post the initial spell of rains. The same may ease inflationary concerns, going forward. It also helps that RBI has adopted a more dovish stance with respect to a further cut in interest rates The last few quarters have seen muted growth while the results for the coming quarter Q1FY16 are also expected to be muted with low single digit growth in topline and bottomline. However, on a yearly basis, we expect Sensex earnings to grow at ~18.3% each in FY16E and FY17E to 168 and 191, respectively Structurally, outlook for Indian equity markets has improved significantly. This is on the back of a steep correction in commodities, especially crude oil & industrial metals, 75 bps repo rate cut & subsequent transmission of same to corporate balance sheets and relatively stable exchange rates. However, some volatility may be positive for India Inc. The effect of the above will further accelerate positively on performances of companies across sectors going into H2FY16E We expect markets to remain in a consolidation mode and undergo a base building process in the coming months amid volatility on global news flows and the result season. Any sharp correction should be utilised to build the equity portfolio Debt The domestic debt market witnessed a sharp sell-off during June 215 despite the rate cut by the Reserve Bank of India on its June 2 policy meeting. Bond yields rose 2-25 bps across the yield curve. The sell-off in Indian bonds could be attributed to the global bonds sell-off along with the RBI's hawkish policy tone lowering future rate cut expectations The Reserve Bank of India has cut the benchmark repo rate by 75 bps in the last six months while the yield on government securities is at the same levels as they were at the start of 215 The domestic debt market remains attractive from a medium term perspective as the inflation trend remains on a downward trajectory and well within RBI s target range Investors may consider both duration and accrual funds depending on their risk return profile Commodity Global gold prices have been trading in a range with a downward bias despite a heightened risk-off trade in the global capital markets on Greece and China related concerns Global prices corrected to around US$115 per ounce from US$12 per ounce in the last month Indian prices have tracked global prices and witnessed some selling pressure. They corrected to around 26 per 1 gram After the multiyear bull phase in 24-12, gold prices corrected significantly. The violation of the long term trend line highlights the breach of a decade long trend of outperformance. This breach of long term up trend support, signals a period of medium-term consolidation Page 2
Global economy and markets In June, the focus of the financial markets returned to Greece. With Greece having defaulted on its payment to the IMF, its exit from euro may have a contagion effect Globally, the focus turned towards Greece's potential exit from the eurozone as concerns over a US Fed rate hike took a backseat after a fairly dovish FOMC outcome where the Fed kept the rate unchanged Global markets were volatile with the month starting on the hope that a deal would be reached between Greece and its creditors. The optimism was reflected by the equity markets. However, later during the month Greece failed to come to an agreement with its creditors. The European Central Bank s (ECB) decision to end the emergency lending assistance (ELA) prompted the Greek government to announce it would shut its banks and impose capital controls to avert the collapse of its financial system. This caused much turbulence in the financial markets affecting global markets The environment continued to remain challenging for the bond markets. Concerns of a broader fallout led to a rise in G-sec yields of vulnerable eurozone economies like Spain, Italy and Portugal. However, bonds perceived to be low-risk such as German Bunds and US Treasuries witnessed buying interest The Chinese equity market witnessed a sharp correction following concerns over economic growth, speculation about further restriction on stock market trading and profit taking post a strong performance prior to this recent correction Exhibit 1: Global markets under pressure in June on Greece related concerns 2 14.1 Chinese equity markets have been extremely volatile and have corrected around 3% in the last month. However, they had rallied more than 12% prior to the recent correction. Developed markets, in general, underperformed emerging markets 1-1.6 3.8 -.2 -.6-1.6 5.4-2.2 -.9-4.1-8.5-4.3-4.8-6.6-3.7-7.3 Brazil India Japan US Germany France UK (%) China 1 M 3 M Source: Bloomberg. Return as June 3, 215 Exhibit 2: Chinese market still remains best performing market in last year Chinese equity markets remain the best performing market in the last year despite the recent correction on the back of a significant outperformance prior to that 12 1 8 6 4 2 35.1 18.8 16. 33.5 11.6 11.3 1.4 9.3 12.8 8.3 4.7 6.1 -.2 -.4-2 China -2. -3.3 Japan Germany India France US Brazil UK (%) 6M 1Y Source: Bloomberg. Return as June 3, 215 Page 3
Greece: No vote raises Grexit concerns Greek voters have decisively rejected the terms of an international bailout with the final result in the referendum at 61.3% in favour of "No", against 38.7% who voted "Yes". The European Union had demanded austerity measures from the Greek government to ensure continuous supply of emergency funds The immediate impact of the development on Greece related concerns would be on global currencies as the risk-off trade may lead to volatility in global capital markets The appetite for safe haven assets such as US treasury and German bonds has increased while yields are likely to head lower. Gold demand, however, has remained subdued despite indicating its overall structural weakness. However, the impact on other emerging currencies as well as on the US dollar has been muted as investors were, to a larger extent, prepared for the event Eurozone leaders held an emergency meeting in Brussels on July 7. They have planned another on meeting on July 12 to approve a plan to aid Greece if creditor institutions are satisfied with the revised Greek loan application and reform commitments on July 8 How it all started? The debt crisis of the Greek government started in 29 after the global sub-prime crisis. In late 29, fears developed about Greece's ability to meet its debt obligations due to revelations that previous data on government debt levels and deficits had been misreported by the Greek government. This led to a crisis of confidence indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to other eurozone countries The Greece economy shrunk 23% since the 29 sub-prime crisis resulting in government revenues dropping significantly The government resorted to significant government spending cuts. Since currency management was not an option for the Greece central banker as it was a part of the euro, companies resorted to wage cuts to remain competitive. Greek wages fell nearly 2% from mid-21 to 214. Unemployment has risen to nearly 25% from below 1% in 23 Since Greece continued with its social spending, particularly pensions, it had to resort to foreign debt to service this social spending In May 21, the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF), nicknamed the Troika, announced a 11 billion bailout loan to rescue Greece from sovereign default conditional on implementation of austerity measures, structural reforms and privatisation of government assets. A year later, a worse recession along with a delayed implementation by the Greek government on the agreed conditions in the bailout programme revealed the need for Greece to receive a second bailout worth 13 billion (including a bank recapitalisation package worth 48 billion). All private creditors holding Greek government bonds were required, at the same time, to sign a deal accepting extended maturities, lower interest rates and a haircut of more than 5% Due to the growing domestic political unrest due to austerity measures, Greece was forced into premature snap parliamentary election in December 214. The new government refused to respect the terms of its current bailout agreement. The Troika suspend all scheduled remaining aid to Greece under its current programme Page 4
The Troika, however, granted a further four-month technical extension of its bailout programme to Greece to renegotiate with the new Greek government so that the last financial transfer under the previous bailout terms could be completed before the end of June 215. The deal was important to ensure that the Greece government is able honour its debt payment to IMF on June 3, 215 Ultimately, the Greek government broke off negotiations with the Troika on June 26, 215 and, consequently, defaulted on its 1.6 billion loan repayment to IMF on June 3, 215. Greece became the first developed country to default on the IMF payment Exhibit 3: GDP Growth: The economy has contracted considerably since Lehman crises 8 6 Exhibit 4: leading to high unemployment 3 25 26 4 2 2 15-2 1-4 -6 5-8 -1 % 23 24 25 26 27 28 29 21 211 212 213 214 % Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Exhibit 5: 1 Year G-Sec yield: Cost of funding has increased significantly on repayment concerns % 4 35 3 25 2 15 1 5 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 18.8 Exhibit 6: Debt to GDP ratio: High debt poses structural concerns % 18 17 16 15 14 13 12 11 1 9 8 23 24 25 26 27 28 29 21 211 212 213 214 Page 5
India: Normal monsoon crucial but proactive government measures may prevent volatility in inflation We do not expect any sharp rise in CPI inflation due to monsoon related concerns on pro-active measures by the government CPI inflation for May 215 came in at 5.1% in line with expectations while WPI stayed in the negative territory at -2.36% for the seventh consecutive month. Globally, food prices as well as prices of other industrial commodities particularly crude oil remain subdued and the same may prevent any sharp spike in inflation India, as a whole, has received a decent spell of rainfall in the initial period of crop sowing with rainfall in the period June 1, - 24, 215 at 124% of long period average (LPA). The spell of rainfall has, however, weakened in the last 15 days with cumulative rainfall in June 1-July 5, 215 at % of LPA. Going forward, July needs to be closely watched as it receives ~33% of the total seasonal rainfall while its distribution and quantum will decide the impact of the current monsoon season on the domestic agricultural economy In India, normal monsoons are extremely important in overall economic activity and inflationary expectations. However, its correlation with food inflation is weak. Income growth, food behaviour and government proactive policy measures have higher impact on inflation The government has announced the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) emphasising on increasing farm productivity with special focus on increasing the irrigation penetration and optimal utilisation of water resources including implementation of microirrigation (MIS) technique. It has also approved setting up of an online national agriculture market that will provide more options to farmers for selling their produce. The latest MSP increase has been quite moderate for domestic agri crops (3.7% YoY for paddy, 1.3% YoY for cotton) a deviation from the recent trend of higher MSP increase Exhibit 7: CPI inflation remains well within RBI s comfort level Exhibit 8: Industrial growth improves in last few months (%) 12 11 1 9 8 11.2 9.9 8.8 8. 8.3 8.6 8.3 7.5 8. 7.7 (%) 1 5 7 6 5 4 6.5 5.5 4.4 5. 5.5 5.4 5.2 4.9 5.1 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15-5 -1 Apr-12 Oct-12 Apr-13 Oct-13 IIP Apr-14 Oct-14 Apr-15 Page 6
Equity markets: Volatility to remain high utilise it to build portfolio Corporate India is witnessing green shoots in terms of recovery and flow of operating leverage (increase in utilisation levels, change in favourable product mix and lower input costs) and financial leverage (improvement in working capital cycle and lower rates), which is gradually will improve profitability after few quarters Domestic equity markets staged a smart recovery since the second half of June 215 and recovered around 7% since then after having corrected 11% from the highs made in March 215. However, markets have again turned volatile at the start of July on Greece and China related global news flows Global markets have also been under pressure as a sharp correction in Chinese markets added to the already depressed investor sentiment. Industrial commodity prices have taken a sharp hit in the last month impacting companies related to those commodities Worries over monsoons have receded with rainfall so far being satisfactory and near its long term average. Going forward, July needs to be closely watched as it receives ~33% of the total seasonal rainfall. Its distribution and quantum will decide the impact of the current monsoon season on the domestic agricultural economy Sowing, domestically, has, however, been upbeat post the initial spell of rains with cumulative sowing at ~31 million hectares (MH) in June 1- July 3, 215 vs. 19 MH in the corresponding period last year. The same may ease inflationary concerns, going forward. It also helped the RBI adopt a more dovish stance with respect to a further cut in interest rates The monsoon session of the Parliament is likely to be stormy given few controversies surrounding the government and the same may prevent the passage of the much anticipated bills like GST and Land Acquisition bills. Non passage of these bills may impact market sentiments The quarterly results, so far, have been muted while the results for the coming quarter (Q1FY16) are also expected to be muted with low single digit growth in topline and bottomline. However, on a yearly basis, we expect Sensex earnings to grow at ~18.3% each in FY16E and FY17E to 168 and 191, respectively Structurally, the outlook for the Indian equity markets has improved significantly. This is on the back of a steep correction in commodities, especially crude oil & industrial metals, 75 bps repo rate cut & subsequent transmission of the same to the corporate balance sheets and relatively stable exchange rates. However, some volatility is likely to be positive for Corporate India. The effect of the above will further accelerate positively on the performances of companies across sectors going into second half of FY16E We expect markets to remain in a consolidation mode and undergo a base building process in the coming months amid volatility on global news flows and result season. Any sharp correction should be utilised to build the equity portfolio Page 7
Fixed income: Investment opportunity amid volatility G-Sec yields are at same level as they were at the start of 215 despite a 75 bps rate cut by the RBI. The current levels on longer duration G-Secs offer an investment opportunity in duration funds The Indian debt market witnessed a sharp sell-off during June 215 in spite of the rate cut by the Reserve Bank of India in its June 2 policy meeting. The bond yields rose 2-25bps across the yield curve. The selloff in Indian bonds can be attributed to the global bonds sell-off with the RBI's hawkish policy tone lowering future rate cut expectations Concerns over below normal monsoons and its impact on food inflation also dampened investor s sentiments. India, as a whole, received a decent spell of rainfall in the initial period of crop sowing with rainfall in June 1-24, 215 at 24% of long period average (LPA). The spell of rainfall has, however, weakened in the last 15 days with cumulative rainfall in June 1 July 5, 15 at % of LPA. Going forward, July needs to be closely watched as it receives ~33% of the total seasonal rainfall. Its distribution and quantum will decide the impact of current monsoon season on domestic agricultural economy Amid the negative domestic and global news flows, the structural improvement on the fiscal management and supply side concerns continues: a. Sowing domestically has, however, been upbeat post the initial spell of rains with cumulative sowing at ~31 million hectares (MH) in June 1 July 3, 215 vs. 19 MH in the corresponding period last year. The sowing has been robust in pulses (up 133% YoY), oilseeds (up 44% YoY) and cotton (up 7% YoY) crops with special emphasis on pulses wherein the central government has announced a special bonus in terms of enhanced MSPs for growing pulses, which are largely imported for domestic consumption b. The MSP increase has been quite moderate for domestic agri crops (3.7% YoY for paddy, 1.3% YoY for cotton) c. The Central government through its various initiatives like Pradhan Mantri Krishi Sinchai Yojana (PMKSY) is emphasising on increasing the farm productivity with special focus on increasing the irrigation penetration and optimal utilisation of water resources including implementation of micro-irrigation (MIS) technique d. The government has approved setting up of online national agriculture market that will provide more options to farmers for selling their produce The Reserve Bank of India has cut the benchmark repo rate by 75 bps in the last six months while the yield on government securities is at the same levels as they were at the start of 215 Indian debt markets remain attractive from a medium term perspective as the inflation trend remains on a downward trajectory and well within RBI s target range Investors may consider both duration funds as well as accrual funds depending on their risk return profile Page 8
Gold: Medium-term outlook remains benign Global gold prices have been trading in a range with a downward bias despite heightened risk-off trade in the global capital markets on Greece and China related concerns Global prices corrected to around US$115 per ounce from US$12 per ounce in the last month Indian prices have tracked global prices and witnessed some selling pressure and corrected to around 26 per 1 gram Investment demand for gold is largely governed by the broader economic climate. One of the major determinants of the investment demand is inflationary concerns. With a low global economic growth environment adding to deflationary pressure, inflationary demand factor for gold remains absent in the near term Another major determinant for global gold prices is real interest rates. With the US Federal Reserve likely to raise interest rates, going forward, the opportunity cost of holding gold will increase while the same is likely to put pressure on gold prices from a medium-term perspective Technically, after the multiyear bull phase during 24-12, gold prices corrected significantly. The violation of the long term trend line highlights the breach of a decade long trend of outperformance. This breach of long term up trend support, signals a period of medium-term consolidation Exhibit 9: Gold prices under pressure despite uncertain global news flows 14 The overall medium-term outlook remains subdued with consolidation in the near term 135 13 125 12 115 11 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Price ($/Ounce) Exhibit 1: Indian prices witness selling pressure in line with global prices 31 3 Indian prices have been following the global trend the outlook remains range bound 29 28 27 26 25 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Price ( /1 grams) Source: Bloomberg Page 9
Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC Andheri (East) Mumbai 4 93 research@icicidirect.com Disclaimer The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities Ltd (I-Sec). The author may be holding a small number of shares/position in the above-referred companies as on date of release of this report. I-Sec may be holding a small number of shares/position in the above-referred companies as on date of release of this report. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This report may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. I- Sec may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject I-Sec and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform them of and to observe such restriction. Investors should consult their financial advise if in doubt about whether the product is suitable for them. Page 1