India Monthly Investment Outlook and Strategy

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1 India Monthly Investment Outlook and Strategy May 2013

2 Contents Macroeconomic Outlook April Recap Asset Classes- 12 Month Views Asset Allocation Recommendations India - Equities India - Fixed Income Currencies Commodities Equity Stocks Advisory Portfolio Mutual Funds - Equity / Fixed Income Bonds 2

3 Macroeconomic Overview Global Economic backdrop remains decidedly challenging, and conditions have been softening US: Data readings have been less encouraging of late, including the latest prints for ISM surveys and durable goods orders. The sequestration and lack of progress on medium-term fiscal reforms are only adding to the global economic headwinds. First quarter CY 13 GDP growth came in at 2.5% as Federal spending cuts were more severe than anticipated. We expect that the ongoing cuts in Federal outlays will continue to act as a drag on GDP growth for rest of this year and for much of 2014 as well. The US Federal Reserve chose to keep unchanged its current program of USD85Bn a month in securities purchases. The policy statement also raised the possibility that the QE program could be increased if necessary. Europe: Notwithstanding the stabilization since last year, high frequency indicators have pointed to a weakening of conditions again, including in core countries like Germany. However, there are hopes that the political stalemate in Italy may come to an end, for now, with the possible establishment of a grand coalition. The ECB cut the refinance rate by 25bps to 0.5% and kept the deposit rate at 0.0% Emerging Markets: After showing signs of improvement earlier in the year, a soft spell has re-emerged. China, for example, grew less stellar than expected in Q1 and the April PMI was not very encouraging either. Risks In our view, the global economy remains vulnerable to a significant worsening of conditions in the Eurozone, a spike in oil prices or a continued stand-off between US political parties on the issue of the fiscal cliff. However, none of these are our base case scenario. Source: HSBC Global Research/Bloomberg 3

4 Macroeconomic Overview India Growth has stabilized since last year, but the recovery has yet to shine through. Wholesale Price Inflation (WPI): Moving in the right direction. Declined to 6% y-o-y in March vs. 6.8% in February WPI headline inflation declined further in March to 6% (vs. 6.8% in February) led by primary articles, especially food inflation. Similarly, core inflation (non-food manufacturing) also declined, easing to 3.4% (vs. 3.8% in February). After having trended up for a while, CPI finally slowed a tad in March (10.4% y-o-y vs.10.9% in February). Looking ahead, WPI is likely to remain relatively stable at current levels over the next few months, but CPI may trend slightly lower. The relatively large structural element to inflation will add to the stickiness, together with the on-going adjustment in fuel prices. Index of Industrial Production (IIP) picks up sequentially, though slips y-o-y. Registers 0.6% y-o-y growth in February Industrial production grew at a slower clip in February (0.6% y-o-y vs. 2.4% in January) led by contractions in mining and electricity output, partly due to base effects. By use, all categories pulled back, except capital goods. Sequentially, however, IIP recovered on a seasonally adjusted basis (2.4% m-o-m sa vs. 0.9% in January) and the momentum has firmed since December. Power outages continue to hamper output. PMI Manufacturing for the month of April eased to 51 vs 52 in March The economy clearly seems to be losing wind again domestic orders are easing & dampening growth while frequent power cuts continue to hamper operations. HSBC composite India manufacturing PMI eased to 51 vs.52 in March, led by slower growth in output (50.2 vs in March) and new orders (52.3 vs 52.8 I March). New orders growth was led by pick up in new export orders (51.1 vs in March). Backlog of works continue to rise (51.1 vs in March), albeit at a slightly slower pace. Supplier delivery times continued to lengthen (49.3 vs in March). Input & output price inflation moderated. WPI: Wholesale Price Index an index that measures and tracks the changes in price of goods in the stages before the retail level. CPI: Consumer Price Index is an index that measures changes in prices at a household level for various consumer goods and services. PMI: Purchasing Managers Index is an indicator of the economic health. The manufacturing PMI is based on new orders, inventory levels, production, supplier deliveries and employment environment. Source: HSBC Global Research/Bloomberg 4

5 Macroeconomic Overview India Easing with the inflation guards up: RBI cuts by 25bps Facts: The RBI, in the May annual policy review, cut the policy rate (the repurchase or repo rate) by 25bps to 7.25% while keeping the CRR unchanged. Consequently, the reverse repo and marginal standing facility rates were lowered to 6.25% & 8.25% respectively. Implications: Growth remains too low for comfort. Combined with the easing in inflation pressures in recent months, the government s recent reform push, and progress on fiscal consolidation, this gave the RBI a little elbow room to sneak in another rate cut. Even so, the RBI is still not at ease with the inflation outlook and it remains concerned about current account deficit and its financing, despite the narrowing of the deficit during the January-March quarter. It, therefore, signaled, yet again that the scope for further rate cuts is limited. RBI also rightly pointed out that a revival in growth, rather than monetary policy easing, should rely on stepped up implementation of structural reforms and infrastructure investments, while continuing with fiscal consolidation. If the government continues to make progress in these areas, it will gradually lift growth through higher investments. However, we agree with the RBI that the recovery will prove protracted. Moreover, it is difficult for the government to push reform policies through in the current political environment, with the recent loss of another coalition partner clearly not helping. While the room for further monetary policy easing has essentially been exhausted for now, in our view, it cannot be ruled out that the RBI may still fire another small salvo in coming months. However, cutting rates further poses inflationary risks considering that monetary policy settings are now accommodative while capacity is relatively tight in the supply-constrained economy. Any further easing, therefore, has to be approached with caution. Bottom Line: RBI cut again. It remained concerned about the weakness of growth while somewhat encouraged by the recent easing in inflation. However, the room for further easing is limited given lingering inflation risks and the still high current account deficit. Moreover, the supply-constrained economy is more in need of a further dose of structural reforms. Source: HSBC Global Research/Bloomberg 5

6 April Recap India - Equity Indian equity markets rose in the month of April amidst expectations of a rate cut in the May RBI monetary policy review given the easing of macro economic indicators and continued institutional buying. For the month FIIs invested USD 1bn while DII sold USD 0.23bn. YTD CY13, FIIs have invested USD 11.1bn while DIIs have sold USD.1.5bn. We expect markets to focus on Q4 FY 13 quarterly results, earnings projections by corporate India and developments on the political & economic reforms. The near term outlook for economic growth remains challenging and political developments have the potential to increase volatility in the short-term. Tactically, we look for risk on-risk off to continue. We have revised our Sensex target downwards to 20,700 (from 21,700) for the year 2013 and continue to remain Neutral on equities. India - Fixed Income Bonds at the longer end of the yield curve exhibited rally during the course of the month and ended at 7.73% in April 2013 vs % in Mar 2013 due to expectations on the RBI easing policy rates. The 12 months Bank certificate of deposit (CD) ended the month at levels of 8.42%, thereby aiding ultra short and short term funds. Currency The INR strengthened against the USD during the course of the month due to overseas portfolio flows. The USD strengthened against the EUR due to concerns emanating from Cyprus. The GBP weakened against the USD as the domestic backdrop remains poor. Commodities Gold prices weakened during the course of the month due to concerns over the impact of gold sales by Cyprus, and potential sales by other Eurozone nations. Oil prices continued to weaken due to global concerns leading to marginal risk aversion Equity - India MTD YTD Sensex 19, % 0.4% CNX Mid-cap 7, % 8.1% Equity - World MSCI Emg Mkt 1, % 1.5% MSCI World 1, % 10.3% Bonds & Currency 10 Yr Yield* bps 32 bps USD/INR** % 2.2% Commodities Gold (USD) 1, % 11.9% Brent Crude (USD) % 5.2% FII: Foreign Institutional Investor an investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. DII: Domestic Institutional Investors a local institutional investor 6 * Arrow movement reflects impact on bond prices while numbers are in yield terms ** Arrow movements reflect impact on INR As on April 30, Source Bloomberg

7 India - Equity Indian equity markets rose in the month of April amidst expectations of a rate cut in the May RBI monetary policy review and continued institutional buying. For the month FIIs invested USD 1bn while DII sold USD 0.23bn. YTD CY13, FIIs have invested USD 11.1bn (as compared to USD 8.7 bn for the same period last year while DIIs have sold USD.1.5bn (as compared to (USD 1.1) bn for the same period last year). We expect markets to focus on Q4 FY 13 quarterly results, earnings growth commentary by corporate India and developments on the political & economic reforms. Fall in PMI led by frequent power cuts Prev. Month = This Month = Nifty volatility index has been declining Globally we look for the evolving situation of US fiscal cliff and Eurozone. The near term outlook for economic growth remains challenging and political developments have the potential to increase volatility in the short-term. Continuation of reforms can act as a catalyst to the rally. Tactically, we look for risk on-risk off to continue. In our view, valuations, given the April rally, are now in line with the historical average. SENSEX currently trades at a 13.6x FY14 earnings v/s average of 14x over last decade. A diminishing window for reforms, slackness in corporate earnings and a more protracted recovery makes us maintain our Neutral stance on equities. We have however revised our Sensex target downwards to 20,700 (from 21,700) for the year 2013 We continue to recommend equity funds which have shown consistent performance across cycles. On the direct equity front, we continue to recommend a bottom-up approach and advise investors to use dips to accumulate stocks having good management, strong balance sheets, and sustainable business model. FII continues to invest, while DII sell Valuations in line with historical average. Source: Bloomberg; All the views expressed in this document are 12 month views; 7 -ve means negative, = means neutral, +ve means positive 7

8 India - Fixed Income Prev. Month: Duration =; Liquidity =/-; This Month: Duration =; Liquidity =; Systemic liquidity continued to remain tight Bonds at the longer end of the yield curve exhibited rally during the course of the month and ended at 7.73% in April 2013 vs % in Mar 2013 due to expectations on the RBI easing policy rates. The RBI released the government securities auction calendar for April September 13 and the gross borrowing is INR 3.5 Trn as against INR 3.7 Trn in H1FY13. In terms of net supply the quantum is INR 2.54Trn as against INR 2.85Trn in H1FY13. However unlike last year, H1FY14 s borrowing calendar has greater concentration on issuances maturing between years. The Government to boost FIIs investments into the Indian debt market has simplified investment limits by removing the various sub-category restrictions within government securities and corporate bonds thereby aiding sentiments over the medium to long term. The shorter end of the yield curve also witnessed a rally despite the tight liquidity conditions due to investment demand especially for certificate of deposits and select commercial papers and on the RBI easing policy rates. The 12 months Bank certificate of deposit (CD) ended the month at levels of 8.42%, thereby aiding ultra short and short term funds. In this environment we continue to recommend allocation at the shorter end of the yield curve as these would provide stable accrual income besides capital gains during the course of the fiscal in case short rates come off. Shorter end of the yield curve rallied due to investment demand and on RBI s monetary easing. We continue to hold on to dynamic bond funds. We believe that the longer end has the ability to correct given the weak growth numbers though with volatility. Inflation linked bonds are expected to be issued during H1FY14 and the street expects the coupon and principal to be linked to inflation (WPI). The markets are awaiting their structure and modus operandi. Investors also would need to plan for the change in dividend distribution tax increase on debt funds which is likely to come into effect from June. The near term liquidity requirements can continue to be invested in money market funds. However, excess liquidity maintained can be moved to funds with investment horizons over one year to improve on post tax yields. 8 Source: Bloomberg; All the views expressed in this document are 12 month views; -ve means negative, = means neutral, +ve means positive 8

9 Currencies Prev Month: USD + GPB - EUR - USDJPY = EM + USD/INR + This Month: USD + GPB - EUR - USDJPY = EM =/+ USD/INR + The USD INR was range bound despite a record level of current account deficit. The recent strong debt inflows into India (USD 3.4B YTD) should limit INR weakness. However the INR will be prone to weakness if the ongoing reform process is curtailed and on trade deficit beginning to deteriorate again, Recent data releases of February and March shows improvement in the balances though it would be quite early to extrapolate the same. INR strengthened against the USD during the course of the month due to overseas portfolio flows. We have revised our Q2CY13 end target on the USD INR to 54 as against our earlier target of 52. We have even revised our year end USD INR target from 50 to 52. Our forex trading desk expects the INR to remain in a range of against the USD. The recent modification in the FII limits on government and corporate bonds may lead to INR strengthening, however global cues and local developments may check the INR movement. We believe that globally currencies are gradually moving away from risk appetite as the only driver and towards more fundamental factors. Hence as a result we expect the USD to gradually see support as the US economic recovery unfolds, even if the recent soft patch in data may slow concerns about an earlier than expected end to the ongoing quantitative easing.. We expect EURUSD to continue to trade in its recent broad range, given counterbalancing factors. EUR is being supported by reduced tail risks and generally improving risk appetite, thanks to the European Central Bank s aggressive actions, even if recent headlines (Italian elections, bailout for Cyprus and some weak economic data in Germany) have led the EUR to retest the lows of the recent range. However, we expect the EUR to remain under pressure in the long term as growth prospects remain poor for the region and political uncertainties may weigh on sentiment. The USD strengthened against the EUR due to concerns emanating from Cyrpus and the GBP weakened as the domestic backdrop remains poor. GBP should consolidated around current levels before continuing its downward trend as the domestic backdrop remains poor, the Bank of England is likely to ease further and the GBP seems to have lost the safe haven bid. We remain constructive on emerging market currencies where we see solid fundamentals and attractive carry but are selective given their diverging performance. Source: Bloomberg; All the views expressed in this document are 12 month views; -ve means negative, = means neutral, +ve means positive 9 9

10 Commodities Prev Month: Gold +; Oil =; Agricultural +; Industrial + This Month: Gold =; Oil =; Agricultural +; Industrial + We believe that softer global growth and softer Chinese growth is weighing on demand for commodities, while supply is comfortable. So, we have downgraded our view on commodities to neutral. We believe that the gold bull rally of the last 12 years is probably over but we believe that gold is becoming oversold. We believe that investors may take time before diving back into gold investments following the sharp sell-off and the higher inflation expectations, which may take time to materialize amid slower growth, so we have downgraded our long term view on gold to neutral. Oil prices may remain range bound in the coming months as demand may suffer from weaker global growth. In the longer term, we expect oil prices to remain supported by emerging market (EM) demand. We expect demand for industrial metals to gradually increase over the long run, as the Chinese recovery unfolds, but it may take time for this trend to materialize. Gold weakened during the month due to concerns over the impact of gold sales by Cyprus and potential sales by other Eurozone nations The agriculture index remained flat during the month Crude oil prices continued to correct on account on investors seeking risk aversion assets Industrial metal index lost 4.7% in April 13 We believe that agriculture prices have risen sharply, limiting short-term upside as farmers have increased their planting activity due to better prices. Longer-term trends should be supportive though, as production may find it difficult keeping up with rising consumption in the emerging markets. Source: Bloomberg; All the views expressed in this document are 12 month views; -ve means negative, = means neutral, +ve means positive 10 10

11 Disclaimer This document is prepared by the Private Banking Unit of The Hongkong and Shanghai Banking Corporation Limited in India (HSBC) for the information of its customers only. The contents of this document are not and should not be construed as an offer to sell any investment, instrument or service. Furthermore, this document does not constitute the solicitation of an offer to purchase or subscribe for any investment, instrument or service in any jurisdiction where, or from any person in respect of whom, such a solicitation of an offer is unlawful. While this information has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by HSBC or the HSBC Group or by any of their respective officers, employees or agents as to or in relation to the accuracy or completeness of this document. The information stated, opinions expressed and estimates given constitute best judgement at the time of publication and are subject to change without notice. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies that may have been discussed in this document. HSBC, its affiliates, and/or their officers, directors and employees may have positions in securities of any companies mentioned herein (or in any related investments) and may from time to time add to or dispose of any such securities (or investments). Moreover, HSBC or its affiliates may perform or seek to perform investment banking or underwriting services for or relating to such companies and may also be represented in the supervisory board or any other committee of these companies. HSBC makes no representations that the products or services mentioned in this document are available to persons of any other country or are necessarily suitable for any particular person or appropriate in accordance with their local law. Among other things, this means that the disclosures set forth in this document may not conform to rules of the regulatory bodies of any other country and investment in the products discussed will not afford the protection offered by the local regulatory regime in any other country. It is important to note that the capital value of your investment may go down as well as up and you may not get back the full amount invested. Past performance is not an indication of future performance. Private Banking may be carried out internationally by different HSBC legal entities according to local regulatory requirements. A complete list of private banking entities is available on the following website - The information contained in this document has not been reviewed in light of your personal circumstances. Please note that this information is neither intended to aid in decision making for legal, financial or other consultancy questions, nor should it be the basis of any investment or other decisions. This document contains forward looking statements which are, by their nature, subject to significant risks and uncertainties. Such statements are projections, do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from the forecasts/estimates. Copyright. The Hongkong and Shanghai Banking Corporation Limited. ALL RIGHTS RESERVED No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. The Tactical Asset allocation and Direct Equity Advisory Portfolio provided in this document is for illustration purposes only. This has not been reviewed against your personal circumstances or conditions and should not be acted upon or seen as a substitute for the exercise of independent judgment by you taking into account your personal conditions and circumstances. 11

India Monthly Investment Outlook and Strategy

India Monthly Investment Outlook and Strategy November 2012 HSBC Private Bank Issued by The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India). Private banking services are provided