India Monthly Investment Outlook and Strategy

Transcription

1 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 by HSBC India 1

2 Contents 1. Macroeconomic Outlook 2. October Recap 3. Asset Classes- 12 Month Views India - Equities India - Fixed Income Currencies Commodities Best Private Bank in Asia Asset Allocation 5. Recommendations Equity Stocks Advisory Portfolio Mutual Funds - Equity / Fixed Income Bonds 2

3 Macroeconomic Overview Global The Global economic cycle has been slowing for sometime, but now seems to be stabilizing. While it is too early to call for a great cyclical upswing, we think that the risk of a global recession has receded. There are several factors at work. We believe that the monetary policy is being further relaxed and is starting to have some effect, while lower inflation globally is leaving consumers with more money in their pocket to spend. Currency adjustments are helping the Eurozone regain competitiveness. Bank lending is showing some signs of stabilization (though not yet picking up much), as many banks have improved their capital base. The picture is not uniform across regions though. We see signs of growth in the US and even some glimmers of hope for Europe, but we are concerned that slow down in Asia may have somewhat further to go. Global trade reflects this pattern and seems to be edging up again, led by the US, but with some weakness in Asia. Major western central banks strong commitments to support their economies has boosted investor sentiment. We expect this trend to persist, provided politicians hold up their end of the deal. While the current slowdown is likely to continue in the coming months, we believe that the global economic outlook will start to improve in the coming quarters. Risks In our view, the global economy remains vulnerable to a significant worsening of conditions in the Euro-zone, a hard landing in China, US fiscal cliff and its potential impact on US growth next year or a spike in oil prices, although none of these are our base case scenario. Source: RBI/HSBC Global Research/Bloomberg 3

4 Macroeconomic Overview India Bottoming Out? August IIP growth better then expected Facts: Growth in factory output rose to 2.7% y-o-y in August vs. 0.1% in July. This was above consensus expectation of 1.1% growth. On a sequential basis, industrial production expanded by 1.2% m-o-m (seasonally adjusted) following the 0.2% m-o-m contraction in July. On a 3m/3m (seasonally adjusted) basis, IP growth held steady (0.2% 3m/3m vs. 0.2% in July). Implications: Industrial production showed sign of stabilization as foreshadowed by HSBC's PMI reading. However, growth remains moderate by historical standards due to external head winds and supply side constraints. These are only expected to ease gradually, and we, therefore, only expect a moderate and bumpy recovery in industrial output during the remainder of the fiscal year. Domestic demand, especially investment demand, is held back due to global economic uncertainty and, importantly, slow progress on structural policy reform. Policy reforms announced recently are, therefore, welcome and could have a positive impact on investments further down the road. A policy rate cut from the RBI will do little to reinvigorate the supply side while increasing inflation risks by lifting demand in the short run. The central bank is keenly aware of this and will, therefore, approach easing with caution, keeping a keen eye on inflation and further policy progress out of Delhi, especially on the fiscal front. Bottom Line: Industrial production surprised on the upside. This suggest that growth may have bottomed out assuming that external demand doesn't worsen and domestic reform progress is sustained. Source: RBI/HSBC Global Research/Bloomberg 4

5 Macroeconomic Overview India On the rise again : September Inflation up to 7.8% Facts: Headline WPI inflation rose to 7.8% y-o-y in September (vs. 7.6% in August), slightly above market and HSBC expectations of 7.7%. In sequential terms, prices rose 1.0% m-o-m (vs. 1.4% in August) and 9.3% 3m/3m (vs. 7.3% in July). Core inflation (nonfood manufacturing), held steady at 5.6% in annual terms and 0.6% m-o-m in seasonally adjusted sequential terms. Implications: The latest inflation reading was, yet again, testament to the persistence of inflation with core inflation holding steady. While primary food inflation eased, it may increase in coming months as the effects of the deficient monsoons kick in, although the rain deficit narrowed notably and, therefore, reduced the likely upward drift in food prices. Core inflation is also expected to remain firm in coming months. The supply led slowdown in growth has left capacity tight despite the slowdown in economic activity. This will keep underlying inflation pressures simmering for a while. The rise in diesel prices could also spill over to underlying inflation pressures. With inflation number too high for comfort and upside risks to inflation still prevailing, the RBI may remain cautious about easing. It will be important to manage inflation expectations to ensure the uptrend in inflation does not become broader based. Additional measures by the government to contain the fiscal deficit also remain an important precondition for monetary easing. Bottom Line: Headline inflation rose more than expected and core inflation remains firm. This ought to make RBI careful about easing until inflation risks have receded sufficiently and fiscal policy is back on track. Issued by The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India). Private banking services are provided by HSBC India Source: RBI/HSBC Global Research/Bloomberg 5

6 Macroeconomic Overview India Sticking to their guns: RBI on hold Facts: The RBI kept the policy rate (the repurchase or repo rate) unchanged at 8.00%. Consequently, the reverse repo and marginal standing facility rates were kept unchanged at 7.00% and 9.00%, respectively. The cash reserve ratio (CRR) was, however, cut by 25 bps to 4.25% effective November 3. This would inject around INR 175 billion of liquidity into the system and is intended to pre-empt tightening of liquidity in the context of the festive season. Implications: Inflation risks are still lingering, which has been evident from the uptrend in inflation in recent months. The adjustment in fuel prices will also add to inflation and possibly lift inflation expectations, and the supply led nature of the slowdown has left capacity tight. The bold policy measures announced by the government recently were certainly very positive and steps in the right direction. However, while they are necessary to pave the way for rate cuts down the road, they are not sufficient in themselves to alleviate RBI's understandable concerns about inflation risks. Moreover, more needs to be done. The step up in reform momentum combined with further efforts to rein in the fiscal deficit, could pave the way for RBI to cut policy rates, although this would appear more likely to happen closer to the end of the current fiscal year. Even so, the room to cut rates remains limited given the supply-led nature of the slowdown and the only gradual easing in supply constraints expected on the back of the reform efforts. Bottom Line: The RBI's decision to keep the policy rates unchanged was appropriate in light of the lingering inflation risks. Continued progress on fiscal consolidation and structural reforms to revive the supply side can help pave the way for rate cuts, possibly towards the end of this fiscal year. Source: RBI/HSBC Global Research/Bloomberg 6

7 Macroeconomic Overview India Steadying: HSBC manufacturing PMI up in October Facts: HSBC's India manufacturing PMI rose slightly in October to 52.9 (vs in September) due to firm new orders inflows (54.9 vs in September). The improvement in orders seemed to be largely driven by domestic demand as new export orders (53.6 vs in September) grew at a slightly slower pace. Despite the pick up in orders, output growth (52.7 vs in September) slowed, but this was mainly due to insufficient power supply which led to a significant increase in backlogs of work (56.3 vs in September) and slightly longer supplier delivery times (49.7 vs in September). Implications: The manufacturing sector is showing signs of stabilization, with orders from both domestic and external sources firm. However, supply side constraints continue to hamper growth, especially lack of reliable power supply. This will keep output growth moderate in coming months, although the improving inventory-to-order ratio suggests some upside to output growth. A more substantive and sustained uptick in growth hinges on progress on structural reforms and implementation of existing investment projects that are aimed at improving the supply side of the economy. Progress on fiscal consolidation is important requirement to raise investments by crowding in the private sector. The reform measures announced by the government thus far are welcome and will help gradually lift growth. But, more needs to be done to raise the growth potential of the economy back to where it belongs. Bottom line: The manufacturing PMI improved slightly as new order inflows remained firm. However, output growth is likely to remain relatively moderate in coming months due to insufficient power supply, which together with other supply side constraints is keeping underlying inflation pressures simmering. Source: RBI/HSBC Global Research/Bloomberg 7

8 October Recap India - Equity On the back of stellar rally (up 7.6%) witnessed in September 2012, the Indian equity markets were range-bound in October 2012 and finally ended down 1.4% on a monthly basis. YTD October 2012, FIIs have invested a total of USD 18.1 Bn in the Indian market (as compared to USD 0.4 Bn for YTD October 2011). For the month of October 2012 alone, FIIs invested USD 2.0 Bn, reflecting their continued interest in the country, given the slew of policy measures announced by the Central Government and the increase in global liquidity. The near term outlook for economic growth remains challenging and political developments have the potential to increase volatility in the short-term. On the flip side, continuation of reforms can act as a further catalyst to the ongoing rally. We continue to remain Neutral with a positive bias on Indian equities. India - Fixed Income The longer end of the yield curve was range bound during most of last month, however post the RBI s monetary policy meet yields corrected as the RBI left the repo and the reverse repo rates unchanged, though the stance was relatively dovish in nature. The RBI while revising upwards its March 13 inflation (WPI) forecast to 7.5% reduced FY13 growth estimates to 5.8% and hinted at possible rate cuts in Q4FY13. The shorter end of the yield curve rallied due to the RBI reducing the Cash Reserve Ratio requirement of the banks by 25 bps thereby injecting liquidity of ~INR 175B into the system. 1 year Bank CD rates moved lower by 29 bps over the previous month. Currency The INR weakened during the month due to concerns over the current account deficit as exports contraction has been greater than imports contraction. The USD weakened marginally during the month against the EUR due to varying market expectations from the US Presidential elections. Equity - India MTD YTD Sensex 18, % 19.7% CNX Mid-cap 7, % 27.0% Equity - World MSCI Emg Mkt % 8.6% MSCI World 1, % 10.1% Bonds & Currency 10 Yr Yield INR* 8.22% 7 bps 35 bps USD/INR** % 1.4% Commodities Gold (USD) % 10.0% Commodities Gold prices eased during the month due to profit booking as it touched USD 1,796/ounce during the month, levels last seen in February 12. Oil prices eased during the month despite Hurricane Sandy causing destruction in the US East Coast. Brent Crude (USD) % 4.6% * Arrow movement reflects impact on bond prices while numbers are in yield terms ** Arrow movements reflect impact on INR As on October 28, Source Bloomberg 8

9 India - Equity On the back of stellar rally (up 7.6%) witnessed in September 2012, the Indian equity market were range-bound in October 2012 and finally ended down 1.4% on a monthly basis. The global markets were also flattish as most of the big ticket announcements like QE3 and ECB bond buying program had led to rally in earlier month. YTD October 2012, FIIs have invested a total of USD 18.1 Bn in the Indian market (as compared to USD 0.4 Bn for YTD October 2011). For the month of October 2012 alone, the FIIs invested USD 2.0 Bn. We believe the focus of the markets has now shifted to the ongoing results season, credibility of fiscal road-map by the Government (Telecom spectrum auction, PSU disinvestment) coupled with winter session of the parliament, which is expected to commence in last week of November, wherein big ticket bills (pension, insurance, land acquisition, GST etc) are expected to be placed on the floor of the house. The near term outlook for economic growth remains challenging and political developments have the potential to increase volatility in the short-term. On the flip side, continuation of reforms can act as a further catalyst to the ongoing rally. Tactically, we look for risk on-risk off to continue. In our view, valuations remains attractive, especially when compared to history. SENSEX currently trades at a 13.1x FY14 earnings v/s average of 14x over the last decade. We maintain neutral with a positive bias stance on Indian Equities. In our view, a number of the key tails risks facing the global economy have reduced, which has seen global risk appetite recover. We continue to recommend Funds which have shown consistent performance across cycles. In the current rally these funds performed better than their peers. In our direct equity model portfolio, we have added weight in cyclical and relatively high beta stocks whilst sticking to companies with strong corporate governance and attractive valuations. PMI indicates that the manufacturing sector has been stabilizing and the services sector activity continues to rise FII flows have been buoyant in the current year Prev. Month =/+ This Month =/+ Nifty volatility index has eased in recent months Despite rally: valuations are attractive Source: Bloomberg; All the views expressed in this document are 12 month views; -ve means negative, = means neutral, +ve means positive 9

10 India - Fixed Income Bonds at the longer end of the yield curve corrected during the month due to the RBI retaining the current repo rates and indicating further rate cuts only in the January March 13 qtr as against market expectations of October December 12. The finance minister announced a fiscal roadmap prior to the RBI s policy with the objective to reduce the fiscal deficit from FY13E 5.3% of GDP to 3.0% of GDP by FY17. The fiscal consolidation roadmap along with possible telecom auction and government disinvestments in the coming weeks increased expectations from market players for a rate cut. Prev. Month: Duration =/+; Liquidity =/-; This Month: Duration =/+; Liquidity =/-; Systemic liquidity tightened during the month due to the festive season and lower spend by the Government We believe that the RBI may cut policy rates towards the end of the current fiscal and the room to cut rates remains limited given the supply-led nature of the slowdown. We continue to believe that in the event the RBI cuts rates, this will lead to a shift in the yield curve downwards. This can lead to the 10 year g-sec yield to rally to 7.90% from present levels of 8.15%. Moving forward the key risk for investors would be the reinvestment risk given the declining interest rate scenario. Hence, we look to reposition portfolios to capture capital gains from a falling yield curve. In the current environment therefore, we recommend a mix of dynamic bonds funds and long term debt funds (gilt & income funds). Apart from maintaining attractive accruals, these schemes have registered capital gains through active fund management and may continue to do so in an easing interest rate environment. However, investors need to be aware that the longer duration bonds will add to volatility in their portfolios as witnessed in the recent past, especially in case of delay in the RBI s monetary easing, additional borrowing announcements in the latter half of the year. Hence, the investment horizon for such investments accordingly therefore needs to upwards of 1 year. We also recommend to our clients to maintain sufficient liquidity for any tax free issuances by high quality public sector entities over the next quarter. The Union Budget has provided a limit of INR 600 bn for such bond issuances in this financial year Our earlier view of shorter end yields coming off faster than the longer end yields has played out to a large extent through easing systemic liquidity and softening of shorter tenor rates. Yields in the 1 year paper have come off by approx bps over the last 6 months. Given the lower rates in the shorter end of the spectrum, clients may consider moving funds from the liquid/ ultra short term schemes to the short term/ income funds, depending on the tenor of the investments and 7.8 liquidity requirements of clients as these schemes should be held with a time horizon upwards of six/twelve months, respectively. 7.6 The longer end of the yield curve witnessed volatility during the course of the month INR Sovereign Curve Current INR Sovereign Curve Prev Month 3M 6M 1Y 3y 5Y 8Y 10Y 12Y 20y Source: Bloomberg; All the views expressed in this document are 12 month views; -ve means negative, = means neutral, +ve means positive 10

11 Currencies PrevMonth:USD =/+ GPB =/- EUR =/- USDJPY = /+ EM =/+ ; USD/INR + This Month:USD - GPB = EUR + USDJPY = EM + USD/INR + We have turned more positive on the INR since the announcement of reforms by the government in order to boost investor sentiment and crop the burgeoning twin deficits. Having said that, we still acknowledge the implementation risks and political obstacles to these reforms, however, we have always been in the camp that more policy reforms will come. Possible reduction in withholding tax on INR denominated infrastructure bonds to 5% from 20% validated our view. With the final ruling of the GAAR possibly announce after the end of October which could include the withholding tax changes, we think the market is likely to start re-build their short USD-INR positions in anticipation of that and other reforms. INR weakened against the USD during the month We feel that the INR deserves a constructive view in light of the recent easing by the central banks of developed economies. We now see the INR continuing to appreciate with a forecast of USD-INR at 49 by the second half of We believe that the recent trends of euro strength and USD weakness are likely to persist given ongoing central bank support which is reducing tail risks and boosting risk appetite, although we may see a period of consolidation and rangetrading for now as both sides face hurdles in the coming months. GBP, as always, seems to be caught in the crossroads, and is likely to trade alongside EUR versus USD, although it may continue to under perform EUR. USD marginally gained against the EUR and GBP during the month Despite these moves, we believe that the ugly contest continues, as each major Western currency faces its own issues. As a result, we believe that emerging market (EM) currencies will see inflows, particularly where attractive yields encourage the carry trade. One currency where we remain neutral despite its carry appeal is AUD, which could have difficulty reaching new highs given its sensitivity to China s slowdown. Source: Bloomberg; All the views expressed in this document are 12 month views; -ve means negative, = means neutral, +ve means positive 11

12 Commodities Prev Month: Gold +; Oil =; Agricultural +; Industrial = This Month: Gold +; Oil =; Agricultural +; Industrial = We believe that the longer-term outlook for commodities is improving, supported by the recovery in Chinese economic data, although it may take some time for higher prices to materialise given some short-term uncertainty. We expect Gold to reach USD 1,900/ounce by year end, buoyed by the US quantitative easing program, global easing, central-bank demand and a weaker USD. Weak jewellery demand, low Indian bullion imports, rising scrap supply and limited retail coin and small bar could check gold price appreciation during the remaining months of the year. In 2013 we expect monetary easing to support gold prices up to near USD 2,000/ounce, however sluggish physical supply/demand balances should check gold price appreciation. Tensions in the Middle East have provided support to oil prices outweighing softer demand presently. In the longer term, we expect oil prices to remain supported by emerging market (EM) demand, but this may take some time to materialise. In our view, Industrial metal prices may not rebound significantly until we see a notable improvement in Chinese growth numbers, but we believe that prices will still somewhat benefit from recent central bank actions. We believe agriculture prices have risen sharply thereby limiting short term upside. Longer term trends should be supportive, though, as we believe that production may find it difficult keeping up with rising consumption. Weak jewellery demand and low Indian Bullion imports led to subdued Gold prices The agriculture index fell by ~3% during the month. Crude oil prices weakened by ~2.6% during the month. Industrial metal index rose by ~8% during the month Source: Bloomberg; All the views expressed in this document are 12 month views; -ve means negative, = means neutral, +ve means positive 12

13 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. Disclaimer 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.