Monthly Strategy Monthly Strategy Monthly Strategy

August 13, 2012 December 12, 2013

13 August 2012

Monthly Strategy Monthly Strategy Monthly Strategy

December 12, 2013

Table of Content
House View...................................................................... 2 Global economy and markets........................................... 3 India: CAD improves, currency stabilises but inflation worries remain............................................................. 4 Equity markets: Election outcome euphoria takes market to new highs ................................................................ 5 Fixed income: Inflation worries continue to put pressure on long dated papers ................................................... 6 Bullion: Indian gold prices trading at premium to global prices due to supply restrictions ...................................... 7 Currency: INR likely to remain range bound ................. 8 Commodity: Range bound on mixed cues........................ 9

Analysts name
Sachin Jain sachin.ja@icicisecurities.com Sheetal Ashar sheetal.ashar@icicisecurites.com

House View
Equity

The improvement in current account deficit and stabilisation of currency along with some improvement in GDP growth has improved market sentiments to a certain extent Significant foreign inflows are driving the markets to all-time high levels discounting improvement in growth, going forward, on the back of a BJP-led NDA government. We think it is premature to extrapolate the state election results to general election results Those running systematic investment plans should continue to do so. With the Sensex at an all-time high, markets have entered uncharted territory. However, given the Indian economy is slowly beginning to gain ground and foreign investors continue to favour India, it is unlikely that markets could change course on the downside, notwithstanding small corrections Inflation, however, remains worrisome for policy makers. The WPI inflation at 7% and CPI inflation over 10% is certainly giving discomfort to RBI. Further rate hike expectations have increased post the latest inflation number and the same has led to a sharp negative reaction on long term yields The heavy supply schedule of November is now behind us with the month ahead much less busy in terms of issuances. However, additional issuances due to bond switch programme of | 50000 crore by the government, where they will be replacing G-Secs maturing over the next one or two years with longer dated securities, will put additional supply side pressure on long date government securities Gold prices have been range bound over the last three months despite global prices falling around 12% and the Indian currency also remaining at around similar levels due to supply restriction on gold imports by the Government of India Over the medium term, gold prices may remain subdued as recovery in the US and, consequently, QE tapering along with some stability in currency will reduce the attractiveness of the metal The year 2013 witnessed most of the major emerging countrys currencies depreciating against the US dollar. Among them, the Indonesian Rupiah, Japanese Yen and the Indian rupee depreciated most while the South Korean won stood unaffected for the whole year Given the improvement in current account deficit and RBI better prepared to counter sharp volatility in currency, the Indian currency may not witness a sizeable depreciation in the near term Crude oil prices remained range bound in 2013 on concerns over QE tapering that was offset by ongoing tensions in Middle East region and recovery in US economy. We expect Brent oil prices to remain in the range of $100-120 on account of a rebound in demand from the US Indian consumers were, however, unable to reap the benefits of low metal prices as the landed cost for them almost remained the same on the back of a depreciation of the domestic currency

Given the sharp up move discounting general election outcome in 2014, markets may turn volatile in near term

Debt

Higher inflation and increase in supply may prevent any significant fall in G-Sec yields

Gold

Gold prices have also been moving on news flows surrounding the US Federal Reserve tapering. The market is expecting the US Fed tapering to ultimately happen and the same will result in liquidity concerns for gold investment

Currency

The Indian currency may not witness a sizeable depreciation in the near term

Commodity

Depreciation in currency negated the positive impact of a fall in global metal prices

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Global economy and markets

Most developed markets were upbeat as the European Central Bank even delivered a surprise rate cut to fight falling inflation and the rising euro. ECB president, Mario Draghi, went on to state explicitly that they have not reached the lowest bound on interest rate and maintained the downward bias A sharp hike in US treasury yields due to concerns over tapering led to investors shying away from debt markets and searching for opportunities in the equity market Chinese markets were boosted by better-than-expected exports growth and policy reforms announcements by the government Japans equity markets have been outperforming significantly on the back of ultra loose monetary policy of newly elected president Shinzo Abe. Analysts expect Abes quantitative and qualitative easing, stimulus measures and other reforms to continue throughout 2014
20 15 9.3 10 (%) 5 0 -5 Germany US France China Japan 8.6 9.2

Exhibit 1: Global markets cheer deferring of US bond buying tapering

17.0 16.1

3.7 5.8

11.7

4.1

3.5

-0.1

-1.2

3.7

-1.8

UK

1M

3M

Source: Bloomberg, Returns as Nov 30, 2013

Exhibit 2: Japan manages to receive significant FIIs inflows resulting in its outperformance
70 60 50 40 30 20 10 0 -10 -20 65.8

27.0

23.5

15.3

(%)

20.7

13.4

12.0

12.1

2.9 7.5

5.0

7.5

-0.1

-4.2

1.9

Germany

US

France

UK

China

Japan

6M

1Y

Source: Bloomberg, Returns as Nov 30, 2013

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Brazil

India

-8.7

Brazil

India

-3.3

4.9

India: CAD improves, currency stabilises but inflation worries remain

Q2FY14 GDP grew 4.8% YoY vs. market expectation of 4.5% YoY. Agriculture provided strong support at 4.6% YoY growth compensating for fragile services growth, which was the lowest print in the current GDP series Current account deficit for Q2FY14 narrowed sharply to 1.2% of GDP reflecting better trade dynamics on the back of a sharp upswing in exports and contraction of non-oil imports. However, the QE taper nervousness resulted in capital outflows. As a result of this, the capital account witnessed a deficit of US$5.3 billion during the same period WPI inflation for October 2013 came in higher at 7%. Food articles inflation at 18.1% and fuel group inflation at 10.3% were major contributors. Manufactured goods inflation bucked its declining trend and rose to 2.5% from 2.06% (September 2013). The worry also stems from sharp upwards revision of August 2013 inflation to 6.99% from 5.85% due to upwards revision of all the sub group index IIP for September stood at 2% YoY, lower than market expectations of around 3.5% YoY. Growth in manufacturing failed to instil any confidence about a sustainable recovery as it printed 0.6% YoY as against -0.2% YoY earlier. Industrial production is yet to show a firm turnaround and will weigh on overall GDP growth
Exhibit 4: GDP growth seems to have bottomed out
5.5

Improvement in current account deficit and positive outcome of state elections helped the currency to stabilise. Also, with RBI having raised significant dollars through swap window, the confidence that RBI will be able to better manage the currency fluctuation also helped the sentiment in forex markets

Exhibit 3: CAD improves on lower imports and higher exports

0 -5 -10 -15 -20 -25 -30 -35 Sep-11 Dec-11 Sep-12 Mar-12 Dec-12 Jun-12 Mar-13 Sep-13 Jun-13

4.5

4 Mar-12 Sep-12 Dec-12 Jun-12 Mar-13 Jun-13 Jun-13 Aug-13

Current Account balance

Source: Bloomberg

Source: Bloomberg

Exhibit 5: Sharp up move in WPI over last six months

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 7.3 7.3 7.3 7.3

Exhibit 6: Three months rolling IIP indicates some pick-up in activity

4 3 3 2 2 1 1 0 -1 -1 -2 Nov-12 Oct-12 Jan-13 Sep-12 Dec-12 Feb-13 Mar-13 Jul-13 May-13 Sep-13 Apr-13 Jun-13

7.2

7.0 5.7 4.8 4.6 4.9 5.9

6.5

7.0

Nov-12

Oct-12

Aug-13

Jan-13

Dec-12

Feb-13

Mar-13

May-13

WPI (LHS) Food Articles

Manufactured Goods(LHS) Fuel Group

Sep-13

Apr-13

Jun-13

Oct-13

Jul-13

3 months rolling IIP

Source: Bloomberg

Source: Bloomberg

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Equity markets: Election outcome euphoria takes market to new highs

After having delivered over 9% return in October, Indian equity benchmarks were volatile during November delivering a negative return of 1.8%. However, markets touched all-time high levels on the euphoria after results for state elections were announced on expectations the BJP led NDA government will be able to garner a decisive mandate in the general election in 2014 The improvement in current account deficit and stabilisation of currency along with some improvement in GDP growth has also improved market sentiments, to a certain extent However, other leading indicators like auto sales, cement dispatches, further rate hikes by the RBI due to higher inflation, below average IIP growth and signs of slowing domestic consumption continue to point towards below average growth in the near term Significant foreign inflows are driving markets to all-time high levels discounting an improvement in growth, going forward, on the back of the BJP led NDA government. We think it is premature to extrapolate the state election results to general election results Those running systematic investment plans should continue to do so. With the BSE Sensex at an all-time high, markets have entered uncharted territory. However, given that the Indian economy is slowly beginning to gain ground and foreign investors continue to favour India, it is unlikely that markets could change course on the downside, notwithstanding small corrections

Exhibit 7: FII hoist markets to new highs

30000 25000 20000 15000 10000 5000 0 -5000 -10000 Nov-13 Oct-13 Dec till date May-13 Aug-13 Mar-13 Sep-13 Jan-13 Jun-13 Feb-13 Apr-13 Jul-13 6400 6200 6000 5600 5400 5200 5000 (%) 5800

| Crore

Net FII Investment

Nifty (RHS)

Source: Bloomberg

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Fixed income: Inflation worries continue to put pressure on long dated papers
Global debt markets have been under pressure as the minutes of the Feds last policy meet and positive jobs data from the US led to concerns over US taper expectations resurfacing again. US 10 year G-Sec yield have moved up 25 bps to 2.85% While global weakness weighed on many other emerging market currencies, the rupee was largely stable throughout the month as Indias macro-environment incrementally improved during the month. Q2FY14 current account deficit narrowed to the lowest level since 2010 to 1.2% of the GDP on falling gold imports. RBI raised US$34 billion through FCNR plus overseas bank borrowing incentive windows adding to the strength of the RBI to manage forex markets Inflation, however, remains worrisome for policy makers. The WPI inflation at 7% and CPI inflation over 10% is certainly providing discomfort to the RBI. The further rate hike expectations have increased post the latest inflation number and the same has led to a sharp negative reaction on long term yields The heavy supply schedule of November is now behind us with the month ahead much less busy in terms of issuances. However, additional issuances due to bond switch programme of | 50000 crore by the government where they will be replacing G-Sec maturing over the next one to two year with longer dated securities will put additional supply side pressure on long date government securities Since the currency market has stabilised, RBI is supporting growth through easy liquidity as high inflation is preventing it from resorting to rate cuts. As and when inflation trajectory looks downward RBI will resort to easing of policy rates. We feel the 10 year G-Sec at 9.0% yield is unsustainable and may consolidate around these levels for some time before easing, going forward. Currently, the market is pricing in high inflation trajectory, going ahead, whereby another 25 bps hike in the repo rate is seen during the December 18 RBI policy meeting Short-term and accrual oriented funds with attractive yields continue to offer attractive risk adjusted return as they have relatively limited interest rate risk and yet offer potential to provide some capital gains as and when liquidity improves
Exhibit 9: CPI again back in double digit
20 18 16 14 12 10 8 6 4 2 0 11 14 13 % 10 12 11 9 Aug-13 Feb-13 Mar-13 Jun-13 May-13 Sep-13 Apr-13 Oct-13 Jul-13 10

Exhibit 8: WPI bounces back

9 8 7 6 5 4 3 2 1 7.3 7.3 7.3 7.3

7.2

7.0

5.7

4.8

Nov-12

Oct-12

4.6

5.2

Jul-13

5.9

Aug-13

6.5 Sep-13

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

WPI (LHS) Food Articles

Jun-13

Manufactured Goods(LHS) Fuel Group

Oct-13

7.0

Foods

CPI

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

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Bullion: Indian gold prices trading at premium to global prices due to supply restrictions
Indian gold prices have been range bound over the last three months despite global prices falling by around 12% and Indian currency also remaining at around similar levels due to supply restriction on gold imports by the Government of India

Exhibit 10: Indian gold prices trading at premium to global prices due to supply restrictions
110 105 100 95 90 85 80 75 70 Nov-13 Oct-13 May-13 Aug-13 Mar-13 Dec-13
150% 100% 3.1 1.9 2.5 0.7 Aug-13 Jul-13 0.7 Sep-13 1.1 Oct-13 1.1 Nov-13 50% 0% -50% -100% Value ($ bn) YoY growth

INR(derived)

Gold(INR)

Gold and silver imports slumped 80% to US$1.05 billion in November compared to a year earlier. Gold purchases have been hit this year after India took steps to curb imports of the yellow metal, including imposing a record 10% import duty and requiring that 20% of imports be re-exported

Exhibit 11: Gold imports down significantly on government controls

10 8 6 4 USD(bn) 2 0 May-13 Mar-13 -2 -4 -6 -8 Jun-13 Jan-13 Feb-13 Apr-13 7.2 5.5 6.8

7.7

Source: Bloomberg

Global gold prices have also been moving on news flows surrounding US Federal Reserve tapering. The market is expecting the US Fed tapering to ultimately happen and the same will result in liquidity concerns for gold investment Over the medium term, gold prices may remain subdued as a recovery in the US and, consequently, QE tapering along with some stability in currency will reduce the attractiveness of the metal

Sep-13

Jan-13

Jun-13

Feb-13

Apr-13

Jul-13

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Currency: INR likely to remain range bound

In the past year, most major emerging countrys currencies have depreciated against US dollar. Among them, Indonesian Rupiah, Japanese yen and Indian rupee depreciated most, while South Korean won stood unaffected for the whole year. During the period from May to September 2013, the INR witnessed most weakness among all and were depreciated nearly 25% from 55 to nearly 69 levels
Indonesia Ruppiah South Korean WON 120 INR Thai Baht Brazil's Real Philippine's Peso

Exhibit 12: Mixed cues lead to crude oil moving in narrow range
130

110

100

90 May-13 Aug-13 Mar-13 Nov-13 Dec-12 Sep-13 Jan-13 Jun-13 Feb-13 Apr-13 Oct-13 Jul-13

Past two years data suggests the 1M non-deliverable forward (NDF) premium over the rupee had initially stood between the range of zero to 0.60. However, the same has risen to nearly 1.20 in the period June to September 2013, wherein the rupee depreciated from 55 to 69. From mid-September, it has been observed that the 1M NDF premium over the rupee spot continued to dip from 1-1.20 spread levels to 0.40 wherein the rupee also witnessed some recovery from all-time low of 69 to nearly 61 against the US$. Since then, it was seen that not much of a spike up move happened in spread. However, it stood above the 0.40 mark till date. The rupee has been moving in the range of 61-64 from past three months time slot. This indicates the 0.4 spread remains a pivotal level for short-term positional players. If the spread dips below 0.40, then we may see the rupee getting stronger in the near term On the other hand, the NDF three months premium over rupee spot had traded below 1.50 mark till July 2013. However, post that it witnessed a major spike up move towards 7 by mid-September wherein the major damage to the rupee actually took place. This spread eventually started to cool off from October 2013 and has shrunk from 7 to 1.5. This indicates the INR may not witness a sizeable depreciation over three months

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Commodity: Range bound on mixed cues

Crude oil prices remained range bound in 2013 on concerns over QE tapering that were offset by ongoing tensions in the Middle East region and recovery in the US economy. We expect Brent oil prices to remain in the range of $100-120 on account of a rebound in demand from the US

Exhibit 13: Mixed cues lead to crude oil moving in a narrow range
130

120

110 yy 100

90 Nov-13 Oct-13 May-13 Aug-13 Mar-13 Dec-13 3091 Dec-13 Sep-13 Jan-13 Jun-13 Feb-13 Apr-13 Jul-13

On the LME pricing front, zinc being the only outperformer (YTD up 2.8%) with aluminium being the worst performer (YTD down 6.8%). Copper and lead prices were also subdued with each down 5% and 0.3%, respectively on a YTD basis. Aluminium prices remained subdued on the back of a change in warehousing rules by LME Indian consumers were, however, unable to reap the benefits of low metal prices as the landed cost for them almost remained the same on the back of a depreciation of the domestic currency

Exhibit 14: Range bound movement as US tapering cues offset by signs of recovery in US, Europe
3700 3500 3300 3100 2900 2700 2500 May-13 Aug-13 Mar-13 Nov-13 Sep-13 Jun-13 Jan-13 Feb-13 Apr-13 Oct-13 Jul-13

3582

Source: Bloomberg

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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 400 093 research@icicidirect.com

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