November began with the sluggishness witnessed towards end-October, and rallied in the later part of the month on the back of better investing sentiments and higher inflows with Sensex finally settling at a 19-month high (+4.5% m-o-m). YTD, India now ranks as 4th best performing market among Emerging markets. News flow from developed economies was mixed. The continuance of the political regime in USA revived hopes on timely resolution of US fiscal-cliff (a large cut in government spending and end of tax rebates that can have negative impact on the growth). The scenario further improved with Eurozone's support to Greece that aided in boosting investor sentiments. Economic data were mostly weak in key developed economies. The important event of change of guard in the China too has gone positively with markets given the commitment of the régime to revive growth.
In India, the winter session of Parliament got off to a stormy start. But investor sentiment improved subsequently, as the Government agreed to a debate followed by voting on the proposal to permit FDI in multi brand retail sector. The government also announced its intent to roll out electronic cash transfer of subsidies – a breakthrough initiative that can go a long way in reconfiguring India’s fiscal math. Proposal to set up a high-powered National Investment Board (NIB) for speedy execution of large projects could be a game-changer.
Monthly data on growth continues to disappoint. IIP for September declined 0.4% y-o-y. The disappointment was on account of continued weakness in the Capital Goods segment (-12%) and a de-growth (-0.3%) in Consumer Goods. The headline GDP numbers for 2Q FY13 showed growth number at 5.3% yoy. WPI inflation however eased to 7.5% in October on account of low food inflation and lower core inflation.
The INR depreciated 0.8% through the month. The trend in trade deficit continues to be worrisome, however, current strong investment flows do provide a counterbalance. Markets remain enthused by the Government’s stance of remaining firm on its reform agenda. The government failed to monetize the much touted telecom spectrum auctions. The shortfall has forced an incremental aggression on accelerating the disinvestment of Government holdings in some of the large PSUs.
The money flows into equity markets remained firm through the month. FIIs were net buyers with net inflow of USD 1.7 billion while Domestic mutual funds were net sellers to the extent of $ 600 million. From a near hopeless situation on growth and governance during the first half, India has charted a smart turnaround. The policy rhetoric and initial steps are encouraging. The concurrent onset of global “Risk-On” helps in terms of strong flows too.
Markets move on fundamentals, sentiments and liquidity. As things stand today, we believe that investing environ for Indian equities has bottomed out. Valuations remain favorable as markets trade at 16xFY13E. Sentiments too have revived and continue to improve. Liquidity would remain a second derivative of global money flows – which also look favorable in the medium term. The market is well-poised to provide opportunities for both tactical and directional investors to participate in their respective strongholds.
We continue to believe in the long term India story which rests on strong foundations of a rising consumption class, with growth aspirations, witnessing a systemic governance overhaul and well entrenched on the global map in terms of competitiveness (in both manufacturing and knowledge economy). India stands out as a sweet spot with higher predicted exposure in Global Benchmarks in a growth starved environment. Any global stress on commodities would enhance India's prospects further.
We continue to remain alert to value and committed to discipline in such environment. We have been proactively reconfiguring our portfolios through this period to enhance our core strategy of investing in quality (business, earnings, cash-flow and management) with tactical flexibility to accommodate exposures to businesses/ companies which offer value opportunities in a trending market.
Post the RBI monetary policy review in Oct12, the market anticipation of policy rate cuts had been pushed to the first quarter of CY13 in line with the central bank guidance. The near term market movements have been determined by the likelihood of OMO’s to be conducted by the RBI. The seasonal liquidity pressures on account of festive season currency withdrawals from the banking system have been accentuated by the buildup of government cash balances with the RBI. The system liquidity deficit which averaged Rs 660.86 Billion in October 12 increased to Rs 940.94 Billion during November 12.
The benchmark 10-year government security yield traded in a range of 8.19% to 8.21% during the month. The subdued response in the telecom spectrum auction which targeted to raise Rs 400bn in non tax revenues resulted in markets pricing in additional borrowings. Towards the month end, on an assessment of evolving liquidity situation, the RBI announced an OMO purchase to be conducted on 4th December for an amount of Rs 120 billion. Subsequent to the OMO announcement, yields moved down by around 4 to 5 bps. The benchmark 10-year government security yield closed at 8.175% post the OMO announcement. The AAA public sector credits spreads are currently in the range of about 75bps in the 2-3 yr bucket and 67 bps in the 5-10 year segment.
The lag effect of past policy actions and tight systemic liquidity have resulted in growth numbers showing a downward bias. This should enable core inflation to stabilize and trend lower as evidenced from the recent readings. The monetary policy flexibility has been relatively constrained by the evolution of the fiscal stance. In this light, recent government initiatives on the reforms side, acceptance of the fiscal consolidation roadmap and also the recent decision to move over to Direct Cash Transfer for key government schemes and subsidies provide comfort on the medium term fiscal direction. The fiscal position remains challenging in the near term with a significant likelihood of slippage in the current year fiscal deficit target post the subdued response in the recent telecom spectrum auctions. The prospect of additional RBI OMO support, likelihood of monetary easing in Q1 CY13 and also the flexibility to borrow through Treasury Bills would ensure that any additional borrowings would be absorbed in a non disruptive manner.
We have a benign view on inflation for FY 2013-14 due to output gap in India, soft global commodity prices due to slowdown in China, stable currency, lagged effect of tight monetary policy and our expectation of relatively tighter fiscal policy. This should pave the way for policy easing next year. We maintain a positive view on bonds from a medium term perspective. RBI may have to continue with Open market operations to ease liquidity which augur well for the Gsec market. In view of the same, we have been recommending investors with risk appetite and longer horizon to stay invested in duration funds.
CIO – SBI Funds management Private Limited
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