india monthly investment outlook

7/30/2019 India Monthly Investment Outlook

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India Monthly Investment Outlook

and Strategy

December 2012

HSBC Private BankIssued by The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India). Private banking services are provided by HSBC India


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Contents

1. Macroeconomic Outlook

2. November Recap

3. Asset Classes- 12 Month Views

India - Equities

India - Fixed Income

Currencies

Commodities

4. Asset Allocation

5. Recommendations

Equity Stocks Advisory Portfolio

Mutual Funds - Equity / Fixed Income

Bonds

Best Private Bank in Asia2011


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Macroeconomic Overview Global

Economic data remains volatile, with wide divergences between regions but the global medium term outlook is constructive, in our

view.

In fact, with the exception of Spain, economic activity in most major countries including the US, China and the Eurozone isexpected to trough before the end of 2012.

The pickup in growth may be slow in Q1 2013, as uncertainties about the US fiscal cliff may persist. But the momentum in the US

economy and in some emerging markets should ensure that activity accelerates in H2 2013 and that another recession is avoided.

We think the downside risks to the economy are reduced, and this should allow investment spending to pick up gradually.

Emerging markets should become the engine of global growth once again, with China bottoming out and other EM countries

benefiting from strong domestic demand.

The US may slow somewhat, but less negative growth in Europe helps lift global GDP growth data when compared to 2012.

Inflation pressures have eased of late as a result of range-bound commodity prices, which is providing a welcome boost toconsumers disposable income.

RisksIn our view, the global economy remains vulnerable to a significant worsening of conditions in the Eurozone, a spike in oil prices or acontinued stand-off between US political parties on the issue of the fiscal cliff. However, none of these are our base case scenario.

Source: RBI/HSBC Global Research/Bloomberg

Source: HSBC Global Research/Bloomberg


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Macroeconomic Overview India

Scraping the bottom of the bathtub: Q3 GDP slows a bit


Facts:India's Q3 2012 GDP growth eased to 5.3% y-o-y (vs. 5.5% in Q2 2012), in line with consensus. The sequential growth momentumalso eased (1% q-o-q sa vs. 1.3% in Q2 2012), although this number should be read with some caution given the patchy historicalrevisions to quarterly data. By industry, agricultural output growth slowed as expected (1.2% y-o-y vs. 2.9% in Q2 2012) due to thedeficient monsoons. However, growth in industrial output picked up modestly to 1.2% y-o-y (vs. 0.8% in Q1 2012) while services(7.1% y-o-y vs. 7.4% in Q2 2012) eased a tad.

Implications:We are getting close to the bottom, although we are most likely talking about a "bathtub shaped" recovery with some bottom scrapingin coming quarters. The slowdown in headline growth was a disappointment, but it at least to some extent reflected factors notrelated to the underlying growth momentum. For example, the dry monsoons had a negative impact on agricultural output and thepower outages, in August in particular, also pulled down growth.

Looking ahead, growth may end up moving, more or less, sideways in the near term. Beyond the near term, we expect a gradualrecovery in growth assuming further traction on structural reforms and implementation of infrastructure related projects. Both can helpalleviate supply side constraints and slowly revive the investment cycle. A gradual stabilization of global economic conditions nextyear should also help support the moderate recovery.

From the RBI's perspective, today's numbers have likely not reduced its reluctance to cut monetary policy rates. Inflation remains

elevated and the decline in inflation and a narrowing of the external imbalances still depends on tangible progress on fiscalconsolidation and structural reforms.

Bottom Line:Growth in India is still being held back by the lack of investments in basic infrastructures and slow progress on structural reforms overthe past few years. Near term growth will likely move sideways and, beyond that, only pick up gradually under the assumption thatpolicy reform implementation is sustained.


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Will the downtrend continue? Oct WPI inflation eased unexpectedly


Facts:Headline WPI inflation fell unexpectedly to 7.5% y-o-y in October (vs. 7.8% in September), which was against marketexpectations of a rise to 7.9% and our expectations of 8.0%. In sequential terms, prices rose 0.5% m-o-m sa (vs. 0.7% inSeptember) and 9.3% 3m/3m saar (vs. 9.5% in September). Core inflation (non-food manufacturing) eased to 5.2% y-o-y (vs.5.6% in September) and 0.3% m-o-m sa (vs. 0.6% in September).

Implications:A slowdown in food inflation helped reduce headline inflation and it may help ease broader inflation pressures if the downtrend issustained. However, the easing in annual food inflation partly reflects a base effect caused by the October timing of the Diwali lastyear.

The decline in core inflation was encouraging and that will be an important cue for RBI if it continues to ease in coming months.However, the hike in diesel prices still has to pass fully through and underlying wage pressures remain firm. In addition, the

supply-led nature of the slowdown in growth has left capacity relatively tight and this will keep underlying inflation pressures inplace for a while still.

RBI will no doubt take some comfort from today's inflation reading, but one positive inflation surprise is not enough to materiallyreduce their reluctance to cut the policy rate given the lingering inflation risks. In this context, the elevated and sticky CPI readingsas well as the continued upward revisions to historical WPI numbers remains a concern for the RBI. Moreover, the RBI is eagerlyawaiting more concrete fiscal consolidation measures and continued policy reform implementation.

Bottom Line:Headline inflation eased unexpectedly led by food and core inflation, which should provide the RBI with some comfort. However,this will not be enough to trigger an imminent rate cutting cycle given the lingering inflation risks and the need for more tangibleprogress on fiscal consolidation and other policy reforms.


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Tainted by fickleness: Sep Industrial Production surprisingly contracts


Facts:

Industrial production declined by 0.4% y-o-y in September (vs. 2.3% in August). This was below consensus expectation of 2.8% y-o-yand our 2.2% call. On a sequential bass, industrial production contracted by 2.2% m-o-m (seasonally adjusted) following the 1.6% m-o-m (sa) jump in August. On a 3m/3m (seasonally adjusted) basis, IP also fell a tad (-0.2% 3m/3m sa vs. -0.1% in August).

Implications:

September IP was a negative surprise and is testament to the external and structural headwinds that India's economy is still facing.However, the index yet again fell victim to the volatile nature of the capital goods segment, which makes the index increasinglydifficult to predict and draw any clear directional clues from. The consumer goods segment pulled the index down as well, but thishas also been volatile in recent months.

While the number may have made the RBI a bit uneasy, this one number is not enough by itself to change its overall assessment ofrelative inflation-growth risks. For that to happen, it would need to see slippage across a broader set of indicators and for longer.

We, consequently, believe that the RBI will remain reluctant to cut given the lingering inflation pressures. Moreover, it is also stillkeenly awaiting the announcement/implementation of additional structural policy reform measures and tangible steps to deliver fiscalconsolidation.

Bottom Line:

Industrial production surprised on the downside, but mostly due to the fickle capital goods segment. Other indicators point to astabilization in growth, suggesting the need for a healthy dose of caution when interpreting IP number.


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Gaining momentum: HSBC Nov manufacturing PMI up


Facts:

HSBC's India manufacturing PMI picked up in November to 53.7 (vs. 52.9 in October) due to a strong rise in new orders (55.8 vs.54.9 in October). The improvement in orders was largely led by overseas demand, with new export orders (55.9 vs. 53.6 inOctober) rising sharply. In response to the pick-up in orders, output growth (55.4 vs. 52.7 in October) picked up significantly and itcould have been even better had it not been for power shortages experienced by firms.

Implications:

The manufacturing sector is starting to gather momentum with orders pouring in from both domestic and external sources. Anascent recovery in domestic investments and stabilization in external demand are likely behind the increase in order flows.

Worryingly, inflation pressures have not subsided despite the slow pace of growth. In fact, we are seeing inflation and pricepressures pick up at the slightest recovery in demand. This is a reflection of the supply led nature of the slowdown, which have

left firms operating under tight capacity and, therefore, kept underlying inflation pressures highly reactive to changes in demand.

The improvement in growth and the pick up in inflation signaled by the PMIs are is likely to keep the RBI inclined to remain onhold, notwithstanding the soft Q3 GDP reading. Should inflation risks begin to abate, partly on the back action to contain the fiscaldeficit, and structural reforms inch forward, a window for rate cuts could open up early next year.

Bottom line:

Manufacturing PMI picked up on the back of a firm increase in new orders. However, inflation increased as well on the due tocost pressures and pricing power to pass these on to end consumers. This suggests that the RBI is likely to pause for a whilelonger.


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October Recap

India - EquityThe November rally (+4.5%) has been largely led by risk-on trade on the backof improving sentiments due to the new bailout terms for Greece andexpectation of reforms back home. However, all eyes would be on the evolvingUS fiscal cliff situation along with the on-going Winter Session in theParliament.

YTD November 2012, FIIs have invested a total of USD 19.1 Bn in the Indianmarket (as compared to net selling of USD 0.7 Bn for YTD November 2011).For the month of November 2012 alone, FIIs invested USD 1.7 Bn, reflectingtheir continued interest in the country, given the slew of policy measuresannounced by the Central Government and the increase in global liquidity.

The near term outlook for economic growth remains challenging and politicaldevelopments have the potential to increase volatility in the short-term. On theflip side, continuation of reforms can act as a further catalyst to the ongoingrally. We continue to remain Neutral with a positive bias on Indian equities.

India - Fixed IncomeThe longer end of the yield curve rallied on the last day of the month due to the

Reserve Bank of India announcing buyback of bonds thereby aiding marketsentiments. Prior to this announcement, bond yields exhibited volatility due toexpectations of additional borrowings on account of the fiscal slippage.

The shorter end of the yield curve exhibited varied trends as the 1 monthcertificate of deposits rallied by 7 bps, while the 3 to 12 months segment of thecurve rose by 4 bps to 22 bps.

CurrencyConcerns over the twin deficits impacted the INR during the month as itweakened despite the equity market registering Foreign Institutional Investorsinflows of USD 1.69B during the month. The USD weakened marginallyagainst the EUR during the month.

CommoditiesGold prices eased during the month due to profit booking. Oil prices

appreciated during the month due to ongoing concerns in the Middle Eastregion.

As on November 30, 2012. Source Bloomberg

Equity - India MTD YTD

Sensex 19,340 4.5% 25.1%

CNX Mid-cap 8,140 4.9% 33.2%

Equity - World

MSCI Emg Mkt 1,007 1.2% 9.9%

MSCI World 1,315 1.1% 11.2%

Bonds & Currency

10 Yr Yield INR* 8.18% 4 bps 39 bps

USD/INR** 54.3 0.8% 2.3%

Commodities

Gold (USD) 1715 0.3% 9.7%

Brent Crude (USD) 111 3.4% 7.5%

* Arrow movement reflects impact on bond prices while numbers are in yield terms** Arrow movements reflect impact on INR


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India - Equity

Source: Bloomberg;

All the views expressed in this document are 12 month views;

-ve means negative, = means neutral, +ve means positive

Prev. Month =/+

This Month =/+

Pick up in PMI due to firm increase in new orders

FII flows have been buoyant in the current year Despite rally: valuations are attractive

Indian equity markets started the month of November on acautious note, remaining lackluster through most part of themonth. However, global risk on trade led by a fresh Greekbailout package, US presidential election and reformsexpectation back home helped boost sentiments, therebyhelping the index close with gains of 4.5% during the month.

YTD October 2012, FIIs have invested a total of USD 19.1Bn in the Indian market (as compared to net selling of USD 0.7Bn for YTD October 2011). For the month of October 2012alone, the FIIs invested USD 1.7 Bn.

The recent rally has been largely led by risk-on trade on the

back of improving sentiments, however, all eyes would be onthe evolving US fiscal cliff situation along with the on-goingWinter Session in the Parliament wherein big ticket bills(pension, insurance, land acquisition, GST etc) are expectedto be placed on the floor of the house. Also we await clarity onfiscal road-map by the Government (Telecom spectrumauction, PSU disinvestment).

The near term outlook for economic growth remains

challenging and political developments have the potential toincrease volatility in the short-term. On the flip side,continuation of reforms can act as a further catalyst to theongoing rally. Tactically, we look for risk on-risk off to continue.

In our view, valuations remains attractive, especially whencompared to history. SENSEX currently trades at a 13.8xFY14 earnings v/s average of 14x over the last decade.

We maintain neutral with a positive bias stance on IndianEquities. In our view, a number of the key tails risks facing theglobal economy have reduced, which has seen global riskappetite recover.

We continue to recommend funds which have shownconsistent performance across cycles. In the current rallythese funds performed better than their peers. In our directequity model portfolio, we have added weight in cyclical and

relatively high beta stocks whilst sticking to companies withstrong corporate governance and attractive valuations.

Nifty volatility index has eased in recent months


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Commodities

Gold prices witnessed profit booking during the

month Crude oil prices appreciated by ~3.4% during themonth

Source: Bloomberg; All the views expressed in this document are 12 month views;

-ve means negative, = means neutral, +ve means positive

Prev Month: Gold +; Oil =; Agricultural +; Industrial =

This Month: Gold +; Oil =; Agricultural +; Industrial =

We believe that the longer-term outlook forcommodities is improving, supported by the

recovery in Chinese economic data, although itmay take some time for higher prices tomaterialise given some short-term uncertainty.

We expect Gold to reach USD 1,900/ounceby year end, buoyed by the US quantitativeeasing program, global easing, central-bankdemand and a weaker USD. Weak jewellerydemand, low Indian bullion imports, rising scrap

supply and limited retail coin and small barcould check gold price appreciation during theremaining months of the year.

In 2013 we expect monetary easing to supportgold prices and expect a move towards USD2,000/ounce, however sluggish physicalsupply/demand balances should check goldprice appreciation.

Tensions in the Middle East have providedsupport to oil prices outweighing softer demandand high inventory presently. In the longer term,we expect oil prices to remain supported byemerging market (EM) demand, but this maytake some time to materialise.

In our view, Industrial metal prices may notrebound significantly until we see a notableimprovement in Chinese growth numbers, butwe believe that prices will still somewhatbenefit from recent central bank actions.

We believe agriculture prices have risensharply thereby limiting short term upside.Longer term trends should be supportive ,though, as we believe that production may findit difficult keeping up with rising consumption.

The agriculture index fell by ~1.2% during the

month.

Industrial metal index rose by ~6.3% during the month


13/13
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india monthly investment outlook

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