260 likes | 346 Views
LIQUIDITY, VALUATIONS AND EVENTS. Apr – Jun 2012. MOVEMENTS OF MAJOR INDICES. MOVEMENT OF SECTORAL INDICES. CHANGE IN COMMODITY PRICES. Recap of Jan – Mar 2012 Flows. (in Rs. Million). FII Flows into equities FII flows into debt . (in Rs. Million).
E N D
LIQUIDITY,VALUATIONSANDEVENTS Apr – Jun 2012
Recap of Jan – Mar 2012 Flows (in Rs. Million) • FII Flows into equities • FII flows into debt (in Rs. Million)
Flows from Domestic Institutional Investors (in Rs. Million)
Recap of Jan – Mar 2012 Major Events that drove the market • Monetary easing – fuelled liquidity • Prime driver of the rally in asset prices – both stocks and commodities – during Q1 was the ECB’s twin LTRO programs (December 21 and February 29) worth 1.02 trillion Euros. • Rising Global uncertainty • Rising Spain bond yields • Greece came on the borderline of default • US recovery • Surprised currency market worldwide • Domestic • Cut in cash reserve ratio (CRR) • Outcome of election in 5 states, particularly UP and its impact on policy paralysis • Union Budget
LTRO-2 • Feb. 29, 2012: The ECB held a second 36-month auction, known as LTRO2, that provided 800 euro zone banks with 529.5 billion Euros in low-interest loans. This flood of liquidity boosted asset prices across the world during Q1.
SPAIN BOND YIELDS • Rising yields of Spanish bonds signalled that problems in the euro zone flaring up again. • During March yield on 10-year bond rose 93 basis points to 5.8 per cent. • A Spanish bond auction on April 4 barely managed to raise the minimum amount sought. • Will Spain follow Greece, Ireland and Portugal in seeking a bailout? • Unemployment level in Spain at a very high 23%.
US RECOVERY • News flow from US has improved. • GDP grew at an annual pace of 3 per cent in Q4 2011. • Unemployment rate down to 8.2%. • But recovery in jobs stalled in March. Only 120,000 jobs added compared to 240,000 in Feb. • Strong growth in the US could lead to slowdown in fund flows to EMs owing to home-country bias of institutional investors.
RATE CUTS • Inflation has abated but is not yet in RBI’s comfort zone. • High oil prices due to Israel-Iran stand-off pose a risk. • Reining in of government expenditure, as announced in the budget, was inadequate. • Government will have to rein in fiscal deficit (read, raise fuel prices) to create comfort zone for RBI to proceed with further rate cuts. • CRR was cut by 50 bp
IMPACT OF UNION BUDGET -1 • Budget contained no major reforms and evoked mixed reactions from the market. • Rajiv Gandhi Equity Saving Scheme introduced which will give tax incentive for investing in equity markets. First-time investors with annual income less than Rs 10 lakh may invest up to Rs 50,000 in equities and get a tax deduction of 50%. Scheme carries lock-in of 3 years. • Security Transaction Tax (STT) reduced by 20 per cent on delivery-based trades from 0.125% to 0.1%. • GAAR, which will tax FIIs that don’t have a substantial presence but merely route investments through tax havens, has created uncertainty. • Disinvestment target reduced from Rs 40,000 crore in FY12 to Rs 30,000 crore in FY13 in the light of large slippage last year.
IMPACT OF RECENT STATE ELECTIONS • The Congress Party performed poorly in the recent state elections, losing in UP, Punjab and Goa. • Had it done well in UP, it could have offered support to the Samajwadi Party in the state and received reciprocal support at the centre. • This would have enabled it to pass reform-related bills in Parliament. • Now the party is likely to grow more cautious and not undertake any reforms. Many allies oppose key reforms, and the UPA does not have a majority in the Rajya Sabha. Only reforms that don’t require Parliamentary approval are likely. • Later this year elections are scheduled in Gujarat and Karnataka. • More dole-outs prior to them would have adverse implications. • If Congress fares badly in them too, calls for mid-term elections could become more strident. • Political uncertainty would be negative for the markets.
LIQUIDITY FLOWS • What factors will impact global portfolio flows? • Impact of GAAR • LTRO • QE3 • Slowing Chinese economy
IMPACT OF GAAR • General Anti-Avoidance Rules (GAAR) announced in budget spooked many FIIs. • Entities investing in India via a tax haven such as Mauritius or Singapore must have "substance" in those tax havens. • Funds being invested in India must have been pooled in that tax haven or at least one senior investment manager must be present there.
GAAR – WHO WILL BE AFFECTED? • P-note issuers able to demonstrate substantial presence in Mauritius or Singapore won’t be affected. • FIIs whose funds are pooled elsewhere (say, US or UK) and who route funds via Mauritius will be affected. From April 1 will become liable to pay taxes in India. • May relocate to Singapore to avail of double taxation avoidance agreement (DTAA ) between Singapore and India. • But to avail of that benefit, fund has to demonstrate that it has had operations in Singapore and has incurred expenses of around $200,000 per year for last two years. • GAAR could affect short-run FII inflows. Long-term impact unlikely to be significant, given India’s importance. • Only when more clarity on GAAR emerges can impact be gauged.
MORE MONETARY EASING: LTRO • The most prominent sign of problems in the euro zone flaring up again comes from the yields of Spanish sovereign bonds rising once again. • This could force the ECB to undertake further rounds of monetary easing.
QUANTITATIVE EASING-3 • Operation Twist scheduled to close at end of June. Once it ends, Fed Chairman Bernanke could launch another dose of bond purchase program (despite signs of recovery). • Would get required alibi if euro zone deteriorates. • November presidential election might make it difficult for him to launch new initiative in second half of 2012. • May do it in Q2-Q3 2012, or in January 2013, when effect of the recent fiscal tightening shows up. • Both forms of QE (LTRO and QE3) would drive risky assets in EMs like India up.
SLOWDOWN IN CHINESE ECONOMY • China’s growth rate expected to slow down from 9-10 per cent in recent past to 7.5-8 per cent in 2012 due to monetary tightening. • If world’s biggest consumer of commodities slows down, commodity prices could soften. • Would be a big positive for a commodity importer like India.
ANNEXURE – UNION BUDGET • On subsidies, we got a target – it will be kept under 2 per cent of GDP in FY13 and reduced to 1.75 per cent in 3 yrs. • FM has projected a fiscal deficit of 5.1%, a more credible target than last year’s 4.6%. • Both excise duty and service tax rate hiked by 2 percentage points, which could prove inflationary. Move to a negative service tax list to increase its coverage. • Boost to infrastructure development by increasing the limit of infra tax-free bonds from Rs 30,000 crore to Rs 60,000 crore. ECB allowed for road construction and power. • Budget doubled custom duty on gold and platinum from 2 to 4 per cent to curb consumption.
Disclaimer This presentation is intended for internal use and may contain confidential information that belongs to the sender and/or legally privileged information that is protected by the attorney-client privilege. If you are not the intended recipient of this communication, you must not disseminate copy or take any reliance on it. If you have received this message in error please notify the sender immediately, to arrange the return of the document. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. No person associated with Citrus Advisors is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon. Neither Citrus Advisors., nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. We and our affiliates, officers, directors, and employees world wide, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or may perform or seek to perform investment banking services for such company(ies)or act as advisor or lender / borrower to such company(ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. No part of this material may be duplicated in any form and/or redistributed without Citrus Advisors' prior written consent. No part of this document may be distributed in Canada or used by private customers in the United Kingdom. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed