BILL GROSS SIGNALS THE DEATH OF EQUITIES

THE CULT OF EQUITY IS DYING: BILL GROSS

Bill Gross has done it once again, the co-founder and co-chief investment officer of the world's bond fund  PIMCO has said that it is time to write the obituary for stock investing and stocks are no longer an asset to have and to hold. . Long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. Gross, whose Pacific Investment Management Co has $1.82 trillion in assets, took particular issue with the noted economist Jeremy Siegel. According to him the long-term history of inflation adjusted returns from stocks shows a declining 6.6% real return to which he adds that higher risk is usually, but not always, rewarded with excess return.

ANY MERIT IN INVESTING ?

Gross goes on to add that a presumed 2% return for bonds and an historically low percentage nominal return for stocks – call it 4%, when combined in a diversified portfolio produce a nominal return of 3% and an expected inflation adjusted return near zero. The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned. In his April investment letter, Gross struck a similar tone on total return expectations. Gross then said investors should get used to smaller investment returns because of slower global growth and as the financial services industry continues to deleverage, or reduce its reliance on derivatives and borrowed money to generate higher returns. This time around, Gross said at their currently low interest rates, investors should expect "mere survival" from their bond investments.

WORK HARD FOR YOUR RETURNS

Gross argued that with dwindling returns on stocks and bonds individuals will have to work longer to save for their retirements. "If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money," Gross wrote.

IS BILL GROSS A CLOSET BULL ?

Marketwatch's columnist Jonathan Burton in his article signals the possibility that Bill Gross could be a closet stock Bull. Gross' August investment letter is also reminiscent of BusinessWeek's famous "Death of Equities" cover story, which appeared in 1979, just before the start of a big bull market.

SOVEREIGN WEALTH FUNDS TURN CAUTIOUS

SWFs TURN CAUTIOUS: WHAT NEXT

GIC (SINGAPORE)

Government of Singapore Investment Corp which manages assets of over $100 billion globally, in a sign of extreme caution has boosted its cash levels to those exceeding the 2008 global financial crisis as it scales down  its holdings of equities and bonds particulary  Europe. Cash allocation almost quadrupled to 11 percent of its portfolio in the year ended March from 3 percent a year earlier. Stock holding fell to 45 percent from 49 percent as it pared equities in developed markets, while bonds dropped to 17 percent from 22 percent.

CUTTING EXPOSURE TO EUROPE

GIC is reducing its investments as the MSCI World Index (MXWO) posted its biggest slump since the 2008 global financial crisis and market volatility reached the highest level in more than two years.
GIC’s holdings in Europe fell to 26 percent from 28 percent, with those in the U.K. unchanged at 9. Within Europe, GIC’s assets in Portugal, Ireland, Italy, Greece and Spain made up 1.4 percent of its portfolio, mainly held in real estate and stocks in Italy and Spain. Assets in the Americas remain unchanged at 42 percent, with 33 percent of the total portfolio in the U.S., it said. GIC also raised its allocation to Asia to 29 percent from 27 percent. Holdings in so-called alternative assets increased to 27 percent from 26 percent, it said, with a gain in private equity and infrastructure investments.

CIC (CHINA)

China Investment Corp., which posted a 4.3% loss on its global portfolio last year, has significantly reduced its holdings of public securities and trimmed its investment philosophy thereby pushing into longer-term investments as the $482 billion sovereign-wealth fund seeks to shield itself from market volatility.  CIC said in its 2011 annual report released last week that public equities made up 25% of its global portfolio at the end of last year, down from 48% at the end of 2010. Long-term assets—which include direct investments in nonpublic companies and private equity—and hedge funds together accounted for 43% of its portfolio. Though it disclosed few details of its moves, it said it made direct investments in oil and gas, mining and infrastructure to shift toward "lower-risk assets." Among other assets, CIC said Wednesday that 21% of its overseas holdings were in fixed-income securities, with 11% in cash.
Source: WSJ and Bloomberg

RBI VS INFLATION: NEITHER WILLING TO RELENT

RATES CUTS NOT LIKELY SOON

The Reserve Bank of India left its key policy rates unchanged today, although it cut the Statutory Liquidity Ratio by 100 bps to 23% (seen mostly as a symbolic gesture as most banks hold much more liquidity in government bonds voluntarily). The RBI however slashed growth estimates for the current fiscal much below the Government's estimates to 6.5% and raised the fiscal year end inflation forecast to 7%.

INFLATION: PRIORITY NUMBER 1

Reading today's statement in conjunction with the one in June, one gets the sense that the RBI has become even more resolved in its fight against inflation. The reasons that prompt the Reserve Bank to take this extreme steps include a deficit monsoon which is expected to push WPI further in coming months. The RBI is concerned about growth and external risks, but it also sees numerous inflation risks, including pass through from rupee depreciation, outlook for food inflation due to a poor monsoon, and continued demand stimulus coming from fiscal subsidies. Moreover, despite slowing growth, the central bank sees no discernible easing of demand for protein rich food products, nor does it see persisting supply side bottlenecks easing anytime soon. The risk for inflation to remain elevated, therefore, is considerable.

DONT BLAME THE RBI FOR THE SLOWDOWN

While cutting India's fiscal GDP growth target to 6.5% the Reserve Bank defended its hawkish monetary stance and categorically mentioned that factors other than policy steps have led to the growth slowdown (hinting at government inaction) and cutting rates may not necessarily spur growth.

THE CLOCK IS TICKING

TICKING TIME BOMB !

Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to Times Square in New York, where the American public shortfall is revealed. The world debt clock shows the global figure for almost all government debts in dollar terms.
World governments owe the money to their own citizens and to other nations. But the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as the Greek government did in early 2010, and the country can be plunged into imminent crisis. So the higher the global government debt total, the greater the risk of fiscal crisis, and the bigger the economic impact such crises will have.
Link: http://www.usdebtclock.org/world-debt-clock.html

FOOD PRICES HEADED HIGHER: CHANNEL CHECKS

FEED PRICES SKYROCKET: A LEADING INDICATOR

Average prices of poultry feed – consisting of oilseed cakes, rice bran, grounded maize and soya – have risen by 69% y-o-y in July up from 18% in June, because of the lack of rainfall and higher global prices. These price increases outpace those during the 2009 drought.
Feed is a key input in poultry farming, and this sharp price increase suggests that prices of eggs and chicken (protein food items) may rise sharply in the coming months. If farmers choose to substitute poultry feed with cereals then prices for cereals could rise as well.
Rising feed prices are an early indicator of the potential impact that the deficient monsoons could have on food prices. As delayed monsoons hurt production of vegetables, cereal and oilseeds, we expect WPI food (primary and manufactured) inflation, which is currently 9% y-o-y, to rise into double digits in the coming months. This will keep both WPI and CPI inflation elevated above the central bank's comfort zone

Poultry feed an input into poultry farming, is an early indicator of the potential impact a drought could have on food prices.

IPL TEAM OWNER IS BUST: LENDER ALLEGES

Deccan Chronicle Holdings the parent company of IPL team Deccan Chargers has liabilities running into thousands of crores of rupees that may lead to the erosion of the entire net worth of the company and make it commercially unviable and insolvent, Industrial Finance Corporation of India Ltd (IFCI) has said in the winding-up petition which it has filed in the high court against the Hyderabad-based company.

Contending that DCHL was unable to discharge debts of its creditors and had almost become insolvent, IFCI urged the high court to order winding up of the company under the relevant sections of the Companies Act 1956. The high court was also requested to appoint an official liquidator and restrain the company and its officials from disposing of, transferring or encumbering the company's assets pending the admission hearing and final disposal of the petition. The petition was filed by IFCI on Friday after DCHL defaulted on redemption of 250 unsecured redeemable non-convertible debentures (NCDs) on June 26 this year and failed to pay up its dues of Rs 27,80,47,945 despite "repeated requests and demands". The NCDs were part of a Rs 150 crore NCD issue made by way of private placement by DCHL with Infrastructure Development Finance Company (IDFC) last year at an interest rate of 11.25% per annum for a tenure of 364 days. In July last year, 250 of these NCDs were acquired by IFCI from IDFC.

IFCI said DCHL had massive secured and unsecured debts running into thousands of crores of rupees with various banks, financial institutions, non-banking finance institutions etc. and feared that many more winding up petitions may be filed by other creditors as the company had defaulted on several liabilities. It also cited the recent order of a London court ordering the company to pay Pounds 10,533,478 (around Rs 90 crore) to Tim Wright, the former chief executive of its Indian Premier League team Deccan Chargers, for breach of employment contract as one of the major liabilities facing the company. In its petition, IFCI also revealed that DCHL chairman T Venkattram Reddy had visited their offices in Delhi on June 30 of this year and given a stamped undertaking acknowledging the company's liability of Rs 25 crore plus interest on the NCDs with a promise to make the full payment to IFCI by July 4 this year. IFCI also said that following this meeting, DCHL had arranged for a payment of Rs 2,80,47,945 via RTGS (real time gross settlement) towards interest of 11.25% per annum on the NCDs and gave two cheques, dated July 4, for the principal amount of Rs 25 crore drawn on ICICI Bank at Chennai as well as for Rs 7,36,718 drawn on ICICI Bank, Secunderabad. The cheque of Rs 25 crore, however, was dishonoured by the bank on grounds of insufficient funds.

After this, IFCI filed an application before the Debt Recovery Tribunal in Delhi for recovery of Rs 25,17,28,944 against DCHL on July 16, this year. IFCI said that the action of DCHL in failing to redeem the NCDs on the due date was sufficient to establish that the company had no funds to pay off its dues in the first instance and the letter of DCHL requesting IFCI for a cure period (grace period) of 30 days to redeem the dues with interest had further established that the company was unable to pay off the dues and reconfirmed its inability to pay up the amount due to IFCI.

DOES THE DOW DESERVE TO BE ABOVE 13000

GRIM REMINDERS OF 2009
It seems the 2009 crisis has returned to haunt the US corporate sector even though the market seems to be happily rallying with the Dow breaking above the 13000 mark.

Based on the 291 companies in the Standard & Poor's 500 that have reported earnings so far — along with estimates for the rest — S&P Capital IQ expects overall profits to decline by 0.5% from the same period a year ago. That would be the first time that profits have shrunk since the third quarter of 2009, just after the Great Recession. Analysts are predicting that earnings will shrink 0.3 percent for the third quarter, too. Revenue for those 291 companies has increased just 2.3 percent, compared with a 10-year average of 7.1 percent, according to S&P Capital IQ. Worse, companies are getting more pessimistic about the rest of the year.

EARNINGS FORECAST CUT
Among the largecaps UPS, Cisco  and DuPont have already trimmed down 2012 earnings forecast and cited caution that there could be a case for further guidance cuts. In a survey by data provider FactSet, 47 out of 60 companies lowered the earnings guidance they gave investors for the third quarter. And investors often trade more on outlooks than on the last quarter's results. Shares of online game-maker Zynga plummeted nearly 40 percent on Thursday after it slashed its profit guidance for the year to between 4 cents and 9 cents per share, from 23 cents to 29 cents previously. UPS lost 5 percent of its value the day after cutting its full-year earnings forecast by 25 cents per share, to a range of $4.50 to $4.70. Its stock regained some of that loss later in the week. Starbucks shares plummeted 9.4 percent on Friday after it cut its outlook for the current quarter and said it is still struggling in Europe.

GROWING INFLUENCE OF EMERGING MARKETS IN OLYMPICS

Emerging Markets Now Win Half of All Olympic Medals

Emerging Markets Have Become Leaders in Many Sports

Split of Medals is Moving Towards Emerging Markets

Source: Sports Reference, Goldman Sachs

GUJARAT HIGH COURT'S SHOCKER FOR AUTO INDUSTRY

SETTING A NEW PRECEDENT

In an order which would impact lakhs of people owning cars, the Gujarat high court on Wednesday directed the state government to pass necessary laws to make it compulsory for all four-wheelers registered in Gujarat to convert to natural gas within one year. Further, the court gave two months to the state government to issue necessary orders to impose stringent restrictions to reduce pollution by fixing levels of emission to the minimum, at par with international norms. The order applies to both public and private vehicles running on petrol and diesel.
The order, passed by Chief Justice Bhaskar Bhattacharya and Justice J B Pardiwala, came in response to directions sought by Dhrangadhra Prakruti Mandal, through its vice-president Devjibhai Dhamecha, to the state and Centre as well as all gas and petrol companies operating in Gujarat.
The order said, "The state is directed to pass necessary orders compelling owners of all vehicles having registration in Gujarat to use natural gas and, if necessary, even at higher prices within the shortest possible period, not exceeding one year from today for the protection of lives of citizens."
The judges suggested gas prices be cheaper for public vehicles and higher for privately owned vehicles. Also, fares of public transport should be fixed at reasonable rates so that the end benefit goes to the public.
The Gujarat high court also directed the Central government to allocate natural gas for domestic and vehicular use to the city of Ahmedabad usage at the same rate as it is supplied to Delhi and Mumbai. "This is to enforce the right of equality," the judges said.
Source: Reports

IMPACT

Oil marketeers such as Indian Oil Corp, bharat Petroleum and HPCL would feel the heat as 11% sales of Petrol, Diesel comes from the state of Gujarat

Central Govt doesn't have enough gas for dedicated allocation for entire Gujarat
Auto companies may find it difficult to set up facility for gas engines in one year time

Supply of gas to auto sector falls under city gas distribution which is 4th in priority list

Fertiliser, LPG and Power are top priority for gas supply under Central Govt

Even imports of gas dedicated for Gujarat in one year time would not be possible

WHO WOULD BENEFIT

Petronet LNG, Gujarat Gas and Indraprastha Gas to benefit as gas offtake picks up

CNG cylinder manufacturers such as Everest Kanto to benefit as demand picks up

POWER 'FULL' UPDATE: JUNE 2012

THE POWER FACTOR

All-India generation was up by 8% yoy in June 2012, driven by strong growth across coal and nuclear generation, but partially offset by decline in gas- and hydro-based generation. While coal generation increased 17% and nuclear power reported a growth of 9%, gas and hydro power declined 21% and 5%, respectively. Industry PLFs declined significantly yoy to 51% due to fuel shortages. Coal-supply position deteriorated—32 out of 89 plants face sub-critical inventory levels (vs. 27 last year). While peak deficits declined mom, base deficits increased significantly leading to higher merchant rates. Capacity addition in June 2012 was 83% of the targeted 2,862MW with 2,361MW added. (All numbers pertain to June 2012 with a yoy comparison, unless specified)

GENERATION

Coal generation was up 16.8% on capacity addition while nuclear generation was up 8.8%. Gas generation was down 21% (due to declining output from the KG basin) and hydro was down 5.5% primarily on a higher base. Consequently, overall generation for the month was up 8.1%.

COMPANY WISE BREAK-UP 

NTPC’s total generation increased 9% driven by 8.9% growth in coal generation and 10.2% growth in its gas-based plants (mainly due to lower yoy base). Tata Power reported 58.9% growth in generation, fuelled by the commissioning of Mundra’s first 800-MW unit. Adani’s and JSW’s strong generation growth was driven by capacity additions. Companies with gas-based plants, such as GMR and GVK, continued to see declines on gas supply constraints.

PLFs (Plant Load Factor)

Overall PLFs declined significantly to 51% (55% last year). While PLFs at coal-based plants declined to  65.3% from 67.2% yoy, as capacity additions outpaced increase in coal production, gas-based PLFs declined to 45% from 61% due to declining output from the KG basin. Hydro PLFs declined to 39% vs. 43% yoy. However, nuclear PLFs showed improvement, growing to 78% from 72%. While peak deficit declined to 5.8% vs. 8.1% mom, base deficit increased to 8.6% vs. 7.5% mom leading to 22.6% increase in merchant rate on a monthly basis to Rs4.2/unit.

COAL PRODUCTION

Coal-supply position deteriorated with 32 out of 89 plants facing sub-critical inventory levels (vs. 27 plants in June 2011 and 29 in May 2012). International coal prices at US$85.5 are down 26% yoy, but on a landed costs basis, they are down ~8% due to rupee depreciation. Natural gas production continued its declining trend with May 2012 output down to 119mmscmd, an 11% fall yoy.

CAPACITY

In June, capacity addition was of 2,361MW vs. the monthly target of 2,861MW. YTD, the total addition was 5,463MW against the target of 3,807MW. In the 11th Plan (2007-2012), the industry achieved 86% of its targeted capacity, adding approximately 67.5GW (including approximately 17GW renewable) vs. the targeted 78GW. Currently, all-India installed capacity is about 205.3GW.

Source: CERC, reports

GOLD ETFs VERSUS JEWELLERY

WHY INVEST IN GOLD ?

Gold is considered as better investment option due to its steady rise in price as well as it is considered as a consistent class of asset which has headed north over the last few years. Gold is also considered to be the perfect hedge against the inflation. It also offers the much needed diversification of portfolio. In volatile equity markets, the gold is often considered as a safe haven. Increased global risk, US Dollar weakness, growing inflationary fears, the US debt downgrade and continuing sovereign debt risks in Europe have increased investor appetite for gold, triggering recent price strength.

WHICH IS BETTER: ETF OR FUND OF FUNDS

RISING G-SEC YIELDS SPELL TROUBLE FOR SPAIN

WOULD SPAIN GO DOWN ?
Fears that Spain will require a full-fledged sovereign bailout helped push Spanish government bond yields to another round of euro-era record highs Monday. On Monday, yields on benchmark 10-year bonds hit a record 7.57%, while 5-years reached 7.35% and 2-years were trading at 6.55%. The situation is looking increasingly unsustainable, with talk of an EU breakup on the table once again and speculation that Spain, and possibly Italy, will need a sovereign bailout to survive.

RISING BOND YIELDS SPELL TROUBLE?

Care is needed here for there is a time period where they signal trouble but are not yet a cause of it. This is because most government bonds have fixed coupons or interest-rates so they do not cost any more for the issuing government. Some bonds are influenced by market interest-rates but there are much fewer of them. Also index-linked bonds are influenced by inflation which may or may not be affected by this. So strictly speaking the problems for a country begin when the rise in its bond yields coincides with a period when it has to issue them. This is because issuing them is now on worse terms than before as they are more expensive in terms of the future interest that needs to be paid. European governemnts such as Spain, Italy, Greece and those of other peripheral nations are running fiscal deficits which are spiralling out of control. To fund these deficits the governments need to borrow money at exorbitant rates which signifies growing risk of default for an economy. Also some countries do not manage their debt well and have very short average maturities on it. This makes them more vulnerable to rising bond yields as they find themselves having to offer replacement debt more frequently and thus are more likely to be caught out by a period of higher bond yields.

ARE THEIR PARTICULAR  LEVELS WHICH MATTER?

So far in the Euro zone crisis then a ten-year benchmark yield of 7% has proved to be a point of no return. However this is not a threshold for everyone as Italy has a lower threshold because of its high debt to economic output ratio (120%) and the fact she its has lot of bonds maturing in the next year (298 billion Euros). Another sign is when yields start rising quickly. Whilst on the day itself this may not matter as explained above it sets a bad precedent which in the nature of the two trading emotions of “fear and greed” tends to put fear on the front foot. Also rising yields on shorter-dated bonds matters and is another signal. Generally they start as being a fair bit lower than the ten-year benchmark and a sign of trouble is when they catch up as has happened in Italy over the past week. The situation where they heavily invert as in Greece spells simply crisis. Means that one year bond yield exceeds the ten-year and as it does so by some 195%, we can say that it has heavily inverted and is a sign of severe distress.

HOW DO HIGHER BOND YIELDS IMPACT ON THE WIDER ECONOMY?

Firstly they impact on their government which if it is spending more on its debt finds itself with less money to spend on other things. Or the government might wish to retain the status quo by raising taxes and cutting other spending to compensate. Countries such as Greece have found themselves in a vicious circle here where higher bond yields and an austerity programme have fed into each other meaning that austerity has ended up chasing its own tail. So in such an extreme case the underlying economy can be adversely affected quite severely. Other interest-rates such as fixed-rate mortgages and corporate borrowing are fixed in relation to bond yields so they tend to rise with them. thus by an indirect route the underlying economy has another contractionary influence on it. So not only are rising bond yields a sign of problems in an economy they contribute to future problems for it.

INDIA INC CONSERVING CASH: OUTBOUND M&A DROPS

DEAL MAKING DRYING UP ?
 
The 1st half of 2012 witnessed M&A of US$ 24.6 Billion which is the lowest in the last 3 years and about 19% down compared to H1/2011.

SHOCKING STATISTICS 

• H1CY'12 M&A activity at 3-year low of $ 24.6 Billion
• PE activity down 45% in value terms (YoY)
• Rise in internal mergers and restructuring deals in H1CY'12
• Internal restructuring deals at $15.2 Billion vs $0.4 Billion in 2011
• Outbound deals in value terms down 64% at $2.1 Billion in 2011
• Inbound deals in value terms down 76% at $4.9 Billion in 2011

HIGHLIGHTS

• The total M&A and PE deals in the first half of 2012 were valued at US$28.3billion (544 deals) as compared to US$35.7 billion (508 deals) and US$32.3 billion (510 deals) in the corresponding periods of 2011 and 2010 respectively

• Total value of outbound deals (Indian companies acquiring businesses outside India) in the first half of 2012 was US$2.1 billion (48 deals) as compared to US$5.9 billion (86 deals) and US$17.9 billion (108 deals) during the corresponding period in 2011 and 2010 respectively

• The value of inbound deals (foreign companies or their subsidiaries acquiring Indian businesses) in the first half of 2012 was US$4.9 billion (77 deals) as compared to US$20.5 billion (58 deals) and US$5.4 billion (44 deals) during the corresponding period in 2011 and 2010 respectively

• Value of domestic deals in the first half of 2012 was US$2.4 billion (131 deals) as compared to US$3.4 billion (83 deals) and US$5.6 billion (137 deals) during the corresponding period in 2011 and 2010 respectively

• The total value of mergers & internal restructuring deals in the first half of 2012 was US$15.2 billion (201 deals) as compared to US$0.4 billion (85 deals) and US$0.5 billion (96 deals) during the corresponding period in 2011 and 2010 respectively

• PE deal values amounted to US$ 3.8 billion (218 deals) in the first half of 2012 as compared to US$ 5.5 billion (195 deals) and US$ 3 billion (125 deals) during the corresponding period in 2011 and 2010 respectively

• There were 8 IPOs listed in the first half of 2012 raising a sum of US$ 0.27 billion from the public.

Source: Grant Thornton

THE PRICE OF SAFETY

BOND YIELDS TURN NEGATIVE

In today's environment how much would you expect in return for parking your precious savings into banks. 9-10% is the going deposit rate across most PSU and private sector banks. Though adjusted for inflation the total return is a paltry 2-2.5%. We Indians like to complain about the paltry yields they we get on bonds and bank accounts, but it could be worse. Across Northern Europe, yields are turning negative. The German government this week sold two-year bonds with an average yield of minus 0.06 percent. That means the government will give investors back less than they paid for the bonds in two years and won't pay any interest in the meantime. Two-year bonds of Switzerland, Denmark, Germany, Finland, the Netherlands and Austria are also trading with negative yields on the secondary market. But negative yields on longer-term bonds indicate how far investors are willing to go to avoid potential losses on bonds

LOSS OF CONFIDENCE

According to experts the real reason is that investors have lost confidence in banks and governments across the world and are seeking shelter in the so called safe havens. When investors sell bonds, the price of the bonds goes down and the yields go up vice versa when investors buy bonds, the price goes up and the yield goes down. Yields on 10-year Spanish and Italian bonds have risen to the 6 to 7 percent range as investors have fled those countries. Much of that money has moved into bonds issued by nations sucj as Germany, Belgium and Switzerland (which is not part of the eurozone). Some money fleeing Europe has found its way into U.S. banks and Treasurys. To buy U.S. securities, European investors must buy dollars, which exposes them to currency risk. To avoid that, they must stick with euro-denominated bonds, hence demand for German bunds.

Bond Yields across Western European Markets

JULY FUND MANAGER SURVEY: CORPORATE EARNINGS AT RISK

FUND MANAGER SURVEY

Investor confidence has weakened further, led by a sharp decline in expectations of corporate profit growth, according to the BofA Merrill Lynch Survey of Fund Managers for July.

BofA Merrill Lynch’s Growth Expectations Composite has fallen to 37 in July from 43 in June and 54 in May. A severely deteriorating outlook for profits is driving the fall in confidence. A net 38 percent of investors say corporate profits will worsen in the coming 12 months – compared with a net 19 percent a month ago. It represents a 39 percentage point drop since May. The two-month drop is similar to the fall in confidence in summer 2011 as the sovereign debt crisis took shape. Belief that corporates can grow profits by 10 percent or more is at its lowest point since April 2009. A net 69 percent of the panel expects corporates profit growth to be less than 10 percent in the coming year. A net 58 percent says operating margins will decrease, up from a net 41 percent in June. Both the broader macro-economic outlook and risk appetite have stabilized, however, after two months of sharp deterioration. A net 13 percent of the panel says that the world economy will weaken in the coming year, a drop of two percentage points after a fall of 26 points from May to June. BofA Merrill Lynch’s Composite Indicator for Risk and Liquidity rose slightly month-on-month as investors reduced average cash holdings in portfolios to under 5 percent. Most investors expect further quantitative easing, but few expect this to happen in the third quarter. “July’s survey highlights that corporate profit expectations have to catch up with the downgrade in the economic outlook we have seen the past two months,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. “Rising equity prices have failed to lift investor gloom and we still see a quarter of investors expecting a global recession while hopes for further policy easing have been delayed,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.

EUROZONE CONCERNS SPREAD TO CORE ECONOMIES
Investors’ perception of risk in the eurozone has shifted this month with fears falling about the periphery but rising about Europe’s core. The proportion of respondents who see the risk of a negative shock around Germany’s economy has more than tripled to 32 percent, up from 10 percent in June. Concern about France has risen with a majority of investors (55 percent) believing the French economy could present a negative surprise this year.
Fears that Spain or Portugal could spring a negative surprise have fallen, while expectation of good news from Ireland is growing – 32 percent of investors hope for a positive surprise from Ireland this year, up from 16 percent in June. Confidence in Greece has fallen, however. The proportion saying Greece will avoid exiting the euro fell to 37 percent from 44 percent. European investors see an increasing risk of recession and also concur with rising worldwide concerns about corporate profits. A net 61 percent of European Regional Survey panelists predict worsening corporate earnings, double June’s reading.

IS THE TECHNOLOGY BUBBLE BURSTING?

Technology has been a favorite sector for global investors for the past three years, but U.S. investors have signaled a possible bursting of the IT bubble. Overall, a net 22 percent of U.S. respondents to the Regional Survey are overweight technology – a sharp fall from a net 41 percent a month ago. Within those figures, 19 percent of the panel are underweight IT, up from 9 percent in June. Global investors have also scaled back Technology holdings. A net 32 percent is overweight technology this month, down from a net 41 percent in June. U.S. equities have declined in popularity as global asset allocators have cast their net around the world. A net 14 percent of respondents are overweight U.S. equities, down from a net 31 percent last month. At the same time, asset allocators have reduced their underweights in eurozone, U.K. and Japanese equities. 

OIL AND GOLD VALUATIONS

Despite commodities as an asset class losing popularity this month, investors see gold as fairly valued and oil as undervalued. The proportion of panelists saying gold is overvalued fell from 10 percent to 1 percent. A net 12 percent say that oil is undervalued, compared with it being viewed as fairly valued in June. The last time gold was seen as fairly valued was when it was priced at about $1,000 per ounce. The last time oil was seen as undervalued preceded a surge in the oil price.

OLYMPICS AND STOCK MARKETS

Author: Goldman Sachs

Hosting the Olympics results in a number of economic effects that could have an impact on stock markets. Aside from the benefit of raising the international profile of the host country as both a tourism and investment destination, the announcement of a winning Olympic bid means major investment in infrastructure, including stadiums, accommodation and transport to prepare for the Games. For example, as part of the 2012 Games, the London Olympic Delivery Authority has awarded $9.4bn in contracts to business, and the government has invested an additional $10.2bn in transport and infrastructure projects, representing around 0.8% of UK GDP. This investment offers potential benefits for local business, in particular for sectors such as construction and engineering.

How might this be reflected in markets? If markets were forward-looking, we would expect the benefits of the Olympics to be priced into local equity markets at the time of the announcement, since the approximate magnitude of required investment would be known in advance. Various studies have examined the impact of the Olympic host announcement on stock prices, with mixed conclusions. In particular, Dick and Wang (2008) find evidence that, on average, host stock markets are positively affected by Olympic host announcements. However, Liu (2011) finds little clear evidence that the Chinese stock market was affected (positively or negatively) by either the 2000 host announcement, when Beijing was considered a favourite to win before ultimately losing the bid to Sydney, and the 2008 announcement, when Beijing was awarded the Games.

While there is variation among the host nation stock markets, all but China and the UK have positive returns in the three days following the announcement. The Greek stock market stands out as the top performer: it outperformed the benchmark by almost 8% after the 1997 announcement for the 2004 Games. For London, the day following the announcement in 2005 was the July 7 bombing, causing the FTSE to fall 1.3%, before rebounding. The chart above also shows returns above benchmark during the two weeks of the Games, albeit with no obvious pattern. China’s winning bid announcement coincided with turbulent markets in the midst of the global downturn in July 2001, while the Olympics in August 2008 took place on the brink of the financial crisis.

To see the longer-term impact of the Olympics, we measure the performance of the host stock market against a world benchmark over the six to seven years between announcement and the opening ceremony of the Games, as well as the returns in the year following the Olympics (chart below left). The equity markets in China, Korea, the US and Greece outperformed leading up to the Olympics, whereas those in Spain, Australia, and the UK underperformed. The latter three stock markets each suffered from headwinds in the global cycle leading up to the 1992, 2000 and 2012 Olympics. Interestingly, all recent Olympic hosts have outperformed the MSCI World index in the 12 months following the Olympics. This is true of recent hosts regardless of the size of the economy or state of development, suggesting either the local market is boosted by the international profile of the Games, or is perhaps relieved to have the Games behind them. Given the below-average performance in the UK since the Olympic announcement, UK investors may hope for a continuation of this trend, looking forward to a positive year in equities following the London 2012 Games.

CONSUMPTION SAVES THE DAY 'AGAIN'

FACTORY ACTIVITY SHOWS NO SIGNS OF REVIVAL
May industrial production rose 2.4% vs a contraction of 0.9% in April. On a seasonally-adjusted basis, May IIP was up 2.5% vs -1.0% seen in April. (April data was revised down from 0.1% to -0.9%). Thus, on a cumulative basis, growth during Apr-May FY13 came in at 0.8% v/s 5.7% in the same period last year. Manufacturing rose 2.5%, with growth led by communication equipment, machinery and metal products. This offset the contraction in electrical/textile machinery and medical/optical instruments. Capital goods remained in the red for the third consecutive month, down 7.7% due to a 31% fall in textile machinery.

CONSUMPTION TRENDS: DEVIL IN THE DETAIL
The key contributor to better than estimated IIP and manufacturing sector growth came from stronger than expected data on consumer goods production. Consumer goods grew 4.3% in May’12 vs 3.7% in the previous month and was largely in nature of consumer durables (+9.3% vs +5.2% in Apr’12). The strong growth in consumer durables could be up on seasonal aspects because the leading indicators suggest consumption demand is slowing down. The contrasting data could hint at increasing inventories levels and does not denote improving demand.

LEADING INDICATORS A SIGN OF WORRY

- >Steep 29% yoy decline in bank credit to towards consumer durables
- > Sluggish 15% yoy growth in housing loans a
- > June’12 domestic car sales at 8.6% yoy vs 20% yoy in Mar’12 and two wheeler sales at 9.2% yoy vs 15% yoy last year.

INFOSYS: NOT A PROPHET ANYMORE

Should India's most glamorous Tech company stop giving out a quarterly guidance, well the signs are pretty obvious. On July 12 for the first time in the history of Infosys the company stopped short of diving out a quarterly earnings guidance. This however did not come as a surprise to analysts and fund managers who track this company closely. Critics have over the last couple of years argued the diminished ability of the company to predict the future accurately and this coupled with its inflexible attitude towards the new market dynamics has started to hurt growth prospects significantly.

QUARTERLY GUIDANCE BEING MISSED CONSISTENTLY
For 2 straight quarters Infosys has missed its quarterly earnings guidance and during the preceeding 2 quarters the company narrowly missed the lower end of the guidance range. So it was no surprise when the top management announced that it was for the time being going to stop the practice of giving out a quarterly guidance but only put out an annual guidance. However one tends to wonder if for a company isn't it easier to predict the short term growth prospects rather than taking a long term view in an uncertain global environment such as what we are facing today.

ANNUAL GUIDANCE PRACTICE JUST A MATTER OF TIME ?
The Rupee has been an enigma for technology exporters who were found lacking in their ability to read into the currency market volatility and in turn piled on large hedge positions which in turn prohibited the tech companies to make windfall gains when the currency tanked dramatically. This coupled with the Euro's steep drop vs US Dollar and cross currency movements have significantly eroded the margins of IT companies in last one year. The ongoing European crisis, erractic recovery in the US and slowdown in developing economies are just some of the problems that today's export linked companies have to grapple with. In this scenario the probability of not only companies but entire countries going defunct is a genuine threat. Perhaps the company would be better off not trying to predict the future and thereby reducing the severeity of the onslaught on the stock everytime it misses its guidance.
TRACK RECORD PROVES IT
 
Q1'FY13 RESULTS

Q2FY13 GUIDANCE: NO GUIDANCE

Q1'FY13 ACTUALS
Revenue at $1,752 million (Missed the lower end of range)

FY13 GUIDANCERevenues are expected to be at least $7.343bn; YoY growth of 5.0% (6% in constant currency terms)
------------------

Q4'FY12 RESULTS

Q1'FY13 GUIDANCE
Revenues seen at $1,771 million and $1,789 million; YoY growth of 6.0% to 7.1%

Q4FY12 ACTUALS
Revenues at $1,771 million (Missed the lower end of the range)

FY13 GUIDANCERevenues are expected to be in the range of $7,553 million and $7,692 million; YoY growth of 8.0% to 10.0%
-----------------

Q3FY12 RESULTS

Q4'FY12 GUIDANCE
Revenues seen at $1,806 million and $1,810 million; YoY growth of 12.7% to 13.0%

Q3'FY12 ACTUALS
Revenues at $1,806 million (Narrowly above the lower end of the guidance)

FY12 GUIDANCERevenues are expected to be in the range of $7,029 million and $7,033 million; YoY growth of 16.4%
-------------------

Q2FY12 RESULTS

Q3FY12 GUIDANCE
Revenues seen at $1,802 million and $1,840 million; YoY growth of 13.7% to 16.1%

Q2FY12 ACTUALS
Revenues at $1,746 million (Marginally above the lower end of guidance)

FY12 GUIDANCERevenues are expected to be in the range of $7.13 billion and $7.25 billion; YoY growth of 18% to 20%

HOW DIVIDED ARE ANALYSTS OVER NIFTY 50 COMPANIES

SENTIMENT AND REALITY ARE FAR APART

A turn in sentiment has seen market participants increasing their year end targets for Sensex and Nifty to 21-22000, but the big question is on what basis are these targets being set.

STOCK RATINGS PRESENT A DIFFERENT PICTURE

Dalal Street obviously seems fairly divided over what would perform and what won't based on earnings expectations. For ease of understanding we assume that in cases where 70% of analyst's tracking a stock are having a 'BUY' rating only then we assume that the stock has a consensus 'BUY' rating.

Taking this assumption presents some startling revelations. Essentially there is a consensus 'BUY' on only 17 out of Nifty 50 stocks. In the absence of any conviction how can market participants bring out such bullish estimates on the benchmark indices....one tends to question.

INDIA'S REFORM AGENDA: WHAT'S ON THE PLATTER

INDIA'S SOVEREIGN RATING SCORECARD

Source: Ministry of Finance

IT SECTOR HIRING SLOWS DOWN: MORE EVIDENCE

NOW IGATE DELAYS NEW JOINEE DATES

After Infosys it is now the turn of iGate which has delayed joining dates for new hires as per newspaper reports. California-headquarted iGate, which has a majority of its staff in India and employs around 30,000 people, said out of the 3,000 campus offers it made across India, joining dates of around 1,000 engineers will be delayed by one, or possibly, two quarters. "The overall demand environment remains weak. Close to 1,000 freshers, who were expected to join in July-August, will now join by the end of September or October," said Srinivas Kandula, HR head at iGate. "If the economic situation worsens, we will have to delay it by another quarter," he said.
Last month, country's second-largest IT firm Infosys had said it would delay the joining dates of over 25,000 engineers it hired from campuses to as late as mid 2013, a sign of how IT companies are coping with project delays and weak economic sentiments in the US and Europe.

HEADED FOR A SLOWDOWN ?
Prominent research organisations who track the sector closely have signalled about the possibility of slowing growth in the industry

CLSA

Continued delays in decision-making and flux in discretionary spending implies near-term demand outlook could surprise on the downside. While FY13 EPS seems safe with the currency tailwind, the spectre of 2 consecutive years (FY13/14) of low $-revenue growth looms large

STANDARD CHARTERED 

We see rising risk of subdued volume trajectory in the BFS vertical extending beyond FY13, even outside of event/regulatory risks. This could be in contrast to the quick M&A-led bounce-back in IT spending after the global financial crisis.

DEUTSCHE BANK RESEARCH

Channel checks suggest that clients are not cancelling existing projects or delaying new deal ramp-ups.
However, we believe pricing in the BFSI (banking and financial services and insurance) vertical could be under pressure in 2HCY12. We note that Management of most investments banks would be stringently reviewing the CY12 IT budgets in the first week of July and there is a strong possibility that 2HCY12 spending will come under pressure.

FORTUNES OF RICE PRODUCERS TO TURN ?

INDIA GETTING COMPETITIVE

The government of India today announced a complete removal of the minimum export price requirement for export of basmati rice from the country. For reference MEP is the minimum price at which a country can export its goods. The real world for commodities is price competition and India because of  the norm was losing to competitors such as Pakistan, Philppines. With the MEP being done away with Indian rice exporters such as KRBL and LT Foods can compete on the global stage with rice exporters from low cost countries.

 

IS THE OPTIMISM OVERDONE

DID THE POWER SHIFT DO  THE TRICK ?

Sensex has rallied nearly 10% in last 1 month and picked up momentum in the last week on hopes that the wrong doings under Pranab Mukherjee would be undone by the seasoned economist in Manmohan Singh who currently heads the finance portfolio. Within days of taking over there is a sense of urgency in North block, whether its clarifying GAAR or deferrment of service tax on rail fares. It seems Manmohan Singh has finally been given the freedom the kind of which brought out the best in him during the 1991 crisis period. "The Finance Ministry under Prime Minister Manmohan Singh will very quickly resolve uncertainty among investors caused by anti-tax avoidance rules which were unveiled in the Budget", Planning Commission Deputy Chairman Montek Singh Ahluwalia said a few days later to a leading daily. In a sign of improved sentiment FIIs have pumped in close to `700 crore into cash segment just in the last 1 week, Nifty has rallied all the way to 5300 and Sensex is just a few hunderd points shy of 18000. Market strategists at leading research houses changing their outlook towards India as one of hope and optimism.

TURNING BULLISH ?
Jonathan F Garner , Morgan Stanley "India is trading well below long-run average valuations and close to trough valuations from the 2002 & 2008 perspective"

Adrian Mowat , JP Morgan "Turning positive on India on back of lower oil  prices which in turn will help current account deficit"

Abhay Laijawala, Deutsche Bank "Tactical rally likely to continue in near term, pil off the boil make India look attractive valuations wise sharp deprecation in INR continue to be a tailwinds

REALITY BITES

Expectations and hopes can only take the markets to a limited extent but then sooner or later reality always steps in and we start to question the validity of any rally in the absence of any visible change in the fundamental picture. So before we pop up the bubbly and start celebrating lets take a moment to reflect on where we stand. Whether its rising twin deficts, dwindling industrial output and inflation there seems to be no light at the end of the tunnel.

KEY MACRO VARIABLE   APRIL'2012
Industrial production                 0.1%
 Capital goods                          -16.3%
Auto sales                                8.6%
Manufacturing PMI                  54.9
WPI inflation                            7.2%
        Food inflation                   10.5%
CPI inflation                             10.2%
Trade Balance ($BN)               -13.5

GDP STATS                           Q1-2012
Real GDP                                 5.3%
 Industry                                   0.7%

DO BANKERS EVER LEARN

ARE BANKERS RESPONSIBLE FOR THIS ONE TOO ?

British banking giant Barclays' chairman Marcus Agius quit on Monday, saying an interest rate rigging scandal had dealt "a devastating blow" to the bank’s reputation and "the buck stops with me". Pressure has built on him and CEO Bob Diamond to quit following a $453m fine for Barclays by British and US regulators last week for making inaccurate submissions on the Libor interest rate. Both Mr Diamond and Mr Agius have been called to appear this week before British legislators on the Treasury select committee in the wake of the fine. The news that Barclays traders tried to fix Libor rates rocked the financial world last week. It also wiped billions off Barclays’ market value in a week when British banks were separately sanctioned for mis-selling interest rate insurance. The largest interest rate derivatives sellers include Barclays, Deutsche Bank, Goldman and JP Morgan … many of which are being exposed for manipulating

FAR REACHING IMPACT

The inquiry will focus on possible criminal sanctions against people who breach future regulations on the rate. Banks may face billions of dollars in costs from litigation. More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans as per Wall Street Journal. Derivatives market is approximately $1,200 trillion dollars.  Interest rate derivatives comprise the lion’s share of all derivatives, and could blow up and take down the entire financial system.

IS THE METHODOLOGY FLAWED ?

Libor is determined by a daily poll that asks banks to estimate how much it would cost them to borrow from each other for different timeframes and in different currencies. Because banks’ submissions aren’t based on real trades, academics and lawyers say they are open to manipulation by traders. At least a dozen firms are being probed by regulators worldwide for colluding to rig the rate, the benchmark for $350 trillion of securities.

IS INDIA TURNING NET DEBTOR TO THE WORLD ?

Current account deficit occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.

INDIA'S CURRENT ACCOUNT DEFICIT WORSENS

India's current account deficit (CAD) widened to USD21.8bn (4.5% of GDP) in January-March of 2012, from (an upward revised) USD20.2bn deficit in Oct-Dec'11. As in the previous quarters, the worsening of the CAD was led by a deterioration in the trade deficit position (USD51.5bn in Jan-Mar'12 or 10.6% of GDP, up from USD48.7bn in Oct-Dec'11), offsetting the improvement in net invisibles (USD29.8bn vs. USD28.8bn). The trade deficit widened in Jan-Mar as exports growth decelerated sharply to 3.4%yoy, while imports growth remained sufficiently firm (22.6%yoy) during the same period. Meanwhile, as usual, software services (USD16.9bn vs. USD15.8bn) and private transfers (USD16.9bn vs. USD16.2bn) were the main contributors to the strength in net invisibles.

CAPITAL ACCOUNT IMPROVES MARGINALLY

Capital account surplus improved to USD16.6bn in Jan-Mar'12, up from USD7.7bn in Oct-Dec'11, but was still insufficient to fund the relatively large current account deficit, leading to a an overall BOP deficit of USD5.7bn (as compared to USD-12.8bn in Oct-Dec'11). Foreign investment improved sharply in Jan-Mar'12 as compared to Oct-Dec'11, led by robust portfolio investment flows (USD13.9bn vs. USD1.9bn), while net FDI flows (USD1.4bn vs. USD5bn) reduced appreciably from the previous quarter. Loans (USD2.7bn vs. USD1.6bn) and banking capital (USD2bn vs. USD-5.5bn) flows also improved in Jan-Mar'12 - the latter mainly helped by robust non-resident deposit flows (USD4.7bn vs. USD3.3bn), while other capital subtracted USD3.4bn from the capital account (in Oct-Dec'11, other capital added USD4.7bn to net capital flows).

BALANCE OF PAYMENTS NOT 'BALANCED'

With the releases of the Jan-Mar'12 BOP data, we now have the FY11/12 full year estimate of the BOP position. The CAD widened to USD78.1bn (4.2% of GDP) in FY11/12, a record high in absolute terms and also as a % of GDP, from USD45.9bn in FY10/11 (2.7% of GDP), on the back of a sharp deterioration in trade deficit (USD189.8bn vs. USD130.6bn), offsetting the notable improvement in net invisibles (USD111.6bn vs. USD84.6bn). Due to the sharp deterioration in CAD, the BOP recorded a net deficit of USD12.8bn in FY11/12 (vs. a net surplus of USD13bn in FY10/11), even though the capital account surplus was higher in FY11/12 compared to FY10/11 (USD67.8bn vs. USD62bn).