Hexagon Wealth

May 7, 2013
Market Update

The Sensex rose by 2.9% during the last two weeks and closed at 19,576 on Friday. Most of the sector indices rose, with the exception of the S&P BSE IT index.



The S&P BSE FMCG Index was the biggest gainer and rose by nearly 8%. The rally in FMCG can be attributed to HUL’s 18% jump as Unilever announced a share buyback at a premium to the market.

Other FMCG stocks rose on good sentiment. The rally by itself is in doubt as none of the hoped-for improvements are happening. Bonds rallied during the last two weeks, as the yield of the benchmark 10-year bond fell by 4 basis points and closed at 7.74% on May 3rd. The rupee has marginally appreciated against the dollar over the last two weeks and finished at Rs 53.935/945 per dollar on May 3rd. Over the last two weeks, gold prices have climbed by $64 to $1,469 on May 3rd (Note – this refers to the spot price on the London Bullion Market - PM Fix).


An interest rate cut and a wake-up call to the government

On May 3rd, the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points to a two-year low of 7.25%. The Cash Reserve Ratio (CRR) was left unchanged at 4%. Markets reacted negatively after the announcement as Dr. Subbarao - the RBI Governor - stated that there would be “little space for further monetary easing”. Rate sensitive stocks (stocks which rise if interest rates fall and vice versa) led the decline, as the Bankex fell by -2.4%.

Dr. Subbarao warned that the current account deficit (CAD) was the biggest threat to India’s economy. The Governor also appealed to the government to do its share to revive the economy and stated that interest rate cuts need to be supported by supply-side policy reforms. These reforms include measures to reduce delays in environmental clearances, land acquisition and power shortages which adversely affect production capacity. If the government fails to implement the necessary reforms, supply-side constraints may push up inflation again. However, inflation is likely to remain near the RBI’s comfort zone of 5% in FY14. The RBI may choose to reduce interest rates if the CAD declines and crude prices stabilize around current levels. Our recommended medium to long-term bonds may generate higher returns if interest rates fall.

A U-shaped recovery for India

India’s economy is set to expand faster in the current financial year, but the recovery is likely to be slow and “U-shaped” rather than rapid or “V-shaped” recovery. The RBI estimates that India’s economy will expand by 5.7% in FY14 – only marginally higher than the growth estimate of 5% for FY13 (according to the Central Statistics Office). A growth rate of 5.7% is far below India’s potential rate of growth.

The agricultural sector may expand faster as the monsoon forecast is normal. However, the outlook for the services sector is not so bright, as the domestic growth slowdown is affecting the sector. In March, the services sector expanded at the slowest pace since October 2011 as the HSBC India Services PMI fell to a 17-month low of 51.4. The services sector accounts for about two-thirds of India’s GDP and may be adversely affected by sluggish global growth and a slowdown in domestic consumption. The slump in domestic demand is reflected in the lackluster topline growth numbers in the recent earnings season.

The slowdown in the economy is partly because of sluggish investment. Over the last year, successive rate cuts by the RBI have failed to kickstart investment. Fixed investment growth has remained below the long-run average for several quarters.

                                        Capital Goods

As shown in the graph, capital goods output has been lackluster for several quarters (as per IIP).  Projects worth about Rs 7 lakh crores are stalled at various stages of implementation because of delays in environmental clearances, land acquisition issues and power shortages. Business confidence is low while borrowers and lenders have become risk averse.

In spite of the dismal economic climate, there are some green shoots ahead. During the last few months, the Cabinet Committee on Investment (CCI) has cleared projects worth Rs. 74,000 crores. Additionally, the environmental clearance process has been simplified for mega projects. The investment cycle may revive if the CCI reduces the red tape associated with implementation of projects, and if the government implements supply-side reforms. India’s economy may expand faster if the investment cycle improves.

The tide turns against austerity in Europe

Eurozone leaders may be planning to rollback austerity measures which have dragged down economic growth. In spite of several quarters of painful and unpopular budget cuts and tax increases, the debt-GDP ratios of many European countries have spiked. In March, unemployment in the Eurozone rose to a record high of 12.1%.

Enrico Letta - the new Italian Prime Minister - said that “Europe’s policy of austerity is no longer sufficient,” while the European Commission President, José Manuel Barroso, also expressed concerns about sharp cuts in budget deficits. However, the ECB is not in favour of countries abandoning their fiscal consolidation plans.

Nevertheless, Italy is likely to receive concessions from the ECB as it is the third largest economy in the Eurozone. Other troubled economies may also follow Italy’s lead and demand concessions from their international lenders.

Large-scale government spending programs are unlikely, but the European Commission may allow countries to delay meeting fiscal targets.


This may have a positive but limited impact on growth, as structural reforms are still pending in many Eurozone countries. However, even a slight uptick in growth rates in Europe will have a positive effect on India, as the EU is one of India’s major export partners.

Fund Focus: ICICI Prudential Focused Bluechip

ICICI Focused Bluechip is one of Hexagon’s recommended large-cap funds. This unique concentrated fund not only outperforms its category in bull markets but also restricts downside in falling markets. For example, in 2011, the Nifty fell by 25% but the fund only fell by 16%. For more information, see Hexagon’s Facebook page at https://www.facebook.com/HexagonWealth.

Lets’s Learn: Dividend Yield Stocks

A stock’s dividend yield is calculated by dividing the company's annual dividend per share by the current share price. Companies with high dividend yields generally have strong cash flows, stable growth rates and healthy balance sheets. Stocks of these companies usually outperform in bear-markets. However, high-dividend yield stocks are hard to find in India, as most companies prefer to reinvest profits to expand their operations, being in a higher demand economy.

In contrast, American companies are relatively more cash-rich and mature and hence pay out higher dividends. However, in India, PSUs generally have relatively higher dividend yields. Examples include BHEL, NTPC and Punjab National Bank. On March 31st, the dividend yield of the Dow Jones Industrial Average was 2.52 while the dividend yield of the Sensex was 1.60. In most good Indian listed companies, the dividend yield is not enough to make it an attractive income yielding investment, and nor can one look forward to high capital growth from them, given their current prices.

But one reason why one can look at a dividend yield fund is their lower volatility as compared to other growth oriented funds.

Global Indices: Wall Street Journal
Domestic Indices: BSE/ Accord Fintech



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