Hexagon Wealth

March 18, 2013


Markets Last Week

During the week, the Sensex fell by 1.30% to close at 19,428.

The sector indices finished the week in the red, with the exception of the S&P BSE FMCG Index which rose by 1.5%.

The S&P BSE Consumer Durables Index was the biggest loser and fell by 3.91%.


Higher food and fuel prices push up inflation

Retail inflation rose for the fifth consecutive month in February, as the Consumer Price Index (CPI) rose by 10.91% - a record annual increase.

Currently, India has the highest retail inflation rate amongst the BRICS economies, and also has negative real returns on bank deposits. In February, food prices rose by nearly 14% and contributed to the rise in consumer price inflation.

After falling to a four-year low of 6.62% in January, headline (WPI) inflation rose to 6.84% in February. The rise in wholesale inflation was mainly because of higher fuel prices. Although WPI inflation is above the RBI’s comfort zone, the fall in core inflation in February may persuade the central bank to lower interest rates. Core inflation fell below 4% for the first time in 35 months, to 3.76% in February. If the RBI reduces interest rates, long-term bond funds are likely to generate high returns for investors. Over the last week, these funds have generated annualized returns of almost 20%.

Rising industrial production may stimulate India’s economy but falling investment poses a threat

After two consecutive falls, the Index of Industrial Production rose by 2.4% in January (y-o-y). This figure surpassed estimates, and also exceeded the growth of 1% in January 2012.

The rise in industrial production suggests that the growth slowdown may be bottoming out. However, the 1% expansion in industrial production during the first ten months of the current fiscal year is significantly lower than the growth of 3% in the same period last year.

Furthermore, the fall in capital goods output is disquieting and suggests that the government needs to take steps to revive investment. Sluggish investment may drag down economic growth, which fell to a ten-year low of 4.5% in the third quarter of the current fiscal year. Markets are likely to remain circumspect about growth and may be range-bound. To hedge against any downside risks in equities, we remain partly invested in cash in our active strategies.

A bleak outlook for domestic car sales

In February, car sales fell by 26% to 158,513. This was the biggest annual fall in twelve years, and the fourth consecutive monthly decline.

An exception to this trend is Mahindra & Mahindra – the company recorded an increase in sales in February. The demand for cars has been adversely affected by weak economic conditions, rising fuel prices and high interest rates.

The proposed increase in excise duty on utility vehicles (announced in the Budget) may also hurt automobile sales. Last month, Society of Indian Automobile Manufacturers (SIAM) warned that automobile sales growth may be negative in the current fiscal year.

Lower FDI may lead to an increase in India’s current account deficit

Last week, the Department of Industrial Policy and Promotion announced that India attracted foreign direct investment (FDI) inflows worth $22.78 billion in 2012 - a decline of 34% from 2011.

The fall in FDI may adversely affect India’s current account deficit (CAD) which rose to a record high of 5.4% of GDP in the second quarter of the current fiscal year. This may lead to further depreciation in the Rupee, if India’s FII flows are insufficient to bridge the current account gap.

Investors who want to beat Rupee depreciation can choose to allocate money to international funds such as JP Morgan ASEAN Equity Off Shore Fund or ICICI Prudential US Bluechip Equity Fund. FDI inflows may improve because of recent reforms in the retail and aviation sectors.

Rising exports may lead to an improvement in India’s balance of trade

In February exports rose by 4.25% to $26.26 billion – the second consecutive monthly increase after eight months of contraction. 

The increase is partly because of stronger economic conditions in Europe and U.S.

The trade deficit narrowed to $14.92 billion in February from $20 billion in January. However, between April 2012 and February 2013, exports have fallen by 4% while the cumulative trade deficit has widened, as shown in the chart.

The government plans to announce incentives for exporters. A recovery in the global economy may also result in higher exports, which will result in an improvement in the balance of trade and contribute to domestic growth.

Nevertheless, the government may find it difficult to achieve the current fiscal year’s export target of $360 billion.


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