GMO’s Montier on Why to Hold Cash

Asset allocation is the most important decision in constructing
portfolios that meet clients’ goals. Two prominent figures in the
investment world recently offered sharply different perspectives on
the most prudent approach for advisors.
Central bank policies have distorted markets to such a degree that
investors are devoid of any buy-and-hold asset classes, according to
James Montier. But according to Richard Bernstein, the flood of
liquidity unleashed through quantitative easing (QE) now offers
investors compelling opportunities.
Montier is a member of the asset allocation team at Boston-based
Grantham Mayo van Otterloo. Bernstein is the chief executive officer
of New York-based Richard Bernstein Advisors. The two squared off
in a panel discussion at the 2013 Morningstar Investment
Conference in Chicago last week.
“This is the hardest time to be an asset allocator,” Montier said.
“Normally, you find that safe-haven assets are expensive and riskier
assets are cheap – and vice versa. But today, largely because of the
central banks around the world, we’ve got a very distorted
opportunity set, such that there is nothing you can buy and hold.”
Bernstein agreed that QE has upset traditional valuation dynamics,
but he said investors still have choices.
“There are pockets that are very, very attractive,” he said. “People are generally unaware
of those pockets.”
Let’s look at the key assumptions around Federal Reserve policies that led these two
investors to such divergent views of the markets.
Fed policy and its impact on the markets
Low inflation and low interest rates have driven most asset classes to unacceptably high
valuations, Montier said.

ASIA STRATEGY EUROPE’S POINT OF VIEW ON ASIA: BNP Paribas

We are just back from a week’s marketing in Europe. Since our last trip in early 2013, concerns about Asian
equities have mounted due to: 1) liquidity squeeze in EM and USD appreciation; 2) China’s slowdown, which
is increasingly perceived to be structural; and 3) Japan’s reflation strategy and its consequences. However,
investors see some significant investible pockets. We highlight key perspectives and investment themes.
1: Asian equities to bottom out when bond yields stabilise
FII outflows started in the bond markets and the ensuing contagion led to withdrawals from equities. Until
bond yields and real rates stabilise, investors don’t see equities bottoming out.
2: China – the market most European investors love to hate
China’s economic slowdown is perceived to be structural, with eventual restrictions on shadow banking
activities expected to contract liquidity significantly. Sharp valuation discounts have led some investors to
be neutral on China, but they are in a clear minority.
3: Increasing preference for Korea and Taiwan
These exporting economies underperformed in early 2013 on investor concern about the impact of JPY
depreciation on their competitiveness. Such concerns have faded significantly, leading to recoveries in both
markets. For Taiwan, this is a by-product of investors’ clear preference for the technology sector (a
consensus overweight). For Korea, ‘non-Samsung Korea’ seems to be a focus area.
4: India – the default choice
Despite severe macro headwinds, investors’ default choice is India, in marked contrast to the attitudes we
encountered in early 2013. Apart from the relative ease of stock selection, continued commodity price
weakness and anticipation of further moderation are perceived as macro tailwinds for India.
5: More worried about Indonesia than Thailand
In a world of declining commodity prices, Indonesia – with its commodity-heavy export basket – could face
further current account deficit and currency depreciation pressures, though rate increases and fuel subsidy
cuts are perceived as positives. Thailand, though over-owned, appears relatively safe to investors from a
current account perspective and from a growth stability perspective. Neither are investors significantly
concerned about Thailand’s inflation, fiscal balance or credit cycle for the time being.
New themes: Playing consumption through new avenues & ‘safe’ commodities
The resilience of Asian consumption and its changing pattern across Asian countries have led investors to
focus on consumption as a broad theme across the continent. However, investors are looking at new
avenues to play this theme – eg, through Tourism and travel, 4G services in telecom, online retailing and
messaging, and consumer companies listed in DM but growing in EM. On the other hand, Chinese oil
companies, particularly CNOOC [883 HK], are perceived to be relatively safe due to impending growth
prospects, sensitivity to the USD and relatively stable oil prices

FOMC Wrap: Another Policy Shock :Nomura

Chairman Bernanke and the Federal Open Market Committee (FOMC) delivered
another policy "shock" today. They provided an optimistic assessment of the economic
outlook and much greater clarity on their plans for policy.
Although the policy details were broadly in line with our forecast, we did not expect the
Committee to be so explicit in laying out its plans at this time. We were also surprised
that it did not acknowledge the current “soft patch” in the economic data or the recent
tightening of financial conditions.
The net effect is that there appears to be a stronger consensus within the FOMC for
beginning the process of removing accommodation than we expected. The strong
market reaction to the FOMC statement and the Chairman's press conference is, in
our view, consistent with this judgment.
FOMC plans for policy
The Chairman said that if the economy evolves as the FOMC expects – i.e. if growth
picks up in coming quarters, if labor market performance continues to improve and if
inflation expectations remain well anchored – then it expects policy to evolve in the
following way:
 The FOMC expects to take its first step to reduce the pace of asset
purchases later this year.
 The FOMC also expects to end asset purchases around the middle of next
year, when it expects the unemployment rate to be around 7%.
 The FOMC expects to raise short-term interest rate for the first time in the
first half of 2015.
The FOMC‟s statement also noted that downside risks had diminished since the fall,
suggesting a higher degree of confidence in its positive outlook for the economy and
labor markets.
Ironically, this proposed path for policy is consistent with our pre-meeting forecast, but
we did not expect the Chairman, with the Committee‟s support, to lay out a plan at this
time. We thought the Committee would take more time to reach consensus and that it
would move more cautiously in light of the slowdown in activity in the second quarter
and the recent volatility in financial markets.
The net effect is that the FOMC appears to be further along in the process of
deciding to scale back asset purchases – and more generally beginning the
long-term process of “normalizing” policy – than was evident before today.
FOMC Forecasts
The FOMC participants‟ forecasts suggest that they have an optimistic outlook for the
economy. The central tendency for growth was revised down somewhat for 2013, but
their forecasts remain notably above those of the market participants. The central
tendency of FOMC participants appears to expect growth of 2.5-3.0% in the second
half of this year (Nomura: 2.2%). FOMC participants also revised up their forecasts for
GDP growth next year (Figure 1).
In addition, the FOMC revised down its forecasts for the unemployment rate across
the whole path. These revisions suggest that FOMC participants have changed
their views on some key fundamental trends, such as productivity growth and
labor force participation in a way that suggest it will take less growth than
previously assumed to generate a tightening of labor markets.
Forecasts for inflation in 2013 were revised down substantially, but the revision to the
forecasts for 2014 and 2015 were much more modest, suggesting that the Committee
expects inflation to pick up back towards its 2% target.

The Bull Case, Not the Bull Chase  Citi

 The Bull Case, Not the Bull Chase
 Several indicators suggest that the next six months may not be as rewarding as
the past half year. The Panic/Euphoria Model's latest reading suggest a more cautious
stance might be appropriate as levels have begun to approach "euphoria" territory.
Moreover, lower intra-stock correlation also implies a more upbeat investment
community focused on stock selection and less concerned about macro dynamics,
thereby adding to the risk profile as economic, political or geopolitical events are no
longer being considered by fund managers by virtue of their actions.
 Normalized earnings yield gap analysis suggests only a random probability for
further appreciation by late 2013. With the current weekly normalized gap between
one and two standard deviations below the 40-year average, there is a 70% chance of
market upside in the next six months, in line with the 67% random outcome and down
from the 98% opportunity seen earlier this year. Keep in mind that the 12-month
figures still offer up a 90% probability of equity index strength and accordingly support
a generally constructive tone looking out to mid-2014 but not necessarily the back half
of this year.
 Forecasts for 2H13 US economic strengthening provide a hurdle that needs to be
overcome. Investors believed that first half 2013 would be hampered by the effects of
both the fiscal cliff and the sequester when the year began and thus had low
expectations that could be more easily beaten. Such a set of circumstances are not
present heading towards the balance of the year with Europe potentially being a
significant spoiler.
 Hedge fund positioning and money flows also show a more positive investment
community that needs to see a continuous stream of good news to keep things
in a happy place. Negative headlines about possible Fed policy tapering, Chinese
PMI or more challenging Italian bond auctions already have generated some increased
market volatility and underscore the change in investor attitude. Reports of extended
net long positioning by hedge funds and US equity mutual fund inflows have been
sustained even as some international trends have been less encouraging.
 Nonetheless, the longer term Raging Bull Thesis is still in place for equities. The
secular bull argument for US stocks beginning in 2013 retains its key tenets even as
"chasing the tape" nearer term may be a bit overdone. A revival in US manufacturing
competitiveness, a rebound in housing, mobile technology benefits and the trend
towards energy independence all sustain more growth potential for America, while
demographics and asset class returns surprisingly argue for more equity focused
money over the next few years. Hence, 2013’s double-digit performance may be only
the beginning of a multi-year (and possibly decade long) climb for stock investors who
are still scarred by the sharp bear declines during the 2000s.

Titan-Falling gold prices leading to demand surge; Gauging earnings impact :: JPMorgan

 Gold prices are trending down again. After recovering from mid April
fall, gold prices have started to trend down again and are now closing the
lows seen during April. This has raised fresh investor concerns regarding
consumer demand in falling gold price environment. There is a risk that
consumers may choose to postpone their purchases hoping for a better
purchase price in future or may not find gold as an attractive investment tool
any longer. So far though, volume offtake seems to have held up well for
jewelery retailers. In the past, periods of falling gold prices have triggered
sharp uptick in volumes and jewelery retailers have benefited in terms of
overall increase in sales. Data over the last decade (refer Fig 4 inside)
suggests that a substantial correction in gold prices has typically led to an
increase in gold imports. Also, there seems to be baseline support to India
gold import volume at average 850-900 tonnes as seen over past six years.
Please refer to Bharat Iyer’s note India’s Gold Obsession - Not Easy to
Wish Away for more color.
 Gold price sensitivity for Titan's earnings. We have built in various
scenarios for gold price and volume change for gold jewellery for Titan. We
keep diamond jewellery/watch/eyewear sales assumptions constant.
Assuming gold price decline from -5% to -15% for FY14 and volume
change varying between +10% and +30%, we estimate Titan's FY14E EPS
would be affected by +2 to -8%. Please refer to Table 1 inside for details.
 Falling gold price is more detrimental to unorganised players that
largely have unhedged exposure to gold prices. Organised players like Titan
follow gold on lease model and are hedged on gold prices to a large extent.
Making charges for Titan are also variable (linked to gold prices) vs fixed
charges for unorganised and some regional players. In the scenario of
falling gold prices, the gap between making charges for Titan and other
players narrows. The recent RBI notification restricting gold imports via
consignment route would also affect unorganised players more adversely
than organised players that source gold on lease basis as per our discussions
with various industry players.
Margin impact. As lower gold prices trigger higher purchases of gold
jewellery vs diamond jewellery (which is witnessing slower offtake in recent
months) we expect margins to be affected adversely on account of
unfavorable product mix. However absolute EBIT growth for jewellery may
still be healthy owing to strong sales growth

Tata Motors: 4Q Results Review: JLR margins at 16.9% (close to record levels) surprise positively, product launches to drive growth::

Tata Motors 4Q FY13 results were ahead of estimates as the consolidated PAT
came in at Rs39B (-37% y/y), ahead of estimates. The variance was driven by JLR
–as EBITDA margins came in at 16.9% (close to record levels), driven by the
ramp up of the new Range Rover. The India business loss was largely in line at
–Rs.3.1B (vs. –Rs.4.5B q/q). We reiterate our OW stance on the stock – we
believe that growth at JLR will be driven by new product launches, including the
Range Rover, the RR Sport and the F Type.

Economy: Higher probability now for a July pause :: Kotak Sec

Economy: Higher probability now for a July pause
` RBI keeps the policy status quo...
` ...despite most of domestic factors supporting an easing
` External sector developments seem to have led to the decision to pause
` Probability of a July pause has increased

Acquisition of Cooper Tire – Ambitious move:: Angel Broking

Acquisition of Cooper Tire – Ambitious move

Apollo Tyres (APTY) and Cooper Tire and Rubber Company (CTB) have announced a definitive merger agreement, under which APTY will acquire CTB in an all cash transaction valuing the firm at US$2.5bn (including minority interest). APTY will acquire 100% equity of CTB for an equity valuation of US$2.2bn, ie at a 43% premium to CTB’s 30 day volume weighted average price. The acquisition would be funded entirely through debt. The deal value of US$2.5bn translates into an implied EV/EBITDA multiple of 4.4x (TTM basis), which is broadly in-line with the global average. Post the acquisition, the combined entity will be the 7^th largest tyre company in the world with combined revenues of US$6.6bn. The company expects to close the transaction in the next four months.     

  

Kindly click on the following link to view the Report.

 

Apollo Tyres - Event Update

 

The Fed: transparent as mud :: Bloomberg View

The Fed: transparent as mud

US Federal Reserve Chairman Ben Bernanke seemed a little nervous at his June 19 news conference. His recent comments about the future course of monetary policy had rattled investors and driven bond yields up, tightening financial conditions in a way the Fed didn’t want. Formally unperturbed, Mr Bernanke said he was leaving policy unchanged — but in trying, yet again, to elucidate the Fed’s thinking, he tacitly admitted that something had gone wrong. Fortunately, the policy itself is basically good — but that’s despite, not because of, the ever- evolving formulas used to explain it. Growth in the US is still sluggish, unemployment is still high and inflation is ( a) running well below the Fed’s target and ( b) falling. That suffices to justify interest rates at zero until further notice, together with additional large- scale asset purchases — which is what the Fed intends. There are dangers in this policy, to be sure. Quantitative easing is an experiment and involves risks. Mr Bernanke summed these up drily in a recent speech: There’s the risk that long- term interest rates will remain low ( leading investors to recklessly “reach for yield”) and the risk that they won’t (imposing losses on investors when rates rise and bond prices fall). The point is, in current circumstances, every course involves risk. Tightening monetary policy prematurely, as Mr Bernanke has often explained, courts the greatest danger — that of bringing a hesitant recovery to a stop. On abalance of risks, aggressive monetary stimulus still makes sense. Credibility gap Yet the past few weeks showed that the Fed has a serious credibility problem. The central bank’s formal statement this week failed to acknowledge this — it was essentially a reprint of the previous one — but Mr Bernanke’s news conference showed that the Fed is concerned. He triggered the recent rise in long- term bond yields when he said last month that “ in the next few meetings, we could take a step down in our pace of purchases.” You could argue that he was merely stating the obvious, but the markets took it as important new information. In itself, that needn’t have been troubling. The problem for the Fed is that investors didn’t interpret it as good news about the economy but as bad news about the Fed’s reliability. As the economy strengthens, youd expect long- term interest rates to rise. But the recent rise in bond yields coincided with unexciting jobs data and very low inflation — inconsistent with the “ strong economy” story. The implication is that investors thought the Fed was bringing forward its plans not just to taper QE but also, crucially, to start raising shortterm interest rates. Mr Bernanke tried to address this confusion this week. He emphasised for the umpteenth time that the decision on tapering QE is separate from the decision on starting to raise short- term rates. All being well, tapering would probably start later this year, he said, with asset purchases continuing in 2014 until unemployment falls to 7 per cent. Interest rates won’t rise, the Fed has previously said, until unemployment has fallen to 6.5 per cent. And, Mr Bernanke added with fresh emphasis, perhaps not even then: These numbers are “ thresholds” not “ triggers.” So the Fed will merely start thinking about raising interest rates once unemployment falls to 6.5 per cent, and might well choose not to act at that point. Oh, and it’s always possible, the chairman told another questioner, that the unemployment threshold for interest rates ( and presumably therefore also for QE) will be revised — more likely down than up. Is that now clear? Sudden stop In one way, the intention behind Mr Bernanke’s latest elaborations is simple. He means to assure the markets that stimulus won’t be withdrawn abruptly or too soon. QE will be tapered as the labour market strengthens, but not stopped all of a sudden. Moreover, Mr Bernanke repeats, a slower rate of QE is still stimulus — as is no QE at all, for that matter, so long as the Fed hangs on to its existing stock of assets. Raising shortterm interest rates lies even further in the future. Perhaps that message, Mr Bernanke’s main point, got through: The Fed isn’t about to apply the brakes. But if you ask under precisely what circumstances the stimulus will eventually start to be withdrawn — which is what investors want to know, and is the message Bernanke keeps saying he means to impart with his commitment to “ forward guidance” and transparency — the new refinements really don’t help. Isympathise. There are two underlying problems. One is the complexity of the situation the Fed needs to address. Consider just the labour market. You can measure its condition in many ways, and different indicators ( narrow unemployment, broad unemployment, vacancies, hours worked, quits, hirings and so forth) will often give different readings. Central bankers don’t want to be tied to a simple formula when there are so many moving parts — they want to retain some discretion. Second, the Fed has many policymakers, not just one, and they often disagree. Forward guidance has to be vague enough to accommodate not just the complexity of future decisions in unknown circumstances but also the range of opinions on the Federal Open Market Committee. That vagueness, in turn, allows for bond- market glitches like the one of the past few weeks, as investors ask, “ What on earth did the Fed mean by that?” To repeat, the policy is right, and thats the main thing. But Mr Bernanke’s commitment to transparency and forward guidance has made his job harder. If he wants discretion under fire and the luxury of vigorous internal dissent, he can’t expect forward guidance to work as he envisaged. That’s why we’ll be debating what he really meant until he gives his next speech — and that, if youre wondering, is a threshold not a trigger. Bloomberg View

Technicals: Bajaj Auto, Wockhardt, Coal India, Shree Renuka Sugars, Swaraj Engines, Oracle Financial :: Business Line

Bangalore momentum continues to be robust, positive for Sobha :: Goldman Sachs

Property visits re-affirm our positive view
We recently visited property exhibition in Bangalore. Key takeaways: (1)
Sarjapur Road, Hebbal and Electronic City attracted the most attention with
the most number of projects. Sarjapur Road is a residential area and relatively
close to offices, with prices around Rs3,500-Rs5,000/sqft (possession between 1-
2 years). Prices around Hebbal are about Rs4,000+/sqft and it’s a preferred area
due to proximity to tech-parks and the airport. Prices in Electronic City have seen
some pick up after remaining soft due to slower development in the local
infrastructure; (2) Price increase: Projects launched over last 9-12 months have
seen price increases of 10%-25%; (3) Robust demand with 25%-35% of
properties up for possession in the next 24-36 months already being booked,
while about 80%-90% of properties likely to be completed in the next 6-12
months have been sold; (4) Residential rent growing at about 8%-15% yoy,
with yields of 3%-3.5%.
Office absorption data points to strong latent demand
Based on commercial absorption, we estimate steady state residential
demand of about 80mn sqft assuming 100 sqft per employee and a 1.5
worker per household. In addition to this, there is likely to be incremental
demand from retailers, self-employed professionals, government
employees, etc. Against this demand, recent absorption has been around
60 mn sqft indicating latent demand.
Better affordability with strong demand likely to drive prices higher
On our estimates, Bangalore affordability is 15% better than the last 10-
year average. We expect similar affordability levels in spite of recent price
increases on the back of lower interest rates and increase in income.
According to PropEquity, the 3-month average transaction price in
Bangalore for March, 2013 was at Rs4,025/sqft, up 16% yoy.
Fine-tune estimates for Sobha and Prestige for latest prices
Based on our recent property visits/ absorption data, we add new projects/adjust
pricing on existing projects for Sobha and Prestige. Thus, we change our 12-m
NAV based TP for Sobha to Rs541 (from Rs516) and for Prestige to Rs185 (from
Rs174). We fine-tune our FY14E-FY16E EPS estimates by +0.1%-0.6%. While we
believe Sobha could benefit from higher pre-sales and accelerating cashflows,
we think premium valuations for Prestige adequately reflect its ROE.

Technicals -Reliance Industries, SBI, Infosys, Tata Steel, :: Business Line

 

INR- Short-term strength likely :: Business Line

The rupee made an all-time low of 60 on Thursday, after the Federal Reserve confirmed its plan to end the asset purchase programme, which it started in 2008.

The demand and supply is seen deciding the move for the rupee against the dollar .

The recent correlation between the euro and the rupee, and dollar index and the rupee, seemed to have broken.

The Dollar Index slipped from 84 to 80 levels while euro climbed up from 1.29 to 1.34 levels.

This move was not followed by the rupee.

The sync of the rupee with international markets was missing. The only factor which impacted the move was pure demand and supply.

The demand was seen not only from local importers but also from foreign investors who have invested in the Indian bond markets for higher yields. The recent announcement by the Federal Reserve increased the yield difference between the US and Indian bonds, resulting in reduced arbitrage.

The US bond yield has increased to 2.45 per cent from 1.38 per cent in July 2012 , while the Indian 10 year G-sec yield are currently at 7.38 per cent.

The high hedging cost is seen giving lower, in fact negative returns to the investors. The investment opportunities in the US bond market seems more lucrative than the Indian bond market. Hence foreign investors are pulling out money from here and investing back in the US.

The high current account deficit puts further pressure on the rupee. Being a net importer nation, we are dependent on foreign flows.

The internal fundamental problems are acting as major hurdles to revive the investment cycle.

The fact that the flows will further reduce in time to come, is leading to a panic situation in the market.

The rupee has almost hit our expected target of 60 and we continue to maintain our bearish outlook on it. The major factor behind this could be the fresh bull trend that we are expecting in the dollar.

We expect the dollar index to move to 87-88 levels by the year-end. While we continue to see probability of the rupee breaching 60 levels , we expect the rupee to move towards 56-57 levels and correct from there.

(The author is Founder & CEO, India Forex Advisors. The views are personal.)

Sizzling Stocks :: Business Line

A guide to shifting your home loan :: CEO, BankBazaar in Business Line

Want to shift your home loan to another bank?

First, research the market well on interest rates. Some banks charge a different interest rate if the loan amount is less than Rs 25 lakh or Rs 30 lakh. So check if you have got it right on that parameter. Next, speak to your present bank about your intentions to port the loan. Some banks allow a concession in interest rates on payment of a small fee known as the conversion fee. This conversion fee is usually equal to the processing fee charged by other banks. Hence, you may be better off staying with your present bank if the revised interest rate offered by your present bank is the same as the one offered by the new bank.

The other factors to keep in mind include:

Rupee’s date with 60... :: Business Line

The rupee is meandering into the senior citizens zone having already touched 60 levels. It is further expected to hover around that level for sometime since there are no significant announcements or policy decisions from the Government. Globally also, almost all emerging market currencies have taken a beating and are trading at an all-time low against the dollar.

There are reasons galore for this uphill climb — Bernanke’s recent announcement of reducing quantitative easing coupled with weakness in the domestic macro economic factors, world economy going through a rough phase amidst fears of unavailability of cheap liquidity, the actions of Bank of Japan resulting in weak performance of yen. On the domestic front, weak macro economic factors such as poor current account deficit numbers, lack of economic policy reforms, and subsequent sell-off by foreign investors from both equity and debt market, took the rupee to 60 levels.

At present, the rupee is looking weak and is expected to make new lows during the next few trading sessions, before recovering a bit on account of profit-booking. There is hardly any chance of RBI intervention in these conditions. It would be better in the long-term for the economy, if the rupee can find its correct levels for trading. This recent rally has also opened up the rupee’s weakness against other currencies. The rupee is trading weak not only against the dollar but has also depreciated against the pound, euro and yen. Pound and euro are expected to trade near 95 and 82 levels against the rupee in the near future, while the yen is likely to trade around 65 levels against the rupee.

(The author is Regional Director, Alpari Financial Services (India). The views are personal)

As the rupee sinks the WINNERS are... :: Business Line

IT and pharma companies that have a large portion of revenues unhedged will benefit the most

As the rupee sinks the LOSERS are... :: Business Line

Analysts expect short-term pressure from FIIs :: Business Line

With FIIs being net sellers to the tune of Rs 2,094 crore on Thursday and over Rs 25,000 crore for entire June (including from debt markets), what can the Indian markets expect going forward?

WITHDRAWAL FEARS

The US Federal Reserve Chairman Ben Bernanke has indicated in as many words that the inevitable withdrawal of stimulus will happen sooner than expected. “If the incoming data support the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases,” he said at a press conference on Thursday.

According to market experts, the outlook for FII flows would remain muted in the short-term but should look up in the long-term once the risk of rupee slide and volatility is contained.

Motilal Oswal, Chairman and Managing Director, Motilal Oswal Financial Services, said: “I don’t foresee any severe selling pressure from FIIs as the Government is seen acting on containing gold imports, bringing down the current-account deficit as well as on the FDI policies. The RBI too is carefully watching the rupee situation and if it falls further we could see it intervening by going in for a rate-cut as well.”

According to Sudhakar Ramasubramanian, MD, Aditya Birla Money, FIIs being in risk-off mode is likely to continue till the time currency remains tight.

“A daily depreciation of 2-3 per cent in the rupee and an increase in crude by 15 per cent in the last two days would stoke inflation further. Till rupee stabilises to around Rs 57-58 levels, we would remain cautious. Presently market is not reacting to fundamentals but to liquidity and flows.”

Reliance Capital to stop gold sales :: Business Line

Syndicate Bank (Rs 116.4): Sell :: Business Line

`No logic for FIIs to invest in debt as hedging costs dearer’ :: Business Line

The economic logic for foreign funds to invest in domestic debt instruments is withering away as yield differentials are narrowing fast, owing to a steep fall in the rupee, said a senior SBI official.

The official also said looking at the real interest rate and the macro fundamentals of the economy, the rupee has to depreciate by 5 per cent every year.

“The rupee fall is primarily due to (US Fed Chairman) Ben Bernanke’s statement of a possible QE3 slowdown. Also, the US interest rates have gone up of late. If you see yield of 10 year US treasury is more than 2.21 per cent.

Kumar further said while the 10—year benchmark yield in the domestic debt market is hovering around 7.3—7.4 per cent, arbitrage opportunity for the FIIs is fast squeezing in the domestic market because of higher hedging cost due to fall in rupee.

“So, the economic logic in investing here is not there as the hedging cost will be around 6 per cent for FIIs, prompting them to pull out their investment,” SBI deputy managing director and group executive for global markets P Pradeep Kumar told PTI during an interaction.

Currently, the US treasury note for 10 year hovers around 2.1 per cent, while it is around 7.3 per cent for Indian 10—year benchmark yield. However, when FII takes an exposure in Indian bond, it has to hedge against exchange rate risk, which comes around 6 per cent.

So, the effective return for FII comes to 1.3 per cent (7.3 per cent minus 6 per cent) as of now in Indian bonds, in comparison to 2.1 per cent offered in US 10 year Treasury note.

Kumar also said the rupee has to depreciate by at least 5 per cent every year on the basis of macro fundamentals. “In the long—run, the rupee has to depreciate because there is both interest rate and inflation differentials between the US and India,” he said.

FIIs pull out $3 b from debt market so far this month :: Business Line

Overseas investors have pulled out over Rs 17,000 crore (nearly $3 billion) from the Indian debt market in just a fortnight due to weakness in the rupee.

During June 3-14, Foreign Institutional Investors (FIIs) were gross buyers of debt securities worth Rs 4,092 crore, while they sold bonds amounting to Rs 21,213 crore translating into a net outflow of Rs 17,121 crore ($2.98 billion), as per data available with market regulator SEBI.

Market experts attributed the huge sell-off to weakness in Indian currency, which is instrumental in FIIs exiting the debt market as the cost of hedging a volatile rupee is rising and in turn hurting the yield differential the FIIs are working with.

Of late, the Indian currency has been consistently hitting record lows and it slumped to a life-time low of 58.98 in the intra-day trade against the US dollar on June 11. On Friday, the domestic unit had closed at 57.51 against the US dollar. Indian currency had lost around two per cent so far this month.

Debt market investments

FIIs have been aggressive buyers of bonds since the beginning of 2013 on account of higher yields offered by the Government and corporate debt with a net investment of Rs 6,926 crore ($1.5 billion) so far this year.

Besides, steps taken by the Government to ease the FII investment rules by doing away with sub-limits and reducing the withholding tax on debt investments have also helped the segment.

Overseas investors’ net investments had reached a two-year high during 2012, attracting a net inflow of around Rs 35,000 crore in the Indian debt market. Moreover, FIIs have withdrawn Rs 1,458 crore ($244 million) from the equity market during the fortnight.

With this, the total foreign investment in the country’s equity market has reached Rs 81,747 crore ($15.10 billion) so far this year.

As on June 14, the number of registered FIIs in the country stood at 1,759 and the total number of sub-accounts at 6,409 during the same period.

How to FII-proof your portfolio :: Business Line

Reduce your Indian equity exposure, buy US stocks via mutual funds, and lighten up on gilt funds to reduce risks from the end of QE.

TCS-Winning in growth (emerging) markets - a bedrock of differentiation :: JPMorgan

 Emerging markets (or more generally growth markets) are not easy to
penetrate for IT Services players. A cookie cutter or one-size fits all approach
hardly works. IT Services players have to understand the nuances of each
market and yet find common elements across markets to craft specific solutions.
TCS sets the benchmark here and sets the industry template of establishing
credibility across emerging markets. At 20% of its revenues from emerging
markets (over US$2 billion per year), TCS stands alone in setting and executing
on its agenda in emerging markets - a bedrock of differentiation.
 Emerging markets are very much unlike developed markets for IT
Services. They are characterized by much greater component of discretionary/
transformation spending spurred by capex (not opex). The annuity component
of revenues is relatively low. Fixed price is the dominant pricing mechanism in
such contracts, not managed services which works better in recurring-type
projects. To succeed in emerging markets the business model has to be
distinctive, geared towards turnkey/transformation projects. There is a fair
element of packaged-based (ERP-based) transformation solutioning.
 The challenge in emerging markets is to develop scale given the dominance
of project-oriented assignments. To establish scale, IT Services firms have to
be able to work on extracting common elements across markets and creating
solutions around those markets. The government is a fairly large client in
developed markets & e-governance initiatives are common to several emerging
markets. TCS does well at developing common, standardized cores, which can
be applied across markets with a customized system integration layer.
 Presence in the emerging markets is important because they may be leading
the adoption of SMAC (Social, Mobility, Analytics, Cloud). Except for the
cloud in SMAC, TCS finds emerging markets shaping up very well for other
stacks of SMAC namely analytics, mobility and social. Unless firms have their
tentacles entrenched in emerging markets, they could be amiss at adequately
understanding and addressing the SMAC opportunities in emerging markets,
which will likely become mainstream in developed markets with a lag.
 Making margins in emerging markets requires differentiated and
transplantable solution-based models (not the cost arbitrage-based onsiteoffshore model of the developed markets). Commonalities exist (in various
emerging markets) in industries such as power/utilities pertaining to leakages in
distribution & generation of power/energy. TCS makes the model transplantable
by leveraging its modular solutions developed for India and other emerging
markets. We discuss TCS’s emerging market template in detail in this report.