The World This Week - 22nd June to 27th June, 2015

The World This Week - 22nd June to 27th June, 2015

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  The World ThisWeek June 22 – June 27, 2015
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  Equity View: The momentof truth has finally arrived! Although it is 2 more days to go for June 30th but as widely expected, the Greece central bank has imposed capital controls and also control on withdrawals by its citizens to about 60 Euros in a day and absolutely no capital can flow out of Greece. During the first part of last week one had expected some kind of agreement between the creditors and the government of Greece however as the latter part unfolded it seemed that the differences between the two parties were as wide as they were ever before. On 30th June, 1.6 Billion Euros of IMF repayment is coming up for Greece. Although the amount in itself is not as big but if a borrower is unable to pay, it enters into default and that triggers cross default clauses, even for account that he is regularly servicing and the lender has to start putting it under NPA. So default is not a benign term! The moment you mark exposure to a particular borrower in default then you basically have to provide for it and the banks and financial institutions primarily in the Europe area are running low on capital due to more than 5 years of recession. If further stress is put on them to provide additional capital due to this default they can themselves come into trouble which is the central concern of any default especially a sovereign. Beyond that, on July 20th there is another payment of 3.5 billion Euros to be made by Greece. However since the Greek government quite belatedly has gone in for a referendum proposal and unfortunately the government itself is guiding its citizens to vote for a ‘NO’, this referendum will happen on July 5th . As of date we understand that the lenders are not in a mood to extend the credit facilities to Greece till the results of the referendum are out by 5th or 6th . However we think good sense will prevail and lenders might think of extending credit facilities since this referendum will actually decide over the longer term whether Greeks (common citizens of Greece) indeed want to be in the Europe. So expect uncertainty to prevail for another 7-10 days. Immediately one needs to see 2 things - One is what happens to the Greek banking system where citizens are queuing up to take their money out. Capital control rules have been imposed. As of now the European Central Bank is unwilling to increase the Emergency Liquidity Adjustment which is basically similar to adjusting the credit given to a member bank by the central bank. Two is what happens to the larger proposal to basically increase the credit facilities or to relax the terms for the Greek government. That is the central bone of contention; therein again the main point of disagreement between the Greek government and the lenders is the lenders want taxes to be increased and spending to be cut. Now Greece economy has contracted by about 25% in the last three years, so the concern is that if the taxes are increased the only performing parts of the economy which is tourism which contributes about 20% might be hit hard. On the other hand if spending is decreased primarily in the form of cut in pensions and wages it might lead to even more poverty. However the argument from the lenders side is that Greeks for a very long period of time have been accused of being less than productive compared to their peers in Europe and the larger parts of the world considering their relative economic prosperity. Moreover the organized sections of the industry there have cornered very hefty disproportionate benefits in the form of pensions and wages which must be rationalized. So it is a classic dilemma where if any society or government or people start living beyond their means beyond a point in time it will come back to bite
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  you. So themoment of truth is there for the Greeks to decide. For the time being the credit facilities might be extended for another 7-10days considering the fact that they have already waited for 2 years. In terms of equity strategy in Asia, this is a situation beyond control it becomes important to manage the risk of your trades or investment. The full impact of Greece exit is not priced into the markets, so the risk reward ratio is 2:1 which means that for every 1% rise in the market that you would see if Greece were to stay in the Euro, if Greece were to exit you might see a 2% decline. It is not a very horrible risk reward but this is something that investors must not ignore that this is an outcome that has not been priced in. Most importantly since the beginning of this, market was factoring in that Greece would stay back. It actually contributed to about 250 points to Nifty, that is something that might be a risk if the market perceives that the exit will happen and of course rest of the events are something we cannot model at this point in time except to manage our trades. That can happen in the markets not only in India but globally also that 2-3% sort of corrections can be expected in this week alone. Because the referendum in on a Sunday, so only on Monday one will come to know exactly what will happen. Also the European ministers are stating that most probably there will be a revolt against Cyprus, the Greece PM and probably one can say a Yes in the referendum. If that happens the markets have to stabilize by next week, but all in all do not be surprised if one has a 3-5% correction in the coming week. The strategy once again would be to be focused on lower beta stocks, on defensive sector which also are quasi low beta stocks. So sectors like FMCG once again will rule the roost, to some extent pure automobiles also will outperform. One has to temporarily avoid sectors who have a high Euro exposure because Euro as a currency can actually give you negative impact so to some extent IT companies who are heavy in Euro, Pharmaceutical who are heavy in Euro and even Auto components may be avoided for the time being.
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  News: DOMESTIC MACRO:  FDIinflows into India jumped 112% in April to $3.6 bn from $1.7 bn in the year-ago period.  Foreign investment outflows from India plunged 81.38% to $1.75 bn during 2014-15,compared with $9.4 bn in 2013-14.  Prime Minister Narendra Modi unveils three mega flagship schemes – the Smart Cities Mission, Housing for All by 2022 and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), aimed at developing cities and towns as "new engines for growth"; the Centre commits itself to spending Rs 4 lakh cr on these missions over the next 5-6 years.  Government proposes income tax benefits for people making payments through credit or debit cards and doing away with transaction charges on purchase of petrol, gas and rail tickets with plastic money.  India's foreign exchange reserves rose by $ 1.17 bn to a new high of $ 355.459 bn during mid June. GLOBAL MACRO EURO  European Central Bank increases its funding lifeline to Greece's banks to around 89 bn euros, allowing the country's banks to stay open as Athens inches towards a deal with creditors.  Euro zone manufacturing PMI came in at 52.5 in June compared with 52.2 in May, while services PMI rose to 54.4 in June compared with 53.8 in May; composite PMI was 54.1 in June compared with 53.6 in May. United States  US gross domestic product fell at a 0.2% annualized rate in the March quarter, revised from a previously reported 0.7% drop, and compared with 2.2% growth in the December quarter.  US existing home sales surged up by 5.1% to an annual rate of 5.35 mn in May from an upwardly revised 5.09 mn in April.  US Services PMI was 54.8 in June compared to 56.2 in May; the composite PMI was 54.6 in June, down from 56.0 in May. China  China to invest $80 bn in 193 major domestic aviation projects this year.  People's Bank of China to moderately increase short-term liquidity in the banking system through issuing reverse repos to stabilise market expectations.
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  Indices: Date Sensex MidcapAuto Bankex CD CG FMCG HC IT Metals O&G Power Realty Teck 22/06/15 27,730 10,644 18,746 21,022 10,638 17,243 7,626 16,238 10,831 9,340 9,897 2,032 1,420 6,098 23/06/15 27,804 10,652 18,772 21,091 10,592 17,486 7,647 16,261 10,714 9,500 9,980 2,037 1,425 6,051 24/06/15 27,730 10,617 18,622 21,047 10,533 17,387 7,674 16,376 10,680 9,351 9,889 2,030 1,412 6,019 25/06/15 27,896 10,690 18,787 21,215 10,524 17,756 7,633 16,394 10,575 9,385 9,983 2,050 1,427 5,981 26/06/15 27,812 10,686 18,865 21,059 10,692 17,558 7,613 16,425 10,719 9,300 9,900 2,037 1,440 6,025 0.29% 0.40% 0.63% 0.17% 0.50% 1.83% -0.17% 1.15% -1.03% -0.43% 0.02% 0.24% 1.39% -1.20% Commodities and Currency: Date USD GBP EURO YEN Crude (Rs. per BBL) Gold (Rs. Per 10gms) 22/06/2015 63.50 100.93 72.31 51.73 4022 26716 23/06/2015 63.64 100.41 71.62 51.46 4023 26509 24/06/2015 63.66 100.50 71.31 51.38 4102 26448 25/06/2015 63.61 99.79 71.16 51.40 4042 26322 26/06/2015 63.60 100.09 71.23 51.54 4020 26349 -0.15% Rupee Depreciated 0.84% Rupee Appreciated 1.53% Rupee Appreciated 0.37% Rupee Appreciated -0.05% -1.37% Debt: Tenor Gilt Yield in % (Friday) Change in bps (Week) 1-Year 7.67 -2 2-Year 7.84 2 5-Year -8.02 13 10-Year 7.82 11
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  Phani Sekhar PonangiKaushik Dani Jharna Agarwal Nupur Gupta Ridhdhi Chheda Disclaimer The information and views presented here are prepared by Karvy Private Wealth (a division of Karvy Stock Broking Limited) or other Karvy Group companies. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned here, investors may please note that neither Karvy nor any person connected with any associated companies of Karvy accepts any liability arising from the use of this information and views mentioned here. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above- mentioned companies from time to time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws once the new Direct Tax Code is in force – this could change the applicability and incidence of tax on investments Karvy Private Wealth (A division of Karvy Stock Broking Limited) operates from within India and is subject to Indian regulations. Karvy Stock Broking Ltd. is a SEBI registered stock broker, depository participant having its offices at: 702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051 . (Registered office Address: Karvy Stock Broking Limited, “KARVY HOUSE”, 46, Avenue 4, Street No.1, Banjara Hills, Hyderabad 500 034) SEBI registration No’s:”NSE(CM):INB230770138, NSE(F&O): INF230770138, BSE: INB010770130, BSE(F&O): INF010770131,NCDEX(00236, NSE(CDS):INE230770138, NSDL – SEBI Registration No: IN-DP-NSDL-247-2005, CSDL-SEBI Registration No:IN-DP-CSDL-305-2005, PMS Registration No.: INP000001512”