Outlook for July 2014
The month witnessed the 10yr benchmark fall by 10 basis led by high inflation and geopolitical tensions in the Syria-Iraq region. Brent crude touched a high of USD115.6 per barrel as tensions mounted in the Syria-Iraq region. Supply constraints in the corporate bonds kept the spreads compressed. WPI inflation for May came at 6.01% as compared to 5.20% in April led by higher food inflation. The Indian Rupee depreciated and closed at 60.18 against the dollar as on 30 June 2014 led by huge dollar demands by oil marketing companies and banks as crude prices shot up because of increased tensions in Iraq. The fall was however partially offset by FII $ inflows into the Indian markets.
The debt market is expected to take cue from the upcoming Union Budget FY 15 which is likely to be growth oriented. However, El-Nino weather phenomenon may cause deficient rains which could then exert upward pressure on the yields in the first half of the FY 2015. Moreover, the abysmally low expected GDP growth of 4.5-5.0% does not augur well for the economy hence very high interest rates are not expected to be sustainable over long term. We also believe that RBI could start reducing interest rates by early 2015 post their review on monsoons and subsequent impact on food inflation. The absolute levels on fixed income are still remain attractive for long term investors and we also expect good capital gains as RBI starts cutting the interest rates.
Nifty gained ~5% in the month of June (Q1 FY15 Nifty gained ~13%). FIIs remained buyers of Indian equities worth US$ 1.8 bn and DIIs sold Indian equities in the tune of US$ 0.8 bn. (Q1 FY15: FIIs bought US$ 5.8 bn and DIIs sold US$ 2.7 bn). While the market sentiments remained largely optimistic during the month on expectations of reforms, easing of CPI inflation and RBI keeping the Repo rates unchanged. However, some of the optimism was later dampened on concerns about below average rainfall and geopolitical tension in Middle East. The following sectors outperformed the index: Infrastructure & Real Estate, Metals & Mining and EPC/Capital Goods as against sectors such as Consumer, Telecoms and Information Technology which remained laggards for the first quarter of FY15.
The domestic equity market has remained buoyant in the recent past on the back of the strong electoral mandate to the new government. However, going forward the equity market performance would be driven by government’s ability to deliver reforms. We also believe that domestic markets would take a significant direction post the announcement of the Union Budget FY15. Therefore, in the short term we expect equity market to remain volatile. Moreover the upside in the short term remains limited due to mixed macro-economic data points and supply of paper. Sensex valuations at 16.7x FY15 earnings, remain higher than historical average. However, in the long term we believe that India’s GDP growth would reach its potential of high single digits which would then result in equities delivering double digit returns.
INVESTMENT RISK CONTROL FRAMEWORK
The Company recognises that risk is an integral element of investment management and managed acceptance of risk is essential for the generation of value. The Company’s acceptance of risk is dependent on the return on risk-adjusted capital and consistency with its strategic objectives. The Company will endeavor to reduce risks to the extent it is optimal to do so. In general therefore, the Company’s control procedures and systems are designed to manage risk, rather than eliminate it.
To manage the risk effectively, the Company has a three tiered investment structure with varying levels of decision making, which comprises the Board Investment Committee, Executive Investment Committee and the Investment team.
The Board Investment Committee recommends and reviews investment policy and changes thereto, reviews investments and oversees the risk management framework for the investments. The Executive Investment Committee is responsible for building investment strategy, monitoring investment decisions and returns, providing support on regulatory and tax issues and it also approves delegation of authority to the Dealers. The Investment team is responsible for market tracking, investment decisions, investment compliance, monitoring and reporting of risk.
The Company has strong governance framework encompassing segregation of duties and adequate firewalling between Investment and other roles. The Company has code of conduct to prevent insider trading. System used for investment management is seamlessly integrated within and with its peripheral systems with adequate system as well as manual controls. The activities and systems of the Investment team are subject to concurrent audit.
The Company uses advanced risk identification, measurement and management tools to ensure that risk exposure is within the Board approved risk policy.