FIXED INCOME
Review :
Over the last month, global developments played a key role in shaping the yield movements. Global crude prices softened and broke the key barrier of $60 a barrel. Concerns on Greece exiting from the euro zone resurfaced and dented market confidence. Index of Industrial Production (IIP) for the month of October 2014 was seen at -4.2% as compared to 2.8% in September 2014. Consumer Price Index (CPI) and Wholesale Price Index (WPI) were seen at 4.38% and 0% respectively for the month of November 2014. Indian Rupee remained range bound during the month to close at 63. 04 against the dollar as on 31 December 2014.
Outlook:
We remain positive on the domestic bond markets. FII investment continue to remain positive in the Indian bond market. We believe RBI may reduce interest rates in coming months taking cues from the subdued global oil and commodity prices over a considerable time period along with declining inflation in the domestic market However, geopolitical developments will remain a cause of concern especially with the recent heightened concerns on Greece. INR may be a victim of a currency contagion as dollar continues to strengthen and volatility in financial market goes up. This can lead to some pressure on Indian rates
EQUITY
Review:
Nifty lost 3.6% in the month of December (CY 14 Nifty gained 31%). While FIIs turned net sellers of Indian equities worth US$ 0.1 bn, DIIs turned net buyers of equities in the tune of US$ 0.9 bn (CY 14 FIIs bought US$ 16 bn and DIIs sold US$ 5 bn). Nifty reacted negatively in the month of December despite the fall in oil prices (Brent fell by 18%) primarily due to weak global cues and FII outflows. The following sectors outperformed the index: Banks, Media and Capital Goods as against sectors such as Telecoms, Real Estate and Oil & Gas which were laggards in the quarter ending December 2014.
Outlook:
Short term-Neutral; Long term-Positive
In the short term we expect the markets to be range bound on the back of primary issuance, led by government's divestment program for FY15. The upcoming RBI Monetary policy and the Q3 FY15 earnings growth would set the course for the markets in the near future. Nifty valuations at 16x one-year rolling forward earnings remains higher than long term average of 14.5x. However, we believe that the Indian economy is on the cusp of a strong economic growth revival and this coupled with falling interest rates, global commodity prices would result in corporate earnings compounding at double digit, followed by similar returns from equities.
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.
