Outlook for March 2015
The new Government presented its first full year budget on February 28 amidst lot of expectations from the market and against the backdrop of a nascent recovery in the economy. As expected, the FY15/16 budget maintained the government’s ongoing push toward supply side reforms, a business friendly tax environment, and infrastructure spending boost, while slightly relaxing the deficit reduction plan. On the revenue side, the key announcement was a phased cut in corporate income tax from 30% to 25%. Support for manufacturing was demonstrated through a 25% to 10% cut in royalty and fees for technical services. The General Anti Avoidance Rule (GAAR), was deferred by two more years. Wealth tax was replaced with an additional 2% surcharge on high income individuals. Excise tax and service tax rates on some items were raised, with the expectation that these measures would bring in an additional 0.3% of GDP worth of revenues. On the spending side, subsidy reduction is seen to continue on the back of lower oil prices and changes in pricing and transfer policy. On structural reforms, we welcome provisions to move toward a bankruptcy court, an independent debt management unit, a monetary policy committee for the RBI to deal with a formally mandated inflation target, and incentives for reducing black money in the economy. Overall, the budget was welcomed by the market owing to some realistic assumptions. Index of Industrial Production (IIP) for the month of December 2014 was seen at 1.7% as compared to 3.8% in November 2014. Consumer Price Index (CPI) and Wholesale Price Index (WPI) were seen at 5.11% and -0.39% respectively for the month of January 2015. Indian Rupee remained range bound during the month to close at 61.84 against the dollar as on 27 February 2015.
We remain constructive on bonds and expect bond markets to react positively to the budget. Even though the government announced a higher than expected fiscal deficit target of 3.9% (as against expectation of 3.6%), the gross borrowing figures at `6 trillion were better than market expectations. We believe RBI will reduce interest rates by further 0.75% by December 2015. Inflationary concerns are expected to remain subdued with anaemic domestic growth and soft crude prices. Supply demand dynamics will also help the government securities market as there are no scheduled auctions of government securities will get over in February and there is supply till the start of the next financial year. These factors will keep market sentiment positive. However, geopolitical developments will remain a cause of concern.
Nifty gained 1% in the month of February (FYTD Nifty gained ~33%). FIIs remained net buyers of Indian equities worth US$ 1.4 bn and DIIs turned net buyers of equities in the tune of US$ 0.3 bn after being sellers in the previous month. (FYTD FIIs bought US$ 16 bn and DIIs sold US$ ~4 bn). The market sentiments remained subdued during the month due domestic and global factors, such as: surge in bad debt provisions by few domestic banks, disappointing Q3 FY15 earnings, rising global oil prices (MoM Brent gained ~18%), uncertainties surrounding the outcome of the Union Budget along with concerns of Greek exiting Eurozone. The Union Budget FY 16 presented by the government focused on enhancing growth by accelerating higher infrastructure spends while maintaining fiscal prudence. The FM also provided the roadmap for fiscal consolidation and GST implementation along with announcements on revision of corporate tax rate which cheered the market sentiments. The following sectors outperformed the index: Cement, Real Estate and Finance as against sectors such as Oil & Gas, Telecoms and Media which were laggards for the three month period ending February 2015.
Short term-Neutral; Long term-Positive
In the short term we expect the markets to be range bound on concerns surrounding the implementation of reforms agenda, supply of paper (primarily GoI’s divestment program) and global risk sentiments. Nifty valuations at 17.5x one-year rolling forward earnings remains higher than long term average of 14.5x. However we believe that the robust combination of benign global commodity prices, improving domestic GDP growth, falling interest rates and falling corporate taxes along with stable currency would result in corporate earnings compounding at double digit, followed by similar returns from equities over the long term.
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.