>Repetitive Pattern of Global Financial Market Turbulence

Summary
■ How should global financial market turbulence be understood?: In our main scenario we anticipate that, while Japan’s economy will momentarily slow in 2H10, it will continue to expand at a moderate pace, supported by recovery of the world economy. For this report, we closely reviewed our risk scenario and examined the history of global financial crises over the last hundred years or so to study the reasons for the repeated turbulence seen in global
financial markets in recent years. This examination led us to identify a pattern where (1)
financial crises are followed by (2) the expansion of fiscal deficits and (3) increased inflationary
pressure. Recent global risk factors (new financial regulations of the Obama administration,
European sovereign risk, concerns of monetary tightening in China) can be placed within this
framework without exception. To conclude, the risks that are currently shaking global financial
markets are not a passing issue but are expected to smolder over the medium and long term
as disruptive factors for the world economy.

Introduction of new financial regulations in the US, European sovereign risk, inflation in China, and higher commodity prices (read in report)

■ Examination of four risks facing the global economy: Building on the study referred to above, we present a multifaceted examination of the following four risks. First, should the
leverage of US financial institutions decrease 10% with the introduction of new financial
regulations by the Obama administration, US GDP would decline 2.8%. Second, European
sovereign risk has the potential of triggering global financial uncertainties. Third, should
inflationary pressure accelerate in China, the world economy may experience a hard landing.
Fourth, should commodity prices increase (the possibility has currently diminished), terms of
trade may worsen for Japanese companies. Land mines are buried throughout the world
economy, and any one of them may go off at a moment’s notice. In conclusion, Japan’s
economy is exposed to a range of downside risks, and its recovery is expected to be weak.

To read the full report: MARKET PATTERN

INDIA STRATEGY: Is it raining enough s enough?

Event
Monsoon 8% below normal: The India Meteorological Department (IMD he IMD) reported that rains in the week end ended ed June 16 were 8% below normal normal. It has also reported that there may be a temporary weakening of the monsoon over the next week week, with no major advance over central and eastern India. Although it is still early days, the q question is: uestion is this a cause for concern? Maybe not not, because there’s no clear pattern pattern; however ; however, monsoon worries may heighten inflation expectations and can dampen sentiment sentiment.

Impact
■ There’s no clear pattern; June does not set the pattern for the entire season season...: ...: Normal rains are defined as falling within 10% of the long long-term average normal. Since 1901, there have been 35 instances when June rainfall has fallen short by more than 10%, and on 24 of these instances the overall monsoon season turned out normal. Also, i in the last 25 years, there have n been five ins instances when June received above tances above-normal rainfall while the remaining months (and the en entire season) were rendered rain tire rain-deficient.

■ …b but can ut dampen sentiment and increase inflation worries worries.. ..: Food ood inflation remains the key concern for the government government, and it has been banking
on a normal monsoon for food prices to ease ease.

■ …and can lead to RBI hiking rates faster than expected… expected…: The latest inflation point of 10.2% YoY was higher than expected, impacted mainly by rise in prices of primary articles articles, while food inflation eased , eased. However, a deficient monsoon could raise worries about a rebound in food inflation. While there is a general expectation of a 2 25 bps hike at 5 the next meeting, any concerns around a persistent high level of inflation can make RBI move on rates much faster than expected expected.

■ ... can also slow down private consumption consumption: High inflation and rising rates could strike a double whammy for priv private ate consumption consumption, particularly urban , consumers. Rural demand was resilient last year but could come under pressure in case monsoons were to worsen.

Outlook
While it is too early to judge, a deficient monsoon can impact agricultural (Khari Kharif) output, inflatio f) inflation, sentiment n, and ultimately private consumption consumption.
Per Persistent high inflation could sistent also prompt RBI to raise rates faster than expected. Such a scenario could impact early cycle consumer discretionary sectors such as autos and telecom and interest rate rate-sensitive real estate. We believe that a an interesting play within consumer staples would be to switch n from HUL (HUVR IN; INR257; TP 210; Underperform) to ITC (ITC IN; INR294; TP 335; Outperform). In past rain rain-deficient years years, we have seen HUL underperformi underperforming relative to the market during the June ng June-September period and ITC outperforming the market (see Fig Figs 5 and 6) 6).

To read the full report: INDIA STRATEGY

>International Conveyors Ltd.: …conveying a robust growth story

Market leader in PVC conveyor belting
■ ICL is the market leader in the Indian PVC mine conveyor belt industry, where it has around 45% market share.
■ ICL is one of the major suppliers of underground PVC Belting for carrying coal & potash, and presently supplies over 150 km of PVC belts of various widths and strengths to underground coal mines in India.
■ With increasing focus on the underground mining by the domestic players, ICL is set to corner a sizeable share of the underground PVC belting business.

Stringent testing resulting in durable and quality products
■ ICL’s state of the art testing facilities ensure stringent quality control for conveyor belts at each and every stage of production process.
■ ICL’s conveyor belts are 50% more durable than the conventional conveyor belts, resulting in a superior value for money proposition.
■ The company’s products are approved by the respective authorities in India, US, Australia, Canada and South Africa — thus providing testimony to the quality of the products.

Superior products and customization created a loyal set of customers
■ The company customizes its R&D as per the customers’ requirement, as well as provides onsite training and demonstration at customers’ premises, thereby extending its services beyond the transactions.
■ The customization and product quality resulted in a high proportion of repeat business from the existing customers of ICL.

Technical capabilities acting as an entry barrier
■ The technical knowhow of manufacturing solid woven fabric reinforced PVC impregnated and PVC covered fire retardant, anti static conveyor belting requires atleast 5-6 years’ gestation period. Hence, ICL’s technical prowess works as an entry barrier for potential new entrants in this field.

To read the full report: INTERNATIONAL CONVEYNORS

INTEREST RATE STRATEGY: Steep curve appeals

• Rate hikes in India no longer mean higher yields on longer-term Gilts

• The future path for short rates implied by the yield curve is steepen enough; it already implies a return of policy rates to pre-crisis levels

• Further rate hikes will mainly bring a flattening of INR yield curves; upward pressure on longer-term interest rates will be minor

• India is one of the few local-currency government bond markets where positive total returns in 3Q10 are expected

• We recommend investors buy IGB 7.02 08/17/16 at a yield above 7.6%. The expected 90-day total return is between 1.80-2.8%

To read the full report: INTEREST RATE STRATEGY