>The Global Economy, From Recession to Recovery (GOLDMAN SACHS)

Global growth has continued to improve and it now appears that the deep recession that began in the US in late 2007 and then spread to many other countries has finally ended. Key measures of financial stress have improved and risky assets have staged impressive rallies since mid-March. Looking forward, the global economy is seeing increasing differentiation between the G3— where the growth outlook remains fragile—and robust growth in most emerging markets (EMs).

Indeed, the big story for EMs during the crisis appears to be that there was no big story: by and large, their strong fundamentals allowed them to weather the shock better than most had expected. We forecast that EMs will grow by 2.8% in 2009 and by 7.3% in 2010. In contrast,
among advanced economies, we expect GDP to decline by 3.2% and increase by 1.9% in 2010. For the world as a whole, we are projecting GDP to decline by 0.9% this year and then rebound to 4.1% next year, up from our estimates of -1.2% and 3.5% published in the previous
issue of the Global Economics Analyst.

In the US, we expect growth to accelerate to 3%qoq annualised in 2009H2 on the back of fiscal stimulus, a pick-up in housing construction and inventory restocking. However, growth is likely to decelerate to 1.5% by the second half of next year as fiscal stimulus fades, investment spending continues to decline and consumption growth remains weak in the face of high unemployment. Given this anaemic recovery, we expect the Fed to keep the Funds rate near zero at least until 2011.

In Euroland, our latest forecast sees GDP declining by 3.8% in 2009, an improvement over our earlier forecast of -4.4%. Growth is likely to have turned positive in Q3 and should average 1.2% in 2010. We think the ECB will start ‘tightening by stealth’ over the next few quarters by draining liquidity from the overnight market, and then begin to raise policy rates in the second half of 2010. We expect the UK economy to contract by 4.1% in 2009. However, financial conditions have eased much more in the UK than in continental Europe, which should help propel growth to 1.9% in 2010.

Although GDP growth in Japan turned positive in Q2 thanks to a strong contribution from net exports, domestic demand remains quite weak. We expect GDP to decline 5.7% in 2009 and grow 1.4% in 2010 and Japan’s balance of payments to continue to deteriorate. In the light of this difficult economic outlook, the BoJ is likely to keep the policy rate at 0.1% for the foreseeable
future.

To see full report: GLOBAL ECONOMY

>MONSOON 2009 (MOTILAL OSWAL)

Pradesh Bhraman – Revisiting rural India

As the 2009 south-west monsoon comes to an end, we try and assess its impact on crop output, farm income and the fallout on consumer demand. Over the past one month, we visited three major crop producing states - Uttar Pradesh, Andhra Pradesh and Madhya Pradesh - to gauge the ground reality. Our visit involved insightful interactions with farmers (small and large, rain dependent and otherwise), auto/tractor dealers, fertilizer dealers and FMCG distributors (of every FMCG company in our coverage and several other unlisted players). Following are the key takeaways:

■ Huge variations in monsoon impact; irrigation facilities the key determinant
We observed huge variations in standing crop not only among various districts but also within the same village due to differences in irrigation facilities. The fields which are close to river valleys/have good irrigation facilities have seen very little impact. We note that places where sowing/replanting has failed would see sharp declines in output.

■ Nominal agri GDP unlikely to get impacted
We estimate 2% increase in nominal agri GDP even with 6-7% decline in real agri GDP in FY10. Late showers in August have significantly improved the prospects of the Rabi crop. Also, GoI has increased allocation to NREGS (National Rural Employment Generation Scheme) by Rs100b, which would provide much needed relief to landless laborers/marginal farmers. We expect medium and large farmers (>4 hectares of land) to be better off due to higher crop prices.

■ Small/marginal farmers to lead consumption curtailment/downtrading
Marginal and small farmers, who are likely to witness income erosion, would cut consumption/downtrade in categories like soaps and detergents. They would postpone big ticket spends like marriages and durables. Sales of paints, bikes and new mobile connections have suffered in some areas within the regions that we visited. However, we expect higher spends on durables, automobiles and housing by medium to large farmers, who would gain from higher crop prices.

■ Near-term pressures; strong rebound likely in FY11
Drought years in the past have seen good rainfall in the following year, as El Nino is followed by La Nina, which boosts rainfall and crop output. History of droughts in the past 30 years suggests that overall GDP growth in the year following the drought year is 170-590bp higher. A normal monsoon in FY11 would result in bountiful crops and increase in demand.

To see full report: MONSOON 2009

>KARNATAKA BANK (EDELWEISS)

Stepping up the pace of growth

■ Rise in CD ratio and dip in cost of funds to boost NIMs H2FY10 onwards Karnataka Bank’s (KBL) NIMs are set to expand on the back of increase in the credit-deposit (CD) ratio and decline in cost of funds. We expect NIMs, which bottomed in H1FY10, to increase from below 1% to over 2% by FY10E as: (i) strong disbursement growth will propel the CD ratio from 55% currently to 70% by FY11E; and (ii) re-pricing of high cost deposits will drive down cost of funds from Q2FY10 by ~50bps by FY11E.

■ High credit growth trajectory of 25% plus likely over FY09-11E KBL had adopted a conservative stance on advances through FY09, growing them at 11% Y-o-Y and steadily reducing lending to sensitive sectors. Management, however, intends to move to a strong credit growth trajectory of ~25% CAGR over FY09-11E via the following roadmap: (1) lend in consortium that enables faster and quicker disbursements; (2) follow the hub-and-spoke model which enables faster turnaround time and better pricing; and (3) increase advances to the agriculture segment and fulfill priority sector commitments. The bank already has a strong sanction pipeline which will enable it to achieve targets for the year.

■ Strong operating efficiency and comfortable provisioning coverage The bank has enjoyed high operating efficiency reflected in low opex/assets (at 1.7%) compared to the industry and it is likely to further decline by 15-20bps to 1.5% by FY11E on back of strong balance sheet growth and modest expansion in branches and staff costs. Asset quality has witnessed improvement since FY04, with slippages seeing a secular down trend declining to 1.5% by FY09. KBL’s provision coverage stands comfortable at >70%, one of the best in the industry.

■ Outlook and valuations: Attractively priced; re-initiate with “BUY” We believe KBL is an attractively priced bank compared to its peers at 0.9x FY11E book and 6.9x FY11E earnings, delivering sustainable RoEs of around 16-18%. Given its extensive reach in South India and the non-promoter holding structure, we believe KBL offers an attractive franchisee for potential new entrants in the banking system. All these make a strong case for the stock to re-rate to peer
group valuation. Hence, we re-initiate coverage on the stock with a “BUY” recommendation and rate it ’Sector Outperformer’ on relative return basis.

To see full report: KARNATAKA BANK

>INVESTORS EYE (SHAREKHAN)

INDEX

• Pulse Track >> IIP sustaining growth momentum
• Stock Update >> Housing Development Finance Corporation
• Stock Update >> Axis Bank
• Stock Update >> Sintex Industries
• Mutual Fund >> What’s In—What’s Out

To see full report: INVESTOR'S EYE