Why The Gold Price Rally Will Continue

- "Gold prices hit a new all time nominal high this week. We believe this rally has further to run. Indeed at the end of June we highlighted why gold prices would need to surpass USD1,455/oz to be considered extreme in real terms and hit USD2,000/oz to represent a bubble."

- "For the time being we believe the drivers of this rally are fundamental rather than speculative. However, we admit physically backed gold ETFs are playing an important role in the gold market."

- "However, we view interest rate and exchange rate trends as gold price bullish. Indeed history would suggest a collapse in the US dollar can not be dismissed out of hand. Moreover central banks have become a new source of gold demand while gold mining companies remain committed to closing their hedging programmes."

Yen Intervention and Yuan Adjustment

- "Japan’s intervention in foreign exchange markets last week was a response to the slow pace of CNY appreciation and the yen’s rapid appreciation. Unlike the yuan, the yen is not an undervalued currency but it had appreciated faster than other Asian currencies this year."
- "China’s revealed preference for real appreciation via inflation rather than nominal exchange rate appreciation is paying off. Wages are rising rapidly and the current account surplus is falling as the real effective exchange rate rises. We forecast a current account surplus of only 2.7% of GDP next year."
- "The appropriate metric for assessing currency values is the real effective exchange rate. On that basis, most Asian currencies appear undervalued, but the CNY’s undervaluation is relatively modest in comparison with some of its neighbours. We consider two estimates of the deviation of the real exchange rate from equilibrium and the larger estimate is only 13.5%. That implies a 24% appreciation in CNY/USD over the next five years, which is consistent with our forecast. But that may overstate the necessary extent of CNY appreciation."

French fiscal policy: A timing issue

- "France’s upcoming parliamentary discussion of the budget bill for 2011 probably is the last window of opportunity to set the country’s public finances on a sounder footing before the perspective of the presidential and parliamentary elections of 2012 starts affecting fiscal decisions too directly to make bold decisions likely."
- "The French government seems intent on delivering only a modest structural consolidation for next year. The political cost of the pension reform – which seems to be on track – add to a generally diminished popularity of the current administration and make any bolder effort very difficult."
- "In our Euroland Review and Outlook, we look at Ireland’s efforts to burnish its early-move advantage. Ireland followed up the well-received Anglo restructuring statement with a signal of a larger than expected savings package in the approaching 2011 Budget. We also look at this week’s euro area data which point to the emerging slowdown."
- "We highlight the so-called ‘European Semester’ element of Europe’s ongoing fiscal and economic government reform process. This includes the prescreening of budgets before they are approved in national parliaments."
- "In our UK Review & Outlook we look at the latest data, including retail sales, and the latest commentary from MPC members. The possibility of further policy easing was mentioned. While our view is for the beginning of a gradual rise in UK interest rates during the course of 2011, continued weakening in the global and domestic economy could raise the risk of another round of quantitative/credit easing."
- "Finally, we review the latest inflation news across the euro area, UK and US and look at the SNB’s decision to leave rates on hold. The SNB statement was, in our view, dovish, supporting the view that the central bank will not tighten policy until the start of next year at the earliest."

Risk management in agriculture: Towards market solutions in the EU

- "Volatility in agriculture is expected to increase – production volatility, mostly driven by climate change as well as price volatility, due to higher production volatility, a tight supply/demand balance, volatile energy prices, and other factors."
- "The responsibility to manage risks is increasingly in farmers’ hands. The EU’s Common Agricultural Policy is undergoing major reform towards greater market orientation. Tighter budgets as well as environmental and trade consider-ations have led to the reduction of market interventions. The post-2013 CAP is currently being discussed along those lines."
- "Agricultural producers will need to rely more heavily on market-based tools. We investigated the main risk management tools available for EU farmers pre-dominantly in the light of their effectiveness to stabilise their income – also taking into account, wherever possible, their impact on the environment and their effect on food security. EU farmers will benefit from a growing variety of private risk management tools in the future. Most likely, they will increasingly use financial derivatives and insurance products."
- "The derivatives market is still limited in Europe but developing, and the potential is significant. Public support may encourage the use of derivatives to cope with price volatility by promoting training on these products, ensuring availability of information and ensuring judicious regulation: this will be essential so that commodity derivatives keep serving their purpose of price discovery and hedging."
- "The insurance market is also expected to develop, to cope with production risk and mitigate financial risk. The current insurance level in the EU is generally insufficient to smooth major income reductions in bad years."
- "For the sake of environmental sustainability, thus long-term food security, it is important to reward farmers for delivering public goods: biodiversity, water quality and availability, air quality, soil functionality, climate stability, etc. Key to shifting to a more sustainable agriculture (until other actions are taken to price these externalities), payments for the provision of public goods can also contribute to stabilising farmers’ income."
- "All in all, public policy could be most useful in increasing the risk management ability of farmers. Any extension of the public safety net will reduce the incentives for farmers and other agents along the food supply chain to manage their risks effectively through derivatives, private insurance or on-farm strategies like production diversification. Policies need to empower farmers to take their own risk management decisions and to have access to a diversity of instruments and strategies. More direct interventions are likely better kept as a means of last resort and restricted to measures which do not act at the expense of the rest of the world or of environmental sustainability."

The Importance of M

- "Money matters, but it is better to look at money flows instead of money stocks, and sometimes it is necessary to look at the counterpart of money, credit, to see what is going on."
- "We argue in this note that if the equation of exchange—which is at the heart of the Quantity Theory of Money (QTM)—is recast in terms of money flows rather than money stocks, then the velocity of money proves to be more stable, and changes in money have more direct implications for nominal activity. We find empirical support in the euro area for this relationship. Latest money flow readings still point to an expansionary impulse, though its strength may be receding in coming months."
- "When non-bank sources of credit are creating non-bank money in significant amounts, as is the case in the US or the UK, measures of money relying on bank balance sheet data no longer capture actual monetary developments. In this case, it is necessary to analyse the counterpart of money, credit, as we have done with our credit impulse measure over the last two years. The latest data suggest that the credit impulse in the US and the UK has remained positive, giving continuing support to the recovery."
- "An important task for policy makers is to smooth the credit (and hence money) cycle, among other things by countering both excessive optimism and excessive pessimism in credit markets. Policy makers failed to do the former during the credit boom, but they were quick off the mark doing the latter when the bubble burst. After excessive optimism and pessimism a return to realism is now needed. As this happens, growth may well fall short of the levels reached during the credit boom as fewer but economically more viable projects will be funded. Monetary policy that ignores the diminished potential of the economy, risks fuelling another money and credit driven cycle."

Bad days for the basis

- Resi: Bad days for the basis
- CRE: Introducing the DB quality score "The DB quality score can be a useful benchmark in assessing the potential volatility of collateral and bond cash flows."
- Consumer ABS: Positive momentum in autos shows support for lending in middle-risk credit tiers "Auto lenders more comfortable with sector have started to reach further down the credit spectrum."
- Economics: Exports a key positive contributor to economic performance "Strong capex and robust exports will together keep real GDP growth modestly above trend."
- Rates: Who’s afraid of buying Treasuries? "We remain constructive on yields. Primarily this reflects anemic growth with outright deflation risk, but not a double dip view."
- Agency MBS: A new taste of seasoning "Seasoned 30-year 5.0%s look rich while low pay-up 5.5%s and 6.0%s appear attractive."
- Non-Agency MBS: Competing risks in jumbo MBS  "Interest rates have reached the point where jumbo MBS investors should expect a jump in old fashioned refinancing while credit performance continues to deteriorate."
- CRE: Loan in the spotlight: One Alliance Center "One of the larger specially serviced loans faces significant tenant rollover and refinance risk."
- Consumer ABS: Assessing the spread pick-up for FFELP student loan ABS vs. credit card ABS "Current levels argue for further FFELP tightening."

Venture capital adds economic spice

- "Venture capital injects economic dynamism: An increase in VC investments of 1‰ of GDP is statistically associated with an increase in real GDP growth of 0.30 pp. Early-stage investments have an even bigger impact of 0.96 pp."
- "The direction of causality is not always easy to establish. Yet, tests for Granger-causality in the biggest market, the US, suggest that causality runs from VC-investments to growth. There is also substantial micro-evidence that supports this view."
- "Exuberances drive much of the correlation. Taking account of the dotcom boom and bust as well as of the financial crisis leads to lower coefficients."

The Widening Growth Gap

- Emerging Markets and the Global Economy in the Month Ahead "Fears of a double-dip recession and the risk of deflation in the US have risen appreciably in past couple of months. Although our own baseline forecast has not yet moved that far after accommodating recent economic data releases, the downside risks have clearly increased. However, we have been of the view that the main threat to EM decoupling is a credit-crunch-driven sharp growth deceleration and that EM growth (and assets) would continue to outperform otherwise. Recent asset price performance reinforces our view. Since valuations are now less compelling, however, we have narrowed long positions in selected Rates, FX and Credit markets"
- EM Rates -- The Last Drop "We examine whether EM rates have become more sensitive to global drivers and identify those curves which could still benefit from US rates falling further. While most curves would benefit under this baseline scenario, not all will fare equally under risk scenarios. We examine behavior under "double dip" and a mean-reverting "old normal" highlighting the risks in (long-end) Brazil and Turkey. On the other hand, while many of the other curves are similar in terms of exposure to USTs, individual factors lead us to favor curves where further cuts cannot be ruled out (Mexico and South Africa) or risk-adjusted carry still appears high (Poland)."
- EMFX: Protection in Risk Reversals "The combination of unusually low betas and flat risk-reversals (RRs) suggests that we could see a double-whammy of overshooting in both spot and skews should macro data deteriorate. We hence look at defensive risk-reversals in EMFX in currencies where the hedges have highest payout ratios and the currency betas retraced the most."

- Opportunities in Sovereign Credits "We remain constructive on the performance of EM sovereign credit despite our baseline scenario of lower UST yields, as we believe strong inflows will continue to more than offset the negative impact of lower UST yields on credit spreads. We also present our country-specific views on the major sovereign credits and discuss trading opportunities within each of them."

- Revisiting Financial Condition Indices in Latin America "We update our estimates of financial conditions indices in Latin America. The indices include not only real interest rates but also other financial indicators. Our findings suggest that financial conditions in Colombia and Mexico are rather loose, while those of Argentina, Brazil, Chile and Peru are closer to neutrality."

- The Local Markets Analytics Package (LMAP) Expands to Asia "Two years ago we launched our Local Markets Analytics Package (LMAP), covering six local markets in EMEA and two in Latam. We are delighted to now announce the biggest enhancement to the package, with the inclusion of ten Asian local markets, taking the total tally of markets covered to 21. In this article we present an updated guide to the LMAP, building on the original guide from 2008, but with additional material to address some of the questions we have received from readers over the past two years."

Household deleveraging poses near term risks to consumer spending

- "Household deleveraging has been progressing at a substantial pace. The question is how much further it has to go, and the answer to this question is crucial to the outlook for GDP growth."
- "Progress on the debt side of the household balance sheet has been impressive. We estimate that the debt/income ratio has fallen from a peak of 136% of income in 2008 to less than 120% currently, and at the current rate of personal saving and loan defaults is on track to fall to near 100% by the end of next year. This implies that the household debt service ratio will fall below the range it has been in for several decades."
- "Movements in the saving rate, the key link between the household balance sheet and consumer spending growth, depend not just on debt and debt service, but also on the asset side of the balance sheet, or more specifically on movements in wealth--the gap between assets and debt. Household assets are up from their crisis lows thanks to the bounce in the stock market, though they have taken a hit in the middle of 2010 and remain far below their pre-crisis peak."
- "The key issue is how much more households will feel the need to adjust their saving rate up (and accelerate debt declines for a while longer) in reaction to the large net loss in wealth that has occurred over the past several years. We tested a wide range of specifications of the causal relationship between wealth and saving, and we find that households appear to respond to a three-year moving average of their wealth to income ratio relative to a longer term wealth goal that is best defined as a 20-year moving average of the wealth to income ratio."
- "Given current expected trends in household assets and debt, this relationship sees the saving rate rising further, into the 7-1/2 to 8% range by late 2011, after which it begins to recede slowly. The implication is that consumer spending will continue to be a significant drag on growth through next year, after which it will become a modest engine of growth (consumer spending growing faster than income). This finding reinforces the notion that the Fed will be on hold at least through 2011."

Enterprise 2.0: How companies are tapping the benefits of Web 2.0

- "Web 2.0 is currently the subject of much debate in (expert) public circles – with one of the driving factors being the increasing private use of social media. The growing popularity of the phenomenon – not only among young people – confronts decision-makers with the question of whether they want to deploy Web 2.0 tools actively in their own company. Companies can no longer ignore Web 2.0: the fact that the young generation is making a habit of Web 2.0 indicates that its importance will increase in future."
- "Today, 20% of the companies in the US and Europe use blogs, forums or wikis for internal or external purposes. Web 2.0 applications offer the opportunity to develop networked exchanges and consolidate knowledge. Web 2.0 builds on the input of the participants. In this way, Web 2.0 tools offer recognisable advantages over Web 1.0 communication and traditional knowledge management."
- "Web 2.0 use is predicated on a corporate culture that is big on openness and transparency. Companies must ask themselves the basic question of whether they are ready for this. Clear targets and supportive management are key to the success of Web 2.0 projects."
- "Sequencing: first in-house, then externally – first light-touch, then process-oriented. Companies often start to experiment in-house with Web 2.0 tools before they actively involve their customers or suppliers. Communication and marketing are still the primary objectives linked with Web 2.0 today – but there is also potential to be tapped in the areas of innovation and collaboration."
- "External use: experiments with social networks and microblogging. Frequently, companies recycle information produced for traditional corporate communication on these platforms. But this has little impact on corporate processes and their communication culture. This contrasts, for example, with a corporate blog that opens the door to the critics and their issues, demanding an open exchange of views."

eIDS in Europe: Not (yet) yielding profits for the cross-border financial services sector

- "E-government and online shopping are on the increase, but the use of cross-border financial services still lags some way behind."
- "At the European level a number of electronic identity cards (eIDs) and the qualified electronic signature (QES) do already exist. Together they possess the potential to form another of the foundations of the internal market for financial services – especially for opening accounts."
- "The future of e-services hinges on two mutually reinforcing developments: harmonising the diverse regulatory regimes across Europe and boosting acceptance among the general public."

Germany: Only modest decline in the current account surplus

- "The German economy is currently benefiting from extremely dynamic world trade. In Q2 real goods exports rose by more than 20% and Germany’s macroeconomic growth hit a new record of 2.2% compared with the pre-year quarter."
- "German export momentum is, however, likely to ease significantly in H2 2010 and above all in 2011, as the international inventory cycle as well as the catch-up effects from investments postponed in 2009 will slowly tail off and also the underlying cyclical performance in major client countries will probably recede."
- "In addition to the impact of this cyclical development the highly export-dependent German economy is also being hit by the adjust-ments in Europe’s crisis-ridden countries. The correction of the excesses in the real estate markets and the partially drastic consolidation programmes will severely dampen the import demand of these countries over the longer term."
- "The strain on the German current account is, however, likely to remain within bounds, as the importance of the problem countries for the German economy is relatively low, other major markets are stable, and any adverse effect s may be offset by demand from emerging markets, especially in Asia."
- "Nevertheless, in the medium term Germany’s large current account surplus needs to be reduced, as the origins of the crisis lay in undesirable structural developments on both sides, that is not only in current account deficits, but also in the reciprocal surpluses. All in all, we expect that the German current account surplus will first widen from 5.0% to 5 ½% of GDP this year, before narrowing slowly, however. In 2012 it could then stand at 4 ½%."

DeutscheBank Current Issues 20100906

German residential property: Back in fashion – with good reason?

- 40 million dwellings in Germany. "Germany’s population of just under 82 million people live in approximately 40 million dwellings. Nearly half of these are single and two-family homes. At slightly over 42%, the home ownership ratio is still below the European average. In itself, this ratio represents neither a call for politicians to approve new incentives nor an implicit invitation for investors to tap into the market."
- Prices are unchanged on average. "Unlike in many other European countries, residential markets in Germany did not go on rollercoaster rides in the last ten years. Prices had neither soared up until 2007 nor did they drop in the course of the recession."
- Average fails to reflect major regional differences. "However, price trends also differed substantially between the attractive regions with high in-migration and the economically weak regions with high out-migration. While house prices in the weakest regions fell by more than 30% in the last ten years, they rose by up to 20% in the best regions."
- Slight price increases to be expected in the next few years. "The low number of completions, Germany's quick economic recovery, low interest rates and the fact that many investors are looking for low-risk investment products have led to a small boom in some subsegments of the residential property market. Prices are on the rise for prime inner-city locations especially in the major conurbations. But bargains can be found outside these few major conurbations as well. There are numerous attractive medium-sized towns and cities such as wellestablished university towns. On average, house prices in Germany look set to rise by roughly 1.5% p.a. over the next two years."
- Beware of the risks. "The positive outlook should not, however, render investors blind to the specific investment risks: real estate is always an investment in a particular region or area, making it vulnerable to changes in regional economic structures and the related demographic changes."

DeutscheBank Current Issues 20100903

UK Housing: Another leg down

- "There has been further evidence published this week to suggest that the UK housing market is slowing. A number of house price indicators have fallen over recent months, while we have also seen evidence of weaker activity."
- "Real house prices have not fallen as much relative to their 2007 peak as they did in the early 1990s correction. In the initial adjustment they did fall more sharply, but subsequently gained ground to stand ‘only’ around 20% below their highs (they fell by a total of 35% during a period of over six years in the 1990s). However, we think there is further to go in the adjustment, and after remaining broadly static in 2010 we see a 5% nominal decline in 2011."
- "However, with net new lending at exceptionally low levels, our credit impulse analysis suggests that there may be resistance to house prices falling any further without an absolute decline in the level of mortgage debt. This partly explains our forecast for relatively modest price falls next year. While there is a limit to how far nominal house prices might decline, real house prices could well fall for some time thereafter."
- "Also in this week’s Focus Europe, we look back at the latest ECB decisions. As far as liquidity is concerned, there is an underlying keenness for exit in principle, but the ECB will be led by the markets. As far as monetary policy is concerned, rate hikes are not imminent. We see the first hike in mid-2011. In our Euroland Review and Outlook we also present a schedule of fiscal and other policy events through September and October with the potential to create volatility around euro sovereign debt markets. We examine a range of monetary conditions indicators for Poland and find none suggests a need for imminent rate hikes. In our inflation outlook we explore the two key and counter-veiling forces likely to impact on inflation forecasts—declining growth and rising food prices."

DeutscheBank Focus Europe 20100903

Update on recession/deflation risk in the US and euro risk in Europe

- Rising risk of recession and deflation in the US
• "Fears of a double-dip recession and the risk of deflation have risen appreciably. While our own baseline forecast has not moved that far, the downside risks have clearly increased. We review the recent US economic news and what can be gleaned from movements in financial indicators, indexes of leading indicators, and recession probability models."
• "We find that recession probabilities have in some cases risen close to levels that have in the past been associated with ensuing economic downturns. While the evidence on this point is mixed, the risk is heightened by two policy factors: (1) a Fed that is running very low on available policy stimulus measures and (2) fiscal policy that is scheduled to turn substantially contractionary in the quarters ahead, with at best mixed signals from Washington on the prospects for relief on that score."
• "With inflation low, economic slack high and possibly rising, and longer-term inflation expectations showing some signs of wavering, the possibility of dipping into deflation grows larger. We judge the risk of deflation to be somewhat greater than that of a serious double-dip recession."
- Euro crisis: Mission not yet accomplished
• "Policy makers so far have treated the euro crisis as a liquidity crisis while market participants have tended to believe that at the heart of the euro crisis is the insolvency of one or more euro area states. Hence, measures taken so far have not been able to reduce tensions in EMU bond and money markets."
• "To reassure markets authorities need to develop a scheme that can deal with an insolvent state within EMU, if only as a contingency plan in case their assessment that adjustment will be successful proves wrong. The key for such a scheme is to allow a sovereign default in EMU at minimum cost for tax payers by building an efficient safety net for investors in EMU government debt."
• "Without such a scheme, failure of the deficit countries to adjust as promised could turn into a life-threatening event for EMU. But it will probably take a return of the euro crisis and a clear and present danger of a collapse of EMU to trigger the construction of such a scheme. We expect this to happen within the next one to two years."

DeutscheBank Global Economic Perspectives 20100901

Our country has innovative minds! Curtain up ...

- "Having analysed Germany‟s strengths and weaknesses in the study “Your country needs innovative minds!” this paper now turns its attention to an assessment of the sixteen German federal states’ innovation performance."
- "Our simple model comprising eight indicators for the assessment of Germany‟s regional innovative strength shows the most innovative states to be in the south of the country, whereas the eastern states continue to lag behind in terms of absolute levels."
- "However, if we consider the dynamic, i.e. the changes over the period 2003 to 2007, the picture looks different. The states in the east of Germany – spearheaded by Saxony – are on course to narrow the gap to the highly innovative federal states."

DeutscheBank Current Issues 20100830

Policy Patience

- "At the last two monthly press conferences, ECB President Trichet acknowledged the then normalisation trend visible in markets. Nevertheless, there was no complacency about the challenges that lay ahead. Had normalisation continued, the ECB may have been prepared to re-engage the ‘gradual exit’. However, market events over the last month suggest the potential cost of an early exit from full allotment liquidity probably exceeds the risks from being more patient. As such, it seems likely that the ECB will announce on September 2 to push-back the exit from the full allotment regime from Q4 2010 until at least Q1 2011."
- "Beyond the push-back on the exit from full allotment, the ECB is likely to remain prudent and cautious. We expect the neutral bias on the monetary policy stance to be retained. The staff macroeconomic forecasts probably won’t change much, other than an upward revision to 2010 GDP growth care of the stronger-than-expected outturn to Q2. Nuance will be important. The Council’s rhetoric on global activity could weaken and exports as an upside risk to growth could be dropped. That could presage expectations of a longer spell of full allotment liquidity and unchanged rates."
- "Also in this week’s Focus Europe we delve into S&P’s raised estimate of the Irish banking crisis which caused the agency to cut Ireland’s sovereign credit rating to AA-. It has been called “extreme” and “flawed”, but if S&P’s estimate credibly draws the upper boundary on the cost, it could be an important source of surety for the market. We also review the latest euro area inflation expectations data, including forward-starting breakevens which have fallen to new lows; the state of the Swedish recovery, the outlook for Riksbank policy and the upcoming election; and the impact of declining worker remittances on Romania’s current account position."

DeutscheBank Focus Europe 20100827

The pirate inside us: In the depths of copyright

- "The tide of information online is rising inexorably. Second by second, terabyte upon terabyte of new images, songs, films and other forms of digital content are being uploaded onto the internet. New digital content is being created, consumed, modified, shared and disseminated virally with no loss in quality at low cost."
- "The internet is altering our requirements and our consumption habits. Many consumers find themselves faced with the question of whether to buy digital content stored on a physical medium or to simply download their preferred artists or favourite films online. While the sales of physical media are trending down, fans are using their computers to download individual songs or entire albums by their favourite bands."
- "The majority of files downloaded from the internet are pirated copies since they infringe copyright."
- "This is the fate being suffered by the music and film industries, along with the computer games and digital book markets."
- "Is this solely a threat or is it also an opportunity for change? Are creative minds and thus innovation online hindered or promoted by traditional intellectual property rights? Can free licensing models be an alternative to traditional copyright and help to broaden the knowledge commons with greater creative freedom?"

DeutscheBank Current Issues 20100824

Why The Yen Defies, Befuddles and Dazzles

- "Earlier this month, USD/JPY fell to 84.7 - its lowest level in fifteen years. The all-time low of
79.7 was reached in April 1995 and is now in sight (see chart). This comes in the face of the consensus of opinion consistently looking for yen weakness. Indeed, currently the consensus of analysts’ forecasts expects USD/JPY will trend higher, rather than reach new lows over the coming quarters. We have been looking for yen strength consistently since May 2009 (see FX Blueprint for Summer ’09, 12 May 2009). Part of this view was premised on US rates being low for long and the possibility of risk aversion. The link between US interest rates and the yen is well known and widely followed, however it is not the whole story for the yen. There are have been three important, but less well known developments that provide further support to the yen: the smaller gains for the yen in real terms than nominal terms, Japan’s growing income balance and foreigners being underweight JGBs. Taken all these factors together, we maintain our view of yen outperformace, and look for USD/JPY to reach 80 over the next six months, and possibly even 75."

DeutscheBank Exchange Rate Perspectives 20100824

India Jun-Q review: Not a weak quarter after all

- After a weak start, Jun-quarter ended on a positive note for Sensex "While Jun-qtr earnings season began on a disappointing note it ended with strong positive surprises from few large cap companies. Initial earnings disappointments from NTPC (-21% vs. DB est), Hero Honda (-18%), Maruti (-19%) and Sterlite (-9%) were neutralized by positive surprises from large caps - Tata Motors (+43% vs. DB est), ITC (+18%), BHEL (+12%), Tata Steel and SBI (both +8%), leading to overall Sensex’ yoy EBITDA & PAT growth of 22% & 16% respectively. On free float basis, the corresponding growth numbers were 29% & 31% - largely driven by
strong growth and comparatively higher free float of Tata Steel. Sensex numbers (ex-Oil PSUs) were above our estimates at all levels i.e. Sales (+1.1% vs. DB est), EBITDA (+4.5%) and PAT (+0.6%). Tata Steel (strong turnaround at Corus) helped shore up yoy growth, while Oil PSUs posted negative surprise driven by under recoveries and volatility over subsidy sharing."
- Metals, Cap Goods, Financials lead, Telecom and Cement drag "Metals posted strongest PAT growth (+1.4% vs. of DB est) due to low base and robust turnaround at Corus. Capital Goods followed with 27% yoy PAT growth (+6% vs. DB est), as BHEL, despite a difficult environment, recorded strong numbers on the back of output improvement, indigenization and favorable RM/Sales ratio. Strong NII growth and lower than expected credit costs led to robust growth in Financials (+24% yoy and +4.6% vs. DB est). Unsurprisingly, Telecom witnessed weakest yoy PAT growth at -41% (-29% qoq) – although at revenue and EBITDA level, our Telecom analyst noticed improving competitive position for incumbents on qoq basis. Cement & construction followed with a -28% yoy PAT growth, which was 7% below our already lower estimates."
- We do not see any meaningful risk to our full year Sensex earnings estimate "We believe that street concerns over FY11 Sensex’ earnings growth are overdone. Despite a largely mixed quarter and soft growth (ex- Tata Steel), overall revision to FY11 Sensex EPS was marginal. During the earnings season, there were earning revision to 10 Sensex stocks with four upward and six downward revision - but the overall impact on Sensex PAT was only marginally negative at -1.6%. Earnings upgrade in Tata Motors (+57%) largely neutralized downgrades in Sterlite (-25%), NTPC (-13%) and DLF (-9%)."
- Better than expected monsoon to further stimulate aggregate demand, reiterate Sensex target of 22000 "We reiterate our year-end Sensex target of 22,000 driven by expectation of earning CAGR of ~25% over FY11-12, strong macro economic momentum and robust FII inflows - which have aggregated US$12bn YTD, and hold potential to exceed the annual peak levels of ~US$18bn. Besides, the ongoing monsoon season appears to be one of the best in almost five years and will help further stimulate - already elevated - aggregate domestic demand. We are therefore reiterating our overweight on the consumer discretionary sector."

DeutscheBank India Equity Strategy 20100822