May ‘09 will go down in the history of the Indian markets as one of the most spectacular months with both the Sensex and Nifty rising 28% each to close at 14,625 and 4,449 respectively. They were supported by global equity market momentum and an un-expected decisive electoral verdict which has led to formation of a stable government that can push through economic reforms, which are required the most at the current juncture in the global economic scenario. The increase in liquidity flows was reflected in the performance of the various capitalization based indices, with small cap and mid cap stocks performing better than the large cap stocks. Similarly sectors that gained most from the increased availability of capital/finance did well, as reflected in the sectoral indices, with the Auto, Banks, Capital Goods, Metal, Power, PSU and Realty indices outperforming the Sensex. Oil & Gas was in line while FMCG, Health Care and IT lagged the Sensex.

In terms of key economic data points that came in during the month, India’s GDP for quarter ending March 09 grew by 5.8% YoY (versus 5.8% in quarter ending December 08). With this data, India has recorded a respectable GDP growth rate of 6.70% for the financial year ending March 09. A number of economic indicators show signs of bottoming out like industrial production of intermediate goods, commercial vehicle production, cement dispatches, domestic steel prices and electricity generation. In terms of composition of GDP by money spent, Private consumption constituted 51.4% (52.1% in quarter ended March 08) of the GDP, Government expenditure 13.4% of GDP (11.5% in quarter ended March 08), Gross capital formation 35.7%(35% in quarter ended March 08) and Net exports -2.9% of GDP(-4.3% in quarter ended March 08). These numbers clearly show that government expenditure and investment has been rising to compensate for the fall in private consumption and capital formation.

Liquidity flows into the markets and government directed investments to compensate for the deficiency in private investments ensure this rally is an asset reflation rally. Funds will tend to flow into areas where asset (business) valuations seem stressed or low compared to normal times. This is specifically so for the infrastructure theme that is helped by availability of easy and low cost funds for their longer gestation projects. Government’s focus too will ensure a steady flow of investments in power, roads etc. Considering demand for good quality infrastructure in a country that is rapidly urbanizing and modernizing with a growing population, we think infrastructure will be one of enduring themes, even though it may show volatility to reflect global risk appetite in the short term.

With the strong rally witnessed in last few months, the Sensex is at a valuation near the long term average enjoyed by the Indian market. The initiatives taken by governments of various economies, better liquidity conditions and a strong government at the centre in India have all led to stronger equity markets globally and a re-rating of the Indian market. Some analysts have upgraded the GDP growth numbers for FY’10 and FY’11. However, earnings numbers have not been revised upward as yet as these changes are likely to impact companies with a lag. There is expectation that the second half of this year may be better than the first half which could lead to revisions or better visibility of growth in the next year. Also, the liquidity surge seen in the equity markets lately in our view is likely to be a medium term phenomenon with large quantum of money yet to be invested and investors looking for higher growth. In June the market will focus on the onset of monsoon and the Union Budget to be presented by the new government. Market will also keep a close watch on the actual policy announcements versus expectations. Data flow on leading indicators of the global economy related to countries like US, Europe, Japan will continue to drive overall sentiment on equities.