Post a sharp rise in September 09, the markets fell in October 09 subsequent to touching new yearly highs mid-month, with the Sensex falling 7.2% to close at 15,896 after touching 17,493, and the Nifty falling 7.3% to close at 4,712 after touching 5,181. During the month mid caps outperformed large and small caps reflecting market interest in capturing the relative valuations of mid caps. The market fall was led by the Oil and Gas, Realty and Telecom sectors while the FMCG sector led the outperformance among other sectors like Auto, Banks, Consumer Durables, Capital Goods, Health Care, IT, Metal , Power and PSUs.
For the month, in cash equities, FII’s were net buyers of USD 1.9 Billion (buyers of USD 3.8 billion in September 09), while Mutual Funds were net sellers of USD -1.1 billion (sellers of USD 462 million September 09). Over the next few years emerging markets led by Asia, are projected to grow their GDP at twice the pace of the combined developed markets GDP, which is likely to ensure a steady flow of money in search of returns into these markets- a trend that has just begun. This view is buttressed by the fact that buying by FIIs in India in the current calendar year 2009 so far has already exceeded the entire FII outflows of calendar year 2008. This clearly shows that beyond the intermittent volatility of a nervous and risk-averse world, a situation which may arise from time to time, the long term structural flow of money towards Asia in general, and India in particular seems to be the secular trend which global investors would do well to take notice of.
In terms of economy related data, Index of Industrial Production(IIP) data for August 09 that came in, showed a growth of 10.4% YoY ( as compared to 7.2% YoY in July 09-Revised estimate), reflecting a lagged impact of the government stimulus efforts, lower base effect and broad based pick up in industrial activity. As per activity classification of the IIP, Manufacturing grew 10.2% YoY (as compared to 7.4% YoY in July 09), Mining by 12.9% YoY (as compared to 9% YoY in July 09) and Electricity by 10.6% (as compared to 4.2% YoY in June 09). As per classification by use, consumer goods sustained high growth levels at 8.5% (as compared to 9.8% YoY in July 09) – with consumer durables growth getting stronger at 22.3% (as compared to 21.3% in July 09). Going ahead Inventory restocking (after significant de-stocking earlier in the year) and a slow export recovery will support IIP growth. Leading indicators of economies, like the Indian PMI which is in expansion territory at 55, and the US ISM which has crossed 50 (expansion territory), already indicate expansion of future industrial activity in India and abroad. In the agriculture sector the revival of monsoons has led to replenishment of water reservoirs close to historical averages (about -5% from average), which along with good soil moisture levels has increased expectations of a bumper winter crop output. In the meanwhile strong growth in the Industrial sector is likely to support overall GDP growth in face of slackening in the agriculture output due to a lower summer crop harvest resulting from inadequate monsoons.
At the end of the month RBI came out with its third quarter review of Monetary Policy Review, in which it indicated to its preparation for exiting the loose monetary policy it had in place till now, in face of a recovery in GDP growth and concern on build up of inflationary expectations in the economy. The RBI raised risk weightages for real estate loans, directed banks to increase provision cover for Non Performing Assets, and increased the Statutory Liquidity Requirement ratio to 25% from 24% earlier. The RBI also issued norms on simple securitized debt, ensuring the originator has a stake in all loans securitized. Refinance window for Mutual Funds and NBFC’s was scrapped in face of easy availability of liquidity, while RBI’s foreign exchange swap facility for banks was withdrawn. In the Policy Review the regulator noted the need to keep a watch on inflation, while closely monitoring liquidity conditions to ensure slow exit from its loose monetary policy, so as not to hurt economic growth impulses.
Stand alone results for quarter ended September 09 that came in during the month for the thirty Sensex companies showed a sales growth of 4.3% Year on Year (sequential quarter on quarter growth of 11.2%), EBIDTA margins increased on back of lower raw material prices to show an increase of 9% YoY (flat sequentially), with Net Profit rising 6.6% YoY (flat sequentially), helped by exceptional items. The strong sequential sales growth numbers reflect an improvement in economic growth impetus.
After a good rise in September’09, the Indian equity market seems to be correcting/consolidating, reflecting profit booking amidst a rise in risk aversion among investors world wide. While the broad markets move down, investors would do well to observe that several stocks belonging to sectors like FMCG, Auto, IT, PSU Banks etc. have tested their all time highs in the current rally. Some of the common characteristics of companies showing this high relative strength are - qualitative issues like management strength, sustainability of earnings growth, stronger balance sheets, higher return on capital etc. This trend also shows investor focus on themes related to domestic consumption (like Auto, FMCG, Banking etc) and outsourcing (like IT, Parma), suggesting that opportunities abound to make decent returns over the next several years by focusing on stock specific characteristics and valuations in the Indian equity markets. Apart from this, given the Indian government’s focus on infrastructure ‘execution’ in the country, the infrastructure theme would continue to remain in limelight even though the recent performance of the stocks in this theme has lagged other themes like consumption and outsourcing.
In November 09, in face of a revival of GDP growth prospects across the world led by Asia, the markets will look to monetary policy responses by central banks of various countries around the world for direction. US Federal Reserve actions will be closely watched in this regard. On the domestic front, the market will look with eager anticipation at the divestment offerings of Public Sector Units.
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Gilts remained largely range bound during the month, trading in the 7.25%-7.40% band. Market participants built up expectations of a hawkish monetary policy review from Reserve Bank of India towards the month end. While RBI did raise the alarm on hardening inflation, it kept all key policy rates unchanged. Further it hiked the SLR requirement for banks by 100 bps to 25%. As this was interpreted by the market as resulting in higher demand for gilts, the benchmark 10 year yield eased to 7.25% from pre-policy levels of 7.40%. Further support came from easing global bond yields, correction in equity markets and easing oil prices, which helped in retaining the positive momentum in gilts markets till the end of the month. IIP rose by 10.4% for August, 2009, which was the highest in the past twenty two months. WPI Inflation was at 1.21%, crossing 1% mark for the first time in past 7 months, driven mainly by food prices.
Major highlights of Monetary and Credit policy review are:
- SLR hiked by 100 bps from 24% to 25%.
- Repo rate unchanged at 4.75%.
- Reverse repo rate unchanged at 3.25%.
- CRR unchanged at 5%.
- GDP forecast lowered to 6% for FY10.
- Inflation forecast for March 31, 2010 upped to 6.50% from 5%.
- The standard provisioning of loans to commercial real estate raised from 0.40% to 1%.
- Provisioning of non-performing assets ratio increased to 70% from as low as 10%.
- The RBI introduced requirements to maintain CRR on the CBLO borrowings of banks.
The RBI, in our opinion, has created enough groundwork for an inter-meeting intervention. Debate has already been initiated on the effectiveness and need of excessively loose monetary policy in incremental support to growth. It also means that a hike in CRR/Reverse repo rate can be expected before the January policy review. Increase in SLR by 100 bps, maintenance of CRR on CBLO borrowings and withdrawal of extra-ordinary refinance facility for banks, mutual funds and NBFCs as well as the shift towards an emphasis to inflation from growth already point to a tactical shift in the accommodative stance. We also feel that the market has also priced in and positioned itself for such an action and as such, the market will possibly not lend a knee-jerk violent reaction in such an eventuality.
Post policy, the credit spreads remained unchanged. Comfortable liquidity continued to drive the money market rates lower despite inbuilt signal from the policy to withdraw the currently excessive liquidity from the market.
On the global front, crude price remained above USD 80/bl in anticipation of global economic recovery and in the face of weakening dollar. US 10 year treasury saw a substantial bidding interest as the market discounted the end of buy-back program from Fed. Analyst expect this as signs from Fed of the end of the crisis and reversal in fortunes of greenback as well as the return of confidence in the US economy leading to lowering of trade gap and fiscal deficit there.
The rupee appreciated against USD, in line with global markets, to touch INR 45.90/$ before correcting to above 47/$ on the back of month-end demand from oil companies and some selling by FIIs in equity markets.
Going forward, the benchmark 10-year gilt should continue to remain range bound in the 7.20-7.50 band. The market is likely to keep a close watch on Inflation trends and global crude prices. The money market curve currently remains supported with surplus liquidity and poor credit off-take. However the money market rates are likely to move up if there is an intermittent rate action by the central bank before the next credit policy.
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