The Greek sovereign crises, increase in credit spreads along with tightening of lending standards in the property sector by the Chinese government hurt sentiment across the world causing a fall in equity markets for the month. The BSE Sensex closed down 3.5% while the Nifty closed down 3.6%. Sectors like Realty, Metals, Banking and Power underperformed the Sensex, while traditional defensive sectors like FMCG, pharmaceuticals and domestic plays like Auto and Capital Goods out-performed the index. The oil and gas sector did well with a gas price hike and expectation of further reforms. For the month, in cash equities, FIIs were net sellers to the tune of approximately USD 2.1 bn (buyers of USD 2.1 billion in April ‘10), while Domestic Mutual Funds were net sellers with outflows of USD 160 mn (sellers of USD 580 mn in April ’10).

India’s real GDP saw a growth of 8.6% YoY (Year on Year) in Q4FY10, more or less in line with the consensus view with growth primarily being led by industry which grew by 13.3% YoY. This also helped the FY10 real GDP to grow by 7.4% YoY which was higher than the CSO estimates of 7.2%, primarily driven by industry and actively supported by services. In the fiscal year FY10, the industrial sector, saw a broad-based turnaround, expanding 9.3% YoY vis-à-vis’ 3.9% YoY in the previous fiscal. This performance was also supported by timely fiscal stimulus, generally easy monetary conditions, improvement in business sentiment and favourable base effect. The services sector grew by 8.5% in FY10 vis-à-vis’ 9.8% YoY in the previous fiscal. GDP for the year FY11 is expected to grow at 8% plus given the strong momentum in the economy.

The Index of Industrial Production (IIP) grew at 13.5% YoY for the month of March ’10, a tad slower than the Feb’10 growth of 15.1% YoY. The cumulative growth for FY10 stands at 10.4%. In terms of sub-components, Mining, Manufacturing and Electricity sectors grew by 11.0%, 14.3% and 7.7% respectively in Mar’10 on a YoY basis. The cumulative growth for FY10 in these three sectors was 9.7%, 10.9% and 6.0% respectively on a YoY basis.

On the policy front, the government raised controlled gas prices from USD 1.8 per million metric British thermal units (MMBTU) to USD 4.2 per MMBTU. This has raised expectations of the government freeing auto fuel prices in line with the Kirit Parikh committee report, thus helping reduce the subsidy burden of the government. In other developments, the 3G auction for telecom companies raised USD 14.7 billion for the government, significantly more than the estimated USD7.6 billion in the budget, and this is expected to help the government bring down its fiscal deficit in the current year.

The recent Greek crisis has increased risk aversion in the mind of investors. A € 110 billion package for Greece did not help calm nerves, as a revolt by the Greek people against government spending cuts involved in the deal could still hurt the process of economic stabilization. Investor concerns were not placated by the EU combined package of € 750 billion plus for all European countries in the Union. One should note that the combined estimate for a rescue of all the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) nations is approximately USD 1.4 trillion, which is not a large amount for the European Union and the European Central Bank to commit for stability of the region (the US Government committed USD 13 trillion for its rescue of the US financial system). We think a sovereign credit crises is an issue that will require continuing fiscal profligacy on part of central governments and their central banks.

The more worrisome issue is the state of the European Union financial sector balance sheets, which is much worse off compared to the state of the US financial system. Also weak political will to reform has ensured that there has hardly been any financial sector reform in the interim. Many of these European financial institutions have worrisome exposure to commercial real estate loans, private equity leveraged bonds, and mortgage securities (that are starting to reflect delinquency levels that are associated with weak growth) along with highly leveraged balance sheets.

The reasonable valuations of emerging markets (when compared to historical averages), better growth prospects and strong government balance sheets could help emerging markets eventually break away in terms of returns from the current cloud of worries over developed markets. Moreover, the fall in the commodity complex due to the European crises is positive for countries like India, who are net consumers of commodities. However, no market is insulated from a crisis in any part of the world and therefore in the near term there could be increased volatility. So, even though the Indian economy is doing well and companies are growing at a reasonable pace with balance sheets getting better over the last year, significant earnings revisions are unlikely and sectors which have linkages to the global economy and markets could keep any upward revision in the index earnings forecasts under check. Also, given the state of the global economy and therefore risk aversion, a re-rating of the market beyond historic average multiples seem unlikely in the near term. The market may remain range bound in the near term with divergent stock performance and higher returns are more likely to be driven primarily by astute stock picking.

In June ’10, the markets will look forward to the onset of monsoons, advance tax numbers and publishing of annual balance sheet numbers by corporates for comfort in a turbulent international environment. Events in Europe, China and US will continue to be important drivers of risk appetite in the month.