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Fund Managers Commentary
February 28, 2010
Equity Market
In the month of February, the almost flat closing of the markets with the BSE Sensex closing up 0.4% at 16430 and the NSE 50 index closing up by 0.8% at 4922, did not reflect the intra month volatility, where markets fell by more then 4%, due to worries of a sovereign debt crises in Greece, and fears of tightening liquidity due to the US Federal reserve move to raise its discount rate, while the Chinese central bank moved once more to increase the Reserve Requirement Ratio of banks. Indian markets infact only recovered to close slightly up at the end month on the back of a market friendly Union Finance Budget presented by the finance minister.
Reflecting a bout of risk aversion in form of the intra month volatility, large capitalization stocks outperformed small and mid cap stocks. Sectoral indices movements by and large reflected markets view of budget impact ,with the Auto, Banking , Consumer Durables , Capital Goods, Health Care, Software and Metal Indices outperforming the Sensex, while FMCG ,Oil & Gas , Power ,PSU and Realty indices lagged the Sensex. For the month, in cash equities, FIIs were net buyers of USD 270 million (Sellers of USD 95 million in January 10), while Mutual Funds were net sellers of USD 152 million (Sellers of USD 289 million in January 10).
In terms of economy related data, GDP numbers for the quarter ended December 09 came out, showing a slightly muted growth of 6% YoY (7.9% in quarter ended September 09). The slow down of GDP growth was primarily driven by degrowth of the farm sector by 2.8% YoY (growth of 0.9% in quarter ended September 09) due to a reduced summer crop output in face of an erratic monsoon and a degrowth in government spend on community and social services by 2.2% YoY (growth of 12.7% previous quarter) -primarily due to base effect, as previous years quarterly figures contain large payments due the sixth pay commission. Mining sector grew by 9.6% YoY (9.5% growth in previous quarter), while electricity and utilities sector slowed down from 7.4% YoY growth in the previous quarter to 4.9% YoY growth in the current quarter. The manufacturing sector continued to show acceleration in growth to 14.3% YoY from 9.2% YoY in quarter ended September 09.This was also reflected in the December 09 IIP numbers that came in earlier in the month which showed an acceleration in industrial output growth to 16.8% YoY from 11.8% YoY in November 09. As per other government statistics released for January 10 in the month, the infrastructure sector which accounts for 26.7% of Industrial output grew by 9.4% YoY (6.4% YoY in December 09 ) .Thus in the first ten months of the fiscal, Infra- output grew to 5.4% YoY( 3% YoY previous year) . In other news flow, The International Monetary Fund (IMF) has projected that the Indian Economy would come back to its potential growth rate of 8% in 2010-11. The National Association of Software and Service Companies (NASSCOM) has projected software and services export revenue growth of 13% to 15% in Financial year ending March 11.
On the policy front, in guidelines to be implemented from 1st April 10 RBI proposes that actual rate of interest charged by banks to borrowers would be based on a transparent system of a base rate plus a borrower specific charges (including product specific operational costs, credit risk premium and tenure premium). This would prevent banks from committing the mistake of offering teaser rates or undercutting each other for the sake of increasing balance sheet size, and help a borrower clearly determine the rate of interest he would pay in a transparent way. In additional policy moves, the government amended rules for foreign currency convertible bonds issued before 27th November 2008, allowing issuers to revise within a window of 6 months, the conversion price of bonds issued to the higher of the two weeks average or six months average of the companies stock price, with an aim to help them improve their balance sheet strength.
During the month, we had the presentation of the economic survey, the railways and finance budget of the country. The pre-budget economic survey, after noting reforms and the broad based recovery in growth has predicted that India could bounce back to a high nine per cent growth in 2011-12 and could even become the world's fastest growing economy in four years. It noted that the fast-paced recovery of the economy underscored the effectiveness of the policy response of the government in the wake of the financial crisis and recommended a gradual roll back of economic stimulus over the next 15 to 18 months. The survey was critical of the food management strategy of the government and expressed concern that high double digit inflation in food was starting to feed into inflationary expectations in other sectors of the economy. The survey recommended serious policy measures to improve investment in agriculture to bring sectoral growth to 4%. The survey noted that slowdown in the infrastructure sector has been arrested and recommended creation of a larger infrastructure capacity.
The rail budget emphasized on social responsibility and financial viability .Passenger fares as well as major freight rates were kept unchanged, though freight on food grains and kerosene was reduced slightly. The budget spelt out the vision of adding 1,000 kilometers rail route in one year and 25,000 km by 2020.However, the rail budget made only a small increase in capital expenditure.
The Union Finance Budget was presented by the finance minister on 26th February 2010. The proposals of the finance budget contained a number of market friendly and pro reform proposals like reduction in surcharge on corporate tax, lower fiscal deficit projection, roadmap for roll out of GST and direct tax code among others. The budget proposes a rise in excise duty by 2% to 10% as a step in slowly unwinding stimulus measures instituted in the economic slowdown, now that a robust recovery is visible. The budget pegs the fiscal deficit in the year ended March 11 at 5.5% and aims to reduce the deficit to 4.8% of GDP and then 4.1% of GDP in the subsequent two financial years. The budget proposes to raise USD 8.7 billion through divestment of public sector units and about USD 7.6 billion from 3G auctions. We note the custom duty and excise duty increase has led the government to raise petrol and diesel prices. The combined effect of increases will have the impact of increasing inflation by approximately half a percent. We also note under the current regime, the assumptions of oil subsidies taken into account in the budget are low, which seems to indicate the governments intention to move towards freeing/reforming of pricing of petroleum products. The direct tax proposals widened the taxable brackets, while also increasing the deduction amount, in effect putting more money in the hands of consumers. The budget through its various proposals gives a push to inclusive and broad based growth, while encouraging transparency, accountability and reform in the government system. The Union Finance Budget for the year ending March 11 can be credited for the overall policy direction and reform continuity it maintains.
In March 10 the markets will look to corporate advance tax numbers to get indications of the result season ahead. Issues like central bank policy in developed nations and speed of withdrawal of stimulus measures by governments will concern markets. Sovereign debt issues in Ukraine, Greece etc will continue to impact overall risk appetite of investors in the short term.