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Fund Managers Commentary
July 31, 2010
Equity Market
Positive sentiment for the Indian domestic demand story helped the indices close up for the month despite slow down fears in China, Europe and US. BSE Sensex and Nifty each closed up about 1%. The month saw small and mid-cap stocks continuing to outperform large cap stocks, reflecting favorable perception of investors towards the Indian equity markets. There also was significant stock performance divergence during the month. Sectors like Automobiles, Banking, Consumer Durables, Software, Metal, and Realty outperformed the Sensex, while sectors like Capital Goods, FMCG, Health Care, Oil & Gas, Power and PSU underperformed the index. For the month, in cash equities, FIIs were net buyers to the tune of approximately USD 3.6 Bn (buyers of USD 2.3 Bn in June 10), while Domestic Mutual Funds were net sellers of USD 942 Mn (sellers of USD 236 Mn in June 10).
The Index of Industrial Production (IIP) reported for the month of May 10 showed a growth of 11.5%YoY, which was lower than April 10 growth of 16.5%YoY (as per revised estimates) due to a fading base effect. On a use basis the growth was led by investments, with capital goods growing at 34.3%YoY (69.9% in April 10). Consumer goods showed a growth of 8.2%YoY (April 10 growth of 11.9%) led primarily by durables production growth of 23.7%YoY (32.8% in April 10). The steady growth of the Intermediate goods segment at 10.2%YoY (10.6% in April 10) despite the base effect underlines the strength of industrial growth in the country.
On the monsoon front, the data released by the Indian Meteorological Department (IMD) shows that cumulative rainfall from 1st June to 28th July 10 was only 5% below normal, after having revived towards the end of July 10.The spatial distribution was also good, with 28 out of 36 sub- divisions of the country receiving excess to normal rains, resulting in overall improvement in sowing area-Rice acreage is up 7.6%, Sugar Cane 13.4% and Pulses 13.2% compared to same period last year. IMD is forecasting a rainfall of 102% of the long period average for the current monsoon.
At the beginning of the month the central bank raised the Repo and Reverse repo rates by 25 basis points which was followed at the end of the month by its first quarter review of Monetary Policy for the financial year ending March 11. In its review the central bank increased key short term policy for the fourth time in a row (it raised the repo rate-the rate at which banks borrow from RBI to 5.75% from 5.5% and reverse repo-the rate at which banks park their fund with RBI to 4.5% from 4%), citing that it needed to contain inflation which has now become generalized with demand side pressures clearly visible. RBI also raised its forecast of inflation for the fiscal to 6% from its earlier forecast of 5.5% and noted that excess global capacity in a range of sectors will allow competitive imports to reduce the momentum in domestic prices for the remaining part of the year. The central bank also raised its growth forecast for the Indian GDP to 8.5% from 8%, in face of strong economic growth.
Corporate results that got reported so far for the quarter ended June 10, showed a sales growth of 18%YoY while input and wage cost pressures and lower other income limited net profit growth to 14%YoY. Other income was lower as result of companies investing in capacity expansion in face strong capacity utilization in a strong demand environment.
In recent times concerns have again emerged on the sustainability of the global economic recovery. The US economy grew by 2.4% in the second quarter compared to 2.7% in the first quarter. US consumer confidence index sank to its lowest since February on job market worries. Chinese PMI fell from 52.1 to 51.2 during the month with manufacturing slowing down. Industrial production in China has been on a declining trend since March 10. Investors may note the perception of India being primarily a domestic demand driven economy has led it to be viewed as an attractive investment destination in an uncertain global growth environment where even high growth economies like China are being doubted as to their sustainability of growth on account of their export dependence and property bubble possibilities. The result of this has been that more than 50% of flows to Emerging Asia have found their way into India in the current calendar year resulting in the Indian market reaching present valuations of approximately 16 to 17 times its FY11 earnings. Investors would do well to focus on secular growth themes and within these themes on stocks which demonstrate good quality of earnings with low leverage. Such an approach, while providing comfort in the uncertain global environment could help capitalize on long term wealth generation capabilities of equities as an asset class.
In August 10, the markets will look to the progress of monsoons and rest of the quarterly result declarations while events in Europe, China and US will continue to impact investor sentiment.