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Fund Managers Commentary
June 30, 2009
Equity Market
June 09 was a month of consolidation after the euphoria of the prior three months of the year, with the Sensex falling 1% to close the month at 14,493 and Nifty falling 3.6% to close the month at 4,291. The pause in the markets in June 09 was global in nature, like the rise after March 09, and the fall before that post Lehman Brothers crises. In some ways the pause reflects the skepticism of investors who have missed the rally and are still sitting on a lot of liquidity. It also reflects the search for returns beyond the frontline stocks (which are a part of the Indices) to lesser known but liquid stocks. In keeping with investor sentiment the mid cap index out performed the large cap index, while small cap index lagged both (large cap as well as mid cap). Similarly sector rotation in search of value led to sectoral indices like Consumer Durables , Capital Goods, FMCG ,Health Care, IT, Banking and Metals outperform the Sensex, while Oil & Gas, Power, PSU and Realty underperformed the index.
For the month, in cash equities, FII’s were net buyers of USD 823 million (USD 4.1 billion in May 09), while Mutual Funds were net buyers of USD 163 million (USD 475 million in May 09).
In terms of key economic data points for the country that came in during the month, leading indicator of industrial growth - the Purchasing Managers Index(PMI) for June 09 came in at 55.3% (55.7% in May 09), one of the highest readings in the world. The manufacturing index was helped mainly by the new orders index at 58.6 (59.1 in May 09) while inventory balances index fell to 50.2 from 52.2. Index of Industrial Production (IIP) for April 09, that came in during the month reflected the improvement in the manufacturing sector by showing a rise of 1.4% (-0.8% in March 09-revised data). On a use based classification Mining grew by 3.8% (2.6% in March 09), Electricity by 7.1 %( 6.3% in March 09) and Manufacturing by 0.7% (-1.6% March 09). Exim data for May 09 that came in showed that exports declined 29.2%, while imports declined by 39%, due to decline in oil imports by 60% and decline in non oil imports by 25.4%, resulting in a narrowing of trade deficit to USD 5.2 billion from USD 10 billion May 08. Balance of Payments (BoP) data reported for quarter ending March 09, showed a current account surplus of USD 4.7 billion after nearly two years. Advance Tax numbers for the period the 1st April 09 to mid of June 09 showed an increase in collections of 17% from a year ago, reflecting positively on the state of the Indian economy.
In the short term, emerging markets could face pain due to contracting exports, and cost and availability of credit, which are a natural consequence of problems in the developed world economies. But over the long term, they would gain out of lower commodity prices being largely commodity intensive economies and lower interest rate(cost of capital), both of which act as natural stabilizers of economic growth (retarding growth when the world economy heats up and pushing it up in an economic slow down). This will result in GDP growth rates in such countries ticking back up to new sustainable levels, which will attract global capital flows, in search of returns. This is especially true of emerging economies like India that are largely driven by domestic consumption. The liquidity investors are sitting on globally, could assist in creating such an outcome sooner rather than latter. However related to other emerging markets, non transparency, falling imports and exports, falling electricity consumption, falling profits (state and private companies) and lower FDI, makes us circumspect on the Chinese growth numbers.
In June 09 the market will focus on Union Budget to be presented by the new government and the progress of the monsoons. Employees Provident Funds Organization’s (EPFO) decision on whether to invest part of it’s approximately USD 38 billion corpus, in equities will also be of interest. News on the state of the global economy will continue to drive overall sentiments towards equities.
Debt Market
Bond yields hardened further during the month by 30 bps and traded at 7% yet again. An increase in the pre-announced auction size by RBI, apprehension of higher fiscal deficit in the forthcoming budget, renewed spike in oil prices and hardening of bond rates in global markets led to negative sentiments in bond markets.
Liquidity remained abundant with the RBI’s reverse repo auctions consistently getting subscription in excess of Rs 1 lac crores. Money market rates at shorter end eased further with 3 month bank CDs trading close to the reverse repo rate of 3.25%. 1 year bank CDs rates remained largely range bound with marginal hardening. The corporate bond market was mostly lackluster with poor volumes and spreads widening marginally.
Inflation turned negative for the first time in 30 years to -1.61% by mid-month. Even though inflation is likely to turn positive again by year end, it is likely to be benign and remain supportive for easy monetary stance.
Positive news flow started emerging towards end of June with market participants factoring in no major increase in borrowing program due to expected flows from 3G auction, disinvestments and improved tax collections. Global bond yields also begun to ease, providing further comfort.
Next major event to provide direction to the bond markets would be the federal budget to be announced in the first week of July. The market is likely to gain momentum if the fiscal deficit remains broadly in line with that announced in the interim budget. Besides, any cut in small saving rate could result in downward movement in bond yields. Money market rates are likely to be stable having already eased considerably over the past quarter.