March 2011 EQUITY OUTLOOK The Indian benchmark indices ended FII Equity Flows: Turn Buyers for First Time in 2011 March on a positive note after being 7,000 Cash (US$m) 6,373 6,000 Futures (US$m) 5,580 down ~13% between January and 5,000 3,777 4,159 February 2011. The benchmark gained 4,000 3,000 2,405 Gaurav Kapur 2,220 1,556 2,100 1,740 SENIOR MANAGER - EQUITY about 5.6% during March 2011, 2,000 1,358 1,299 1,000 406 329 making it the second best performing 231 0 -1,000 -529 -363 market in the world for the month. The CNX midcap index also was -737 -993 -826 -2,000 -1,016 -1,257 -1,989 -1,387 up 5.8% over the same period. FIIs were net buyers of ~US$1.5 bn -3,000 -4,000 -3,417 during March, however, they are still net sellers worth around 1 1 1 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 - - - - - - - - - - - - r l t r b n y v c n g p a c u p e a a o e US$650 mn year-to-date. u u e J J M F O A J N D A S M Source: Morgan Stanley Research Asia was the best performing Emerging Markets region in March, rising by 7.1%, while Emerging Markets Ex Asia (+4.7%), despite underperforming, remained resilient in the face of the ongoing political turmoil in the neighboring Middle East North Africa (MENA) region and the rumbling sovereign debt crisis in Europe. Latin America (+3.3%) continued to be the regional laggard, held back by inflation concerns and rising interest rates. Globally, the US economy grew at 3.1% annual rate in the fourth quarter led by a jump in consumer spending. The healthy increase in consumer spending might not sustain as surging energy prices would erode the purchasing power and supply constraints caused by the Japanese natural disaster would slow down the pace of the recovery. On the manufacturing side, the IIP data for the month of January IIP up 3.7% in January higher than consensus came in at 3.7% primarily due to high base effect. We expect %YoY 20 growth to remain subdued in the coming months. However, we IIP up 3.7% in Jan 11, higher than consensus of 2.9% expect recovery in 2HFY12 as the base effect wears off coupled 16 with environmental clearances and order timelines being pushed 12 to FY12 bode well for a recovery. 8 Domestically, headline WPI rose 8.3%, higher than consensus 4 estimates of 7.8% and the 8.2% growth seen in January. Prime 0 1 0 0 0 6 6 6 7 7 7 8 8 8 9 9 9 5 5 5 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - - - - - - - - - - - - - - - - - Minister Manmohan Singh said government will deal with the - - n y y y y y y p n n p n p n p n p n p a a a a a a a e a a e a e a e a e a e J J J J J J J S S S S S S M M M M M challenge of high inflation without disturbing the growth M Source: Citigroup Research momentum. The Prime Minister also said the tax and financial sector reforms were on government agenda and the government would raise resources through sale of equity in the public sector firms during the current financial year. In line with expectations, the RBI raised both repo and reverse repo rates by 25bps each to 6.75% and 5.75% respectively. (Pre-crisis, repo/reverse repo stood at 9% and 6%.) Going forward, we expect RBI raising rates by another 75bps by early 2012, taking repo and reverse repo to 7.50%/6.50%. However, upside risks to inflation could result in front-loading and perhaps an extension of the rate hike cycle. Going ahead, the month of April would see assembly elections in four states – Assam, Tamil Nadu, Puducherry and Kerala, which would be crucial in setting the political tone in the country. Crude prices and inflation would continue to stay in focus and a normalization of crude prices should provide a leg up for the Indian market. At this time, we believe that while market has rallied in March, it should now depict a sideways movement and result season needs to be watched out for any upgrades or downgrades Source: Bloomberg 2 Bharti AXA Investment Managers Pvt. Ltd. FIXED INCOME OUTLOOK MACRO ECONOMIC REVIEW The budget at the end of February signaled optimism by lowering the fiscal deficit target to 4.6%. Markets had gone into the budget FY 11-12, with an expectation of a gross Central Government borrowing budget of ` 4,50,000 crores. The Ramesh Rachuri budgeted number was announced at ` 4,17,000 crores. Govt. also increased the debt FII investment limits for SENIOR FUND MANAGER FIXED INCOME infrastructure companies from the current USD 5 Billion to USD 25 Billion. The target is based on the assumptions of buoyant tax revenues, and higher nominal growth (higher inflation). The spoiler in the works is the subsidies due to oil, fertilizer, and food. With the Jasmine revolution spreading to Libya, and the ongoing struggle between the pro and anti government forces keeping the prices of crude oil on the boil since the beginning of March, inflation has also staged a turnaround to the upside, printing in at 8.31% in March. Consequently, as expected, RBI increase the repo rate by 25 bps, did not intervene to bring down the liquidity deficit, and revised upwards its March end inflation target to 8%. OUTLOOK It seems now that we are firmly in the 3rd leg of the inflation led interest rate hiking cycle, similar to the end of 2007 and the beginning of the 2008 phase. From food articles, inflation has now definitely spilled over onto other articles, leading to generalized inflation. However, there are more global factors fuelling this. The expansionary and loose monetary policies pursued by the U.S., is washing onto other asset classes and shores – notably commodities, and emerging markets, leading to increased consumption, and generalized rise in prices. There have been food price related riots in various parts of the world, of whose outcomes is the Jasmine revolution. The generalized price inflation is one area where monetary policy is widely believed to be effective, and hence we expect an increase of between 50 - 75 bps rise in interest rates by the RBI in this financial year. This is assuming that RBI will continue on its gradualistic rate raising policy. Domestically, a lot depends on the monsoon, and as we head into it, the picture will get much clearer. Preliminary expectations are coming in for a normal monsoon this year. What is interesting is that, assuming the current scenario of 50 – 75 bps rate hike holds, then the earlier rate rises have raised the accrual on the corporate bonds and discounted instruments. This more than ever compensates the holder to a large extent, from further rate rises, and reduction in prices. Juxtaposed with this, is the fact that for many investors, it is not possible to call the top of the interest rate cycle, at which point theoretically, one should go long on duration and get totally invested in long term debt. Hence, we believe that increasing allocation to debt over equity, and that too in the Short Term Income Fund category will really start paying off in the next 6 months to 1 year period. The higher holding period is required to ride out the volatility arising from any rate hikes. As we head into April, and the new borrowing calendar starts, the low rates due to low credit offtake (typical in the 1st quarter of the financial year) will slowly stablise and head higher as one or two auctions happen. Data Source : Bloomberg LP (Unless indicated otherwise) Get the latest Equity Market Outlook & Fixed Income Market Outlook regularly in your mail box. Visit www.bhartiaxa-im.com & subscribe now! 3 Bharti AXA Investment Managers Pvt. Ltd. PORTFOLIO DETAILS Bharti AXA Equity Fund All data as on March 31, 2011 (Unless indicated otherwise) Portfolio Holdings AMFI Sector % to Net Classification Assets EQUITY & EQUITY RELATED PERFORMANCE (as on March 31, 2011) Listed / awaiting listing on the stock exchanges MONEY Reliance Industries Ltd Energy 7.39 (<1 Year Absolute% & >1Year Compounded Annualised %) $ ICICI Bank Ltd Financial Services 7.01 MUNI State Bank of India Financial Services 6.55 Period Bharti AXA Equity Fund - S&P CNX Nifty Infosys Technologies Ltd IT 6.33 Regular - Growth* ITC Ltd Consumer Goods 5.82 Tata Consultancy Services Ltd IT 4.35 6 Months -8.0671% -3.2538% HDFC Bank Ltd Financial Services 4.17 Last 1 Year -0.2841% 11.1381% Housing Development Finance Corporation Ltd Financial Services 4.15 Larsen & Toubro Ltd Construction 3.72 Since Inception 28.4334% 37.5628% Tata Motors Ltd Automobile 3.40 (date of first NAV - HCL Technologies Ltd IT 2.83 October 29, 2008) Opt for Investor Friendly Coal India Ltd Metals 2.46 Past performance may or may not be sustained in future. features like Daily SIP Axis Bank Ltd Financial Services 2.46 and Eco Plan Indusind Bank Ltd Financial Services 2.15 *Performance of the dividend Plan for the investor would be net of the Sun Pharmaceuticals Industries Ltd Pharma 2.10 dividend distribution tax, as applicable.