May 2009.Cdr
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RESEARCH REPORT - MAY 2009 MARKET STRATEGY MAY 2009 Global indices continued to rally in April as data-points that came The US government conducted the so-called stress tests on 19 of the through showed signs of some stability and led to optimism about nation's biggest banks. The aim is to determine which banks are an economic recovery, amidst the ongoing economic contraction. healthy enough to survive another financial shock and which will Significant fiscal and monetary stimuli across the world have likely need additional government support. The results of the test are raised the risk appetite of investors, leading to an increase in market expected on May 4th (Monday). If the results indicate that a liquidity and also a more sanguine view on growth expectations. The significant number of banks need greater capital infusion it may lead earnings season in the US too was marked by some better than to weakness in US financial stocks and have an impact on global risk expected numbers from the financial sector, which added steam to appetite. the rally. Emerging markets stocks, over the last month have outperformed Economic data in the US continued to remain weak; the pace of the developed markets on better growth prospects and a relatively decline has however shown some signs of moderation. While it may healthier financial sector. Liquidity too has improved for EM's given be early to call for economic growth (particularly in the US and EU), the increased risk appetite of investors- a likely outcome of the the outlook looks to have improved, in the backdrop of these economic stimuli announced that has led to a more sanguine perceived 'green shoots'. outlook on a global economic recovery. Outlook for equities too as an asset class For India even though the leeway to has consequently improved resulting in provide a large fiscal stimulus remains fund flow into the emerging markets limited, RBI's sustained monetary easing gaining momentum during the month. and consumption boosting measures As a result, emerging markets including The equity markets have rallied adopted over the recent past are showing some signs of an impact. India have outperformed the developed on the belief that the worst for the markets given better growth prospects Sanguine bottom up indicators like global economy and financial markets is and a relatively healthier financial sector. recent automobile sales and cement Indian indices have gained close to 15% behind us. We believe that for the rally dispatches are examples. over the last 1m whereas the developed to sustain, stability of the US financial Global economic contraction markets (US, UK, Japan) have gained sector, effectiveness of the monetary and continues but pace of decline seems between 3-5%. fiscal stimuli, globally and locally and to be moderating The earnings announcements so far in the outcome of the ongoing general The US Gross domestic product fell at a India have been largely in line with 6.1% annualized rate in the first quarter expectations. We believe that, further elections will be the key variables to after falling 6.3% in the fourth quarter. improvement in economic data, both monitor. Economists expected it to fall at 4.7%. global and local, only will make the GDP was weighed down by a sharp current rally sustainable. We also believe decline in exports and plummeting the effectiveness of the monetary and business inventories. However, the fiscal stimulus will be a key for the inventory slowdown was seen as a performance of equities through CY09. positive, as it could mean the correction Going into the month of May, our markets would focus on the cycle is ending. results of the ongoing general election. Uncertainties on the The Fed Reserve has said that although the economic outlook has outcome of the general elections could lead to risk aversion and may improved modestly, partly reflecting some easing of financial market cap any significant upsides from the close to 12,000 levels of the conditions, economic activity is likely to remain weak for a time. It Sensex. added that the pace of contraction appears to be somewhat slower, We expect the markets to follow a longer term trend once the a belief that has helped lift US stocks over the last two months. election results are out and there is more clarity on FY10 earnings. Indian markets rally on FII inflows Equity gains continued in April- positive sentiment given Domestic equity indices have rallied, taking cues from the global higher risk appetite and liquidity, on the back of 'green equity markets and more so from the stable US markets. The rally in shoots' contribute the Sensex was also spread to the small and mid cap indices, making The US markets began on a strong note in April as better than it a broader market up-move. expected earnings announcements by Wells Fargo and expectations Sector wise the Capital Goods index and Banking index posted that banks will pass the government's stress test, boosted strong gains during the month. During the month, the bidding sentiments towards financials. The US Fed Beige book pointed to process of the fraud-hit Satyam Computers was consummated with continued decline in economic activity but indicated that the pace of Tech Mahindra emerging as the highest bidder at Rs.58. Tech decline is moderating. The Eurozone stocks also rallied taking Mahindra will now have to make an open offer for 20% stake at comfort from results announcements. Rs.58. RESEARCH REPORT - MAY 2009 Page 1 MARKET STRATEGY MAY 2009 FIIs turned significant buyers during the month. FIIs invested Rs. 72.1 factors, in the midst of a global economic contraction: (a) bn in Indian equity markets (cash market) in March 09 on a net basis continuation of monetary easing by the RBI aimed at safeguarding v/s an outflow of about Rs 61 bn in the first three months of the growth; low WPI inflation levels will be a cushion (b) a declining calendar. We have been maintaining that, outflows on account of FII current account deficit if crude prices remain benign, and (iii) the selling will remain a major concern to watch out for. Stabilization of impact of consumption boosts, given to the rural economy, that FII flows and / or positive FII flows are important for the markets to remains relatively resilient. find its feet and move up. Also, critically banks seem to have commenced lending again, going by the data points coming through RBI. Credit-deposit (CD) ratio for Market performance- sector wise for the month of April '09 the banking industry was 71.4% at the end of February 2009 (down from 73.6% at the end of March 2008). Over the month of March 30% 2009, CD ratio increased to 72.3% from 71.4%. Even though this 24% increase is partly seasonal, we believe the RBI's discouragement to 18% banks (by cutting reverse repo rate) from investing in the reverse repo 12% window has likely begun to work. 6% 0% The Indian Government has not provided fiscal stimulus in the l l l l X s Y p e G g h U o a a s a r t a t t E a n T c i E C i d S a u e c m e S F p k G o S p P conventional sense like large capital investment, tax cuts etc that c I M d s A a T i n M o N a B h N F & t a g l c C E E m l i B a S S e O B have been carried out by developed markets and also Asian H economies like China. The Government has however been giving Source: Bloomberg boost to domestic consumption through consistent budgetary measures over past two years. The farm loan waiver, implementation Factory output continues to stagnate - successive contraction of the NREGA, maintaining minimum support prices for food grains witnessed in the IIP readings at high levels in FY09, and also the implementation of Sixth Pay The IIP for January 2009 posted a contraction of 0.5% as compared Commission are examples of such measures, which are aimed at to a 6.2% growth in January 2008. This contraction follows the 2% boosting domestic consumption. contraction witnessed in December 08. The impact of such consumption stimulus is likely visible in recent Mining and manufacturing output contracted at 0.8% and 0.4% auto sales volumes, cement consumption, telecom subscriptions etc. respectively. Capital goods index grew 15.4% yoy, however on While we do believe that a part of the recent upturn in these data- month-on-month basis, there was a decline. points may be due to pre-election spending, the extent of relative demand resilience in our opinion also points to benefits of The RBI and Government have taken several measures recently to government spend/measures. spur growth including interest rate cuts and series of stimulus measures. The recent fall in inflation would provide greater leeway Initial set of Q4FY09 results have been largely in line with to RBI for adopting a softer monetary stance, going forward. expectations Inflation near zero level The earnings announcements so far in India have been largely in line with expectations. Management guidance by frontline IT companies Inflation continued to moderate and was at 0.27% for the week indicated weakness in offshoring market and pressure on billing ended February 14, 2009. This is the lowest level of inflation since rates. Infosys guided for flat earnings scenario going into FY10. annual records started 32 years ago. Reliance Industries results came in line with market expectations.