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From the Fund Managers Desk 1x1pix.gif (807 bytes)
1x1pix.gif (807 bytes)

Wednesday, September 15, 2010 10:40 Hrs IST

Global economic news and foreign fund flows could influence the direction of the market in the near to medium term

Equity Market, DSP BlackRock Mutual Fund

Macro-economic Review

The Industrial Production (IP) growth for June 2010 decelerated sharply to 7.1% y-o-y compared to 11.3% y-o-y growth in May (revised downwards from 11.5% earlier) and 16.5% y-o-y growth in April on account of base effect. On a seasonally adjusted basis the IP index was up 1.2% m-o-m (compared to -2.9% in May). In the manufacturing segment the growth decelerated to 7.3% y-o-y compared to 12% y-o-y in May, on account of machinery and equipment, basic metal & alloy industries and basic chemical and chemical products. Growth in the electricity and mining segments decelerated to 3.5% y- o-y and 9.5% y-o-y respectively compared with 6.4% y-o-y and 10.1% y-o-y in the previous month. According to use based classification, growth in the capital good segment decelerated sharply to 9.7% y-o-y compared to 34.2% y-o-y in the previous month while that in the consumer goods segment picked upto 8.3% y-o-y compared with 7.4% y-o-y in May.

Headline inflation, as measured by the monthly Wholesale Price Index (WPI), decelerated to 10.0% y-o-y for July 2010, compared to 10.6% y-o-y inflation in the previous month and 11.1% y-o-y in May (revised upwards from 10.2% y-o-y). Non-food inflation accelerated to 10.2% y-o-y in July from 10.1% y-o-y in the previous month, while food inflation moderated to 9.6% y-o-y in July as compared to 11.6% y-o-y in June.

The monsoon season started on a slow note, but it recovered strongly in July and August. Cumulative rainfall, which was 15% below normal earlier at end of June, is now only 2% deficient (as of August 25, 2010).

Export growth for the month of July 2010 decelerated to 13.2% y-o-y compared with 30.4% y-o-y in the previous month while Import growth accelerated sharply to 34.3% y-o-y compared to 23.0% y-o-y in June. On a seasonally adjusted sequential basis the exports were down 7.9% m-o-m compared with 2.7% m-o-m growth seen in June while the imports were down 4.0% m-o-m compared with 4.0% m-o-m growth in the previous month. The monthly trade deficit widened to USD 12.96bn compared to USD 10.6bn in the previous month. The y-o-y growth in monthly trade deficit stood at 75.1% in July compared with 12.2% in June.


The MSCI India Index has outperformed the other emerging markets during August 2010. India's performance ranking (among emerging markets) improved significantly from the previous month. Year to date, India is the 11th best performing emerging market.

Sensex/Sectors: The BSE Sensex Index moved up 0.6% during August. On a year on year basis, the BSE Sensex Index is up 14.7%. During the month, Financials was the best performing sector that contributed 1.4% to the absolute Sensex movement while Energy lagged behind with a negative contribution of 0.9%. On a year on year basis, Financials was again the best performing sector with a contribution of 8.0% while Telecom with a negative contribution of 1.8% turned out to be the worst performing sector.

Large/Mid/Small Cap: The Large Cap Index (BSE 100) continued to underperform the BSE Mid Cap and BSE Small Cap Indices, in August. On a 12-month trailing basis, the mid-cap and small-cap indices have outperformed the large cap index by 12% and 19% respectively.

Flows: FII flows in the cash market remained strong for the 3rd consecutive month. On a 3-month basis FIIs purchased equities worth USD 8.2bn, the highest ever. The futures' market, however, saw outflows of USD 363mn. Insurance companies sold equities worth USD 324mn while domestic mutual funds also remained net sellers for the 12th consecutive month, selling worth USD 605mn.

Equity market activity: Market volumes in the cash segment were up 6% m-o-m while market breadth has fallen 10% m-o-m. Volumes in the derivatives segment came were up 12% m-o-m while average open interest remains at an all time high.

Earnings expectations: The consensus expects Sensex EPS growth of 23.0% and 19.0% in FY11 and FY12 respectively.

Corporate activity: Slowed down further in July. YTD debt issuances stood at USD 29.5bn while YTD equity issuances are at USD 15.5bn. M&A activity also witnessed a m-o-m slowdown.

Valuation: The MSCI India's relative PE premium compared to MSCI EM was 61%, up from the previous month. The Sensex Index is trading at 15.8(x) 1 year forward earnings.


August 2010 proved to be a volatile month for the Indian equity market, amidst global uncertainty and weak economic data in the US. Strong inflows, buoyant tax collections and a healthy government balance sheet however ensured that the Indian equity markets continued to outperform other emerging markets. The BSE Sensex Index closed the month 0.6% up, with the Index touching a 31-month high, but gave up some of its gains in the latter half of the month on the back of global uncertainty and moderation in industrial activity.

Industrial Production (IP) growth, though having moderated, continues to remain stable. GDP data released by the Government for 2nd quarter 2010 shows the economy to be in peak health, substantiating the growth expectations for the medium to long term. Monsoon, which had started on a poor note, has also seen a sharp turn around with the annual rainfall now being only 2% deficient. This should help the overall agricultural production and temper inflationary expectations. On the back of strong credit growth, lending and deposit rates which had remained stable so far have started moving up.

Corporate earnings for the quarter have been mixed, and largely as per expectations. The consensus earnings growth expectation for FY11 stands at 23%. From a valuation perspective, though Indian equities seem to be reasonably valued, the recent outperformance could be followed by a phase of consolidation before markets get back on their upward trajectory. Global economic news and foreign fund flows are the other key variables that could influence the direction of the market in the near to medium term, though inherently strong fundamentals make the country well poised to deliver 8.5%- 9.0% economic growth in FY11.

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