| | | How is the Indian economy performing amidst the Global crisis? What is the behaviour of the Indian domestic market via-a vis the Global Market? What is the outlook of the Indian debt market? Are you troubled by all these questions?
To update you on the pulse of the market, ICICI Bank's Club Elite Program for esteemed customers such as you, presents 'Market Pulse', a monthly dose of information on the World of Markets – both Domestic and Global. | | | | Global Economy - Recession giving way to recovery | 
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| US recession continues to moderate as improving financial conditions have lent support to expectations that major declines in economic activity will come to an end in the second half of 2009. Yet while policy efforts are gaining traction in credit markets, concerns about long-run fiscal sustainability have supercharged the normalisation in bond yields and commodities and may constrain the appetite of the Fed officials to pursue more aggressive strategies to clinch a recovery. Moreover, constraints on financial firms and consumer losses to income and wealth remain critical drags that will be slow to lift. The Fedýs ongoing attempts at accommodation through credit-support operations have helped to buoy financial conditions along with data, suggesting that the worst of recession has passed. But the financial landscape is not really supportive enough and a revival in investor confidence still appears fragile. | Back to Top _________________________________________________________________________________________________________________ |
| Global Equity Markets - Hold previous months gain on signs of green shoots |
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| Recovery in stock markets, rising consumer and business confidence and improvement in financial markets have helped in rebuilding the confidence of investors in equities. However, MSCI World Index closed in a negative zone i.e. at around 0.61% in the month of June 2009 owing to mixed economic data. The downgrade of 22 banks by S&P (Standard and Poor Rating Agency) and the mixed economic data, viz. improving orders of durable goods, upward revision in GDP contraction, while a fall in the housing data along with skepticism in consumers about the pending recovery led the US market to decline further. The European stock markets declined as investors doubted the fundamentals justifying the recent rally and as a result the MSCI Europe index closed 2.21% lower than in June 2009 while the Japanese stocks reversed the trend and registered a gain of 1.72%, ignoring fears of deflation as consumer prices continued to decline. Performance of the emerging market was mixed in June2009 owing to improved fundamentals while uncertainty over the speedy recovery in the developed market kept investors bewildered. The Chinese stock market reversed the trend and closed in a positive territory as the World Bank raised its growth estimates to 7.2% on improved economic outlook due to the stimulus package. The Russian equity market remained under pressure on the latest economic data, indicating a further decline in manufacturing and capital spending. |
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| Indian Equity Market - Slides in the run-up to the budget | |
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| The Indian equity market slides marginally in June 2009 after a sharp run-up in the last three months. Higher expectations from the policy maker, stretched valuations and lower credit growth kept the market in a mute mode. During the month of June 2009, the market was volatile with both sided movements owing to a mixed economic outlook. An encouraging speech by President Pratibha Patil and Prime Minister Manmohan Singh on the revival of economic. |
| Performance of Indian Markets* |
| Indices | 1 Month | 3 Months | 6 Months | 1 Year | 2 Years | | Large Cap Indices | | BSE Sensex | (0.9) | 51.5 | 49.2 | 7.7 | (0.5) | | S&P CNX Nifty | (3.5) | 44.1 | 44.0 | 6.2 | (0.3) | | Broadmarket Indices | | BSE 100 | (0.6) | 55.8 | 50.9 | 7.7 | (0.2) | | BSE 200 | (0.3) | 57.7 | 52.1 | 7.5 | (1.0) | | Midcap Indices | | CNX Midcap | 1.4 | 61.7 | 46.5 | 3.6 | (4.7) | | CNX Nifty Junior | 4.3 | 83.5 | 71.0 | 25.1 | (5.3) | | Sectoral Indices | | BSE Automobiles | (1.1) | 52.5 | 88.2 | 27.1 | (1.9) | | BSE Banking | (0.6) | 86.0 | 48.6 | 38.8 | 1.2 | | BSE Capital Goods | 7.3 | 104.4 | 86.1 | 26.9 | 2.0 | | BSE FMCG | 7.9 | 13.2 | 13.7 | 8.8 | 11.2 | | BSE Health Care | 3.4 | 29.2 | 20.5 | (14.7) | (3.4) | | BSE Information Technology | 9.7 | 47.1 | 47.7 | (18.2) | (17.8) | | BSE Metal | (0.4) | 91.4 | 108.1 | (18.0) | 1.1 | | BSE Oil & Gas | 1.1 | 34.3 | 53.7 | 4.2 | 10.9 | | |
| Data as on June 30, 2009 | Source: Crisil, ICICI Bank |
| *% Absolute returns for various time horizons. Returns for above 1 year are annualised |
BSE Sensex and S&P CNX Nifty indices closed the month on a flat note while the introduction of free float methodology for Nifty resulted in a slight difference in closing levels (in percentage terms) of key benchmark indices. Mid caps and Small caps continued to outperform their counterpart large caps and registered a gain of 1.4% and 4.3% respectively. BSE Capital Goods index closed with a gain of 7.3% as the mood of investors was buoyant for the sector, following the speech of the President focusing on infrastructure development. BSE Information Technology index was also up on reports that the forthcoming Union Budget may extend the corporate tax holiday enjoyed by export-oriented units and software parks to help companies in these segments reeling under a demand slump in key Western markets. BSE Auto index was also down as fears of a hike in fuel prices weighed on the investor’s sentiments. Back to Top _________________________________________________________________________________________________________________ |
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| Market is likely to range bound in the near term after the Union Budget kept silent over the disinvestment plan, time frame for Fiscal Responsibility and Budget Management (FRBM), relaxation in FDI norms, no mention of banking and finance sector reforms, unchanged indirect taxation rates and corporate taxation rates. And valuations which had hit near historic lows at 8-9 X FY 2010 earnings have moved from distress levels to an expensive zone of 16-17 X FY 2010. This is not supportive enough at current levels. However, an up move will wholly depend on global cues. The Finance Minister has declared that India Infrastructure Finance Corporation is expected to finance INR 1000bn infrastructure projects which will be the key for India’s growth story going ahead. Progress of monsoon is likely to set the direction for markets over the medium term. The corporate earnings upgrade cycle may start making valuations look more reasonable in the coming months. Increased flow of capital in both debt and equity augurs well for companies in the infrastructure space. Rural India continues to do well on the back of positive government policies while the below average monsoon may be a setback for India’s exchequer and for the prospects of companies dependent on rural growth. FIIs that are driving the market for the last three months will remain the key for the Indian equity markets going forward. Any unforeseen developments in the banking sector in the US or Europe and a further rise in global commodity prices may have a negative impact on the markets. Huge supply of equity issuance is also a concern for the market. In the near term, risk reward is unfavorable after the sharp rally of the last four months. Although the long-term prospects of the Indian equity market remain positive, investors should not get carried away by the short-term volatility. | |
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Equities as an asset class may deliver returns of around 10-15% in the long term with higher volatility. Investments in equity funds may be considered for a horizon of about 2-3 years owing to heightened risk aversion. Systematic Investment Plan (SIP) is one of the prudent routes to invest in equity funds as this considerably reduces the risk inherent in equities. Investors are advised to rebalance their portfolio at regular intervals and maintain the asset allocation in line with the individual risk profile. Back to Top _________________________________________________________________________________________________________________ |
| Indian Debt Market: Bond yields rise due to rising
crude oil prices and uncertainty on government borrowings |
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The Finance Minister in the Union Budget for 2009-10 announced that the government would borrow a gross INR 4.51trn which is higher than its interim budget target of INR 3.62trn. The yield on benchmark 10 year G Sec, 6.05% 2019 had risen to almost 30bps from levels seen in May end on the back of a series of negative factors. Bond yields firmed, moving in tandem with the northward momentum of global oil prices and continued high government borrowings but ample liquidity supported yields in the shorter end of the curve. | 
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However, at the end of the month the bond market has shown that the additional government borrowing with a record supply in June 2009 has been absorbed without large disruptions in yields. Therefore, in the last week of June2009, the yields were stabilised in the 7% range and eased off around 20bps on the first three days in July 2009. The government had already raised 25% above its previous target in the last six auctions and hence the market was expecting only a marginal increase in the borrowing requirement for the six months till September 30, 2009. The yield on the 10-year bond again rose after the additional spending plan announcement. The inflation rate fell into negative territory for the first time in more than three decades, with analysts describing it as a temporary phenomenon since economic demand has not contracted. This was due to the high “base effect“ because crude oil prices were nearing their peak this time last year. The headline inflation rate, measured by the wholesale price index (WPI), stood at (-) 1.3% for the week ended June 20, 2009 as against 11.91% in the corresponding week last year. It touched a low of (-) 1.61% during the month. The government hiked the price of petrol by INR 4 per litre and that of diesel by INR 2 per litre for the first time this year on June 1, 2009, to offset some of the losses being incurred by the oil marketing companies because of the recent rally in global crude oil prices. The banking system continues to be awash with surplus liquidity, with the rising inflow of deposits and the stressed growth of bank credit. The average amount absorbed under LAF Reverse Repo was around INR 1207.68bn. The hefty cut in reserve requirement by the RBI has also left huge cash with the banking system. The impact of advance tax outflow from the system is also moderate due to surplus liquidity. Corporate bond yields remained range bound during the month of June 2009 following the G Sec yields. In the first half of the month, the benchmark five-year corporate bonds peaked at 8.23% yield levels, up 13bps while in the second half of the month they rallied by 30bps to close at 7.93% on lack of fresh supplies which boosted the sentiments. The 5-year AAA corporate bond spreads narrowed by 21bps to close at 145bps levels during the month. Back to Top _________________________________________________________________________________________________________________ |
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| Commodity prices and the rise in fuel prices might prove to be a cause of concern once the base effect wears off around September. The RBI will keep policy rates at all-time lows and maintain high system liquidity in conjunction with their pro-growth policy stance. It is expected that the call rate would continue to rule at a lower level until banks speed up lending to the corporate sector. We expect bond yields to be range bound with an upward bias due to huge government borrowing on account of the high fiscal deficit. | |
| We believe that the rates of interest are likely to steepen a bit albeit with large volatility due to supply concerns. The investors could consider money market related Liquid Plan and Short Term Plan from 6-9 months perspective. Bank Fixed Deposits continue to remain a good investment option considering the assured returns. Back to Top _________________________________________________________________________________________________________________ |
| Mutual Fund |
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| Income Funds |
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| Income Funds delivered lower returns in the range of -0.02% to 1.63% in the month of June 2009. This was on account of the upward movement of the G Sec yield due to continued high government borrowings. Corporate bond yields remained range bound during the month of June 2009 following the G Sec yields. The 5-year AAA corporate bond spreads narrowed by 21bps to close at 145bps levels during the month. However, yields on the sub AAA rated papers remain at elevated levels reflecting risk aversion of investors. Given the current volatility in debt markets, fresh money in Income Funds could be avoided at the current juncture as they exhibit higher volatility compared to short duration debt funds. | |
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| Gilt Funds |
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| Gilt Funds delivered lower return in a wide range of - 1.67% to 0.98% in the month of June2009 as bond yields firmed moving in tandem with the northward momentum of global oil prices and continued high government borrowings. The yield on benchmark 10 year G Sec, 6.05%, 2019 had risen to almost 30bps from levels seen in May end. However ample liquidity supported yields in the shorter end of the curve. Investors could avoid Gilt Funds at this juncture as the shorter end of the curve is more preferable. | |
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| Short Term Plans |
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| Short Term Plans delivered robust returns in the wide range of 0.29% to 1.56% during the month of June2009. The divergent trend with respect to AAA rated and sub AAA rated corporate papers witnessed in the previous month, reversed during the month of June2009. The thin credit spread between 1 year AAA rated and sub AAA rated corporate papers widened from just 43bps to 118bps during the month. Funds which took high exposure in AAA rated corporate bonds outperformed as 1 year AAA rated corporate bond yields and came off sharply by 46bps as compared to the upward yield movement of 29bps and 41bps in AA+ and AA rated securities respectively. Short term plans continue to remain an attractive proposition as they offer a dual benefit of low rate of interest risk and duration management flexibility in comparison to long term debt products. | |
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| Liquid Funds |
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| Liquid funds delivered return in the range of 0.17% to 0.45% during the month of June 2009. The government successfully conducted front loading of borrowing program as liquidity remained at a very comfortable level since the last couple of months. Also the fund pressures from advance tax outflow have been more or less negated by the sizeable maturity of 5.24% 2009 security worth INR 220bn. The average overnight rate for the month hovered around 3.23%. The net Liquidity Adjustment Facility balances moderated to INR 1207bn during the month of June 2009 from the previous month of INR 1320bn. Low rate of interest risk associated with liquid funds makes it an attractive proposition. | |
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| Equity Funds |
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| During the month of June 2009, equity funds covered in our universe delivered returns in the range of -3.35% to 1.75% as Indian equity markets moved in a narrow range owing to valuation concerns. FIIs continued to pour money in the Indian stock market as stability of government regained their confidence in India’s growth story. However, after the current rally, the Indian stock become comparatively expensive among its peers, and as a result, in the later half of the month, FIIs were mainly net sellers. During the month of June 2009, FIIs registered net inflows to the extent of INR 38.3bn compared with net inflows of 201.17bn in the month of May 2009. Mutual funds were also net buyers to the tune of INR 8.63bn during the month of June 2009, while in the previous month they were net buyers to the tune of INR 22.91bn | |
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| Report Acknowledgment | | 
| | Sachin Khandelwal | # 91 22 2653 8786 | sachin.khandelwal@icicibank.com | | Head-Global Private Clients | | | |
| | ICICI Bank Global Research Group | |
| | Dr. G Ramachandran | # 91 22 2653 8811 | ramachandran.g@icicibank.com | | Head- Global Research Group | | | |
| | Rupal Nevatia | # 91 22 2653 8815 | rupal.nevatia@icicibank.com | |
| | Abhishek Sikdar | # 91 22 2653 7859 | abhishek.sikdar@icicibank.com | |
| | Vishal Doshi | # 91 22 6765 2155 | vishal.doshi@icicibank.com | |
| | Nehal Waghmare | # 91 22 2653 7856 | nehal.waghmare@icicibank.com | |
| | Sandeep Raghav | # 91 22 6765 2168 | sandeep.raghav@icicibank.com | |
| | Akhil Bilala | # 91 22 2653 8839 | akhil.bilala@icicibank.com | |
| | Mugdha Sawant | # 91 22 2653 8884 | mugdha.sawant@icicibank.com | |
| | Shreyash Deshpande | # 91 22 2653 7860 | shreyash.deshpande@icicibank.com | |
| | Alan Zacharia | # 91 22 6765 2157 | alan.zacharia@icicibank.com | |
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