Monthly Markets Update (India) - October 2011

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Monthly review of key market segments within India including Equity (Domestic and International), Fixed Income, Currency, Economic Indicators, Mutual Funds & Recommended Portfolios (India).

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<ul><li>1.October 2011Prepared by: iFAST Research Team</li></ul><p>2. Monthly Markets Update - IndiaOctober 2011Key PointsDespite the volatility witnessed, we continue to remain positive on the US equities for the nextthree years.As for the Chinese economy, although inflation continues to be a threat, yet we are of theopinion that the country will loosen its monetary stance in the second half of the year.We believe that the Indian market will remain range bound on account of the negative short-term macro parameters and the continuing gloomy atmosphere in the global environment.On the Fixed Income side, we are expecting some more rate hikes in the current fiscal itselfbefore the central bank presses the pause button on rates.The Indian mutual fund industry saw a decrease in its assets (average assets undermanagement) by 4.06% to Rs. 7, 17,129 crores in the third quarter (July September) of 2011 incomparison to the second quarter (April June) of 2011.A look at the performance of funds shows that all the Equity oriented categories have deliverednegative returns while the debt focused categories are in the positive territory in the month ofSeptember. 3. Monthly Markets Update - India October 2011Equity Markets Update International Markets (As at September 2011 end) Earnings Earnings 20112011 2010 P/EP/E P/E Growth Growth MTD YTDReturn (%) Yr 2011 Yr 2012 Yr 2013 2011 (%)2012 (%) Asia ex Japan (MSCI Asia ex Japan) -13.39% -21.33% 17.00% 10.8 9.5 8.47.40%14.00% Emerging Markets (MSCI EM) -14.78% -23.16% 16.40%9.5 8.6 7.78.90%11.30%Europe (Stoxx 600)-4.74%-18.35% 8.60% 9.6 8.6 7.96.70%11.30%Japan (Nikkei 225)-2.85%-14.94% -3.00% 13.912.210.37.00%14.40%USA (S&amp;P 500) -7.18%-10.05% 12.80% 11.710.5 9.4 16.40%11.70%Australia (S&amp;P/ASX 200) -6.70%-16.32% -2.60% 10.7 9.7 8.99.90%11.10% Brazil (IBOV)-7.38%-24.50% 1.00% 9.2 8.2 7.19.00%12.10% China (HS Mainland 100)-16.98% -24.79% 2.20% 8.6 7.5 6.7 22.60%13.60% Hong Kong (HSI)-14.33% -23.51% 5.30% 9.6 8.6 7.7 17.30%11.70% India (SENSEX) -1.34%-19.30% 17.40% 14.112.211.1 11.60%15.90%Indonesia (JCI) -7.62%-4.17%46.10% 13.911.510.0 23.80%20.10%Malaysia (KLCI) -4.16%-8.68%19.30% 13.412.211.2 10.00% 9.50%Russia (RTSI$)-21.22% -24.24% 22.50%5.1 5.2 4.7 31.20%-1.70%Singapore (STI) -7.28%-16.73% 10.10% 12.411.510.16.60% 8.30% South Korea (KOSPI)-5.88%-13.72% 21.90%9.1 8.0 7.1 13.10%13.80% Taiwan (Taiwan Weighted) -6.67%-18.89% 9.60%13.111.0 9.6-7.50% 19.00%Technology Heavy (NASDAQ 100) -4.54%-3.89%19.20% 13.311.610.4 26.20%14.10% Thailand (SET Index) -14.38% -11.29% 40.60% 10.5 9.2 8.3 25.90%14.10%Source: Bloomberg, iFAST Compilations All returns are in respective local currency terms and MSCI Index returns are in USD 4. Monthly Markets Update - India October 2011Global Market Performance Group 7 CountriesGlobal Indices- G7 (MTD Returns) 0.00% Germany (DAX) USA (S&amp;P 500) UK (FTSE 100)Italy (FTSE MIB) Canada (S&amp;P/TSX) France (CAC-40)-2.00%Japan (Nikkei 225)-4.00%-6.00%-8.00% -10.00%Events Factory orders in the US rose 2.4% m-o-m in Jul 11, after a better-than-expected 0.4% decline in Jun 11 US Unemployment rate remained at 9.1% in Aug 11, unchanged from Jul 11 New home sales fell 2.3% m-o-m in Aug 11, after a better-than-expected 0.3% decline in Jul 11 Industrial production of Germany rose 4.0% m-o-m in Jul 11, after an upward-revised -1.0% decline in Jun 11 Euro-zone retail sales contracted -0.2% y-o-y in Jul 11, after a downward-revised -0.7% contraction in Jun 11 UKs Industrial production fell by -0.2% on a m-o-m basis in Aug 11, after a 0% growth rate in Jul 11 Bank of Japan (BOJ) held its target rate unchanged at a range between 0% to 0.1% in Sep 11 The Industrial production of Japan dropped 3% y-o-y in Jul 11 following a decrease of 2.8% in Jun 11Market OutlookUS markets continued to remain volatile in the month of September as well on account of Euro Zonedebt worries the mixed data of the US economy released, and the Feds weak assessment of the USeconomy. We are expecting the Fed to further lower the economic growth forecasts for the USeconomy, the Fed still expects 2.8% full year growth while our own forecast is 1.6% expansion for 2011.A better idea of the extent of the impact of Euro zones woes on corporate profitability will be known 5. Monthly Markets Update - India October 2011only once the result season starts this month. We continue to be positive on US equities for the nextthree years as the market re-rates to a higher multiple of earnings. On the other hand, the on-goingdebt crisis is having a negative impact on the sentiments and confidence of countries like Germany andthe Euro Zone in general. Finally, as far as the Japanese economy is concerned, the impact of theearthquake along with the problems in US and Europe are having a negative impact on their exports. Wecontinue to stick to our view that the Japanese economy will recover at a slower pace as compared toother regions and countries. 6. Monthly Markets Update - IndiaOctober 2011Asia Pacific (Ex Japan)Global Indices- Asia Pacific (Ex Japan)(MTD Returns)0.00%South Korea (KOSPI)Indonesia (JCI)Australia (S&amp;P/ASX 200)Hong Kong (HSI) Thailand (SET Index)Taiwan (Taiwan Weighted)Singapore (STI)Malaysia (KLCI) -2.00% -4.00% -6.00% -8.00%-10.00%-12.00%-14.00%-16.00%Events Singapores CPI for Aug 11 rose 5.7% y-o-y, after rising 5.4% y-o-y in Jul 11 Industrial production of Singapore for Aug 11 increased by 3.9% m-o-m, after an upward-revised 0.4% gain in Jul 11 CPI of Malaysia decelerated to 3.3% y-o-y in Aug 11 BNM maintained Overnight Policy Rate at 3.0% on 9 Sep 11 Bank Indonesia reference rate is unchanged for seventh months at 6.75% Headline inflation of Indonesia in Aug rose to 4.8% y-o-y compared to 4.6% in Jul The Bank of Korea (BOK) held its benchmark 7-day repo rate unchanged at 3.25% in Sep 11 Koreas Consumer Price Index (CPI) grew at 5.3% y-o-y in Aug 11 compared to a 4.7% increase in Jul 11Market OutlookThe earnings estimate for Singapore has been downgraded on account of the gloomy conditionsprevailing in the international markets. However, we still believe that Singapore equities will delivermore than 20% annualized returns by the end of 2013. Inflation has come down for countries likeMalaysia and Indonesia and is expected to be on a downward trend on account of the easing ofcommodity prices. However, inflation continues to remain sticky for Thailand, as a result of which theCentral Bank hiked the interest rate in the month of August as well which was 9 times since theborrowing cost increased since June 2010. 7. Monthly Markets Update - IndiaOctober 2011BRIC (Ex India) Countries Global Indices- BRIC (Ex-India)- (MTD Returns)0.00%Brazil (IBOV) China (HS Mainland 100) -5.00% Russia (RTSI$)-10.00%-15.00%-20.00%-25.00%Events IPCA Inflation rose to 7.2% y-o-y in Aug 11, up from 6.9% in Jul 11 Brazils Consumer confidence fell to 114.7 in Sep 11, 118.7 in Aug 11 Industrial production of Russia expanded 6.2% y-o-y in Aug 11, after a 5.2% y-o-y increase in Jul 11 Russias Consumer Prices gained 8.2% y-o-y in Aug 11, down from 9.0% in Jul 11 CPI of China rose 6.2% y-o-y in Aug 11 as compared with a 6.5% rise in Jul 11 Chinas Industrial production grew by 13.5% y-o-y in Aug 11 as compared with a 14.0% y-o-y increase in Jul 11Market OutlookThe economic activity in the Brazilian economy decelerated on account of the uncertainties in the globaleconomies. Inflation continued to remain above the governments estimate of 4.5% (Plus/minus 2%). Inspite of this, the Central Bank cut its benchmark Selic rate by 50 bps to reach 12% on the back ofdeterioration in the global economy. Brazils index has been affected by the global panic, European debtcrisis, slowdown in the US economy and the volatility in commodity prices. As for the Russian markets, itwas affected due to global panic and equity market sell-off along with the fears that the Europeandemand for oil will come down. Finally, for the Chinese economy, inflation continues to remain a threatand control in credit growth continues. We are of the view that China will loosen its monetary stance inthe second half of the year due to the ongoing crisis in Euro Zone. We believe that currently valuationsare attractive and we are positive on both Chinese A shares and Hong-Kong listed Chinese equities overthe next 3 years. 8. Monthly Markets Update - India October 2011INDIAEquity Market Outlook 9. Monthly Markets Update - IndiaOctober 2011 India-Equity India Indices (MTD Sectoral Indices (MTDReturns)Returns)0.00% 4.00%Nifty IndexBSE MID CAPBSE SMALL CAP BSE Sensex-0.50%2.00%-1.00%0.00% BSE IT BSE-HC BSE CDBSE FMCG BSE CG BSE METAL BSE Oil &amp; GasBSE Realty BSE BankexBSE AUTOBSE Power-1.50% -2.00%-2.00% -4.00%-2.50% -6.00%-3.00% -8.00%-3.50%-10.00%-4.00%-12.00%Events Indias Manufacturing Purchasing Managers Index was at 52.6 in Aug 11 as compared to 53.6 in Jul 11 Production at factories, utilities and mines rose 3.3% y-o-y in Jul 11, after an 8.8% gain in Jun 11 WPI inflation for Aug 11 was at 9.78% compared to 9.22% in Jul 11 RBI raised the Repo rate by 25 basis points on 16 September from 8% to 8.25%. In addition to this, Reverse Repo rate was automatically adjusted to 7.25% and the marginal standing facility rate to 9.25% The earnings growth for 2011-12 and 2012-2013 are 8.28% and 16.07% which translate to a forward P/E of 13.97X and 12.03X respectivelyMarket OutlookThe Indian markets ended in red by registering a negative return of 1.34% and 1.15% respectively. Someof the macro-economic numbers that came out during the month along with the uncertainties in theglobal markets contributed to the muted growth. Year-on-year growth in the index of IndustrialProduction for July 2011 came in at 3.3% against the Bloomberg consensus expectation of 6.2%. As perthe use-based classification, the Capital Goods and Intermediate Goods sectors contracted by 15.2% and1.1% respectively, while Basic Goods grew at 10.1%. On the other hand, the Consumer Durables andConsumer non-durables grew at 8.6% and 4.1% respectively. We believe that the volatile IIP numbersare a cause of concern for the policymakers, and the deceleration in this month can be attributed to thecontinuous rate hikes that RBI has been undertaking along with the slowdown in the global economy.On the other hand, the WPI Inflation rose to 9.78% in August as against the Bloomberg estimate of9.64%. Inflation has been in the range of 9%-10% since March 2010, and as a result, the RBI has 10. Monthly Markets Update - India October 2011increased the major policy rates 12 times since then. We are of the view that inflation continues to be anightmare for policymakers and until this data falls within the comfort zone of the Central Bank, it willcontinue with its hawkish monetary stance.The month of October is the results season and we are expecting more earning downgrades. We believethat the market will remain range bound on account of the negative short-term macro parameters andthe continuing gloomy atmosphere in the global environment. 11. Monthly Markets Update - India October 2011INDIADebt Market Outlook 12. Monthly Markets Update - India October 2011India-Debt10 Year G-sec Curve8.55 8.58.45 8.48.35 8.38.25 8.28.15 31-Aug-11 12-Sep-11 2-Sep-114-Sep-11 6-Sep-11 8-Sep-11 10-Sep-11 14-Sep-11 16-Sep-11 18-Sep-11 20-Sep-11 22-Sep-11 24-Sep-11 26-Sep-11 28-Sep-11 30-Sep-11 YieldsThe 10-year G-Sec yield hardened during the month of September as it increased from 8.32% in thebeginning of the month and ended at 8.5% .This was on the back of the increase in the major policyrates for the twelfth time since March 2010 in the Mid-Quarter Monetary Policy Review held on Sept 16.RBI has made it very clear that the future course of action will depend upon inflationary tendencies andglobal events. In short, we can expect some more rate hikes in the current fiscal itself before the centralbank presses the pause button on rates. In addition to this the Government also increased theborrowings to Rs. 2.2 trillion in the second half of the year, which was much above the expectations.Both these factors contributed to the increase in yields.We continue to advise investors to stay in short-term papers like FMPs Short Term Funds and UltraShort Term Funds as they continue to give higher post-tax returns as compared to Savings Accounts andUltra Short-Term Funds. In this scenario, we advise:Investors with a time horizon anywhere from 3 months to 24 months can lock-in their money inFMPs (available with varying maturities) at the prevailing high ratesInvestors with idle cash in the savings account should look at Ultra-Short Term Funds. TheRecommended Funds in thiscategory includes DWS UltraShortTerm Fund and Birla Sun-life Ultra short term Fund. The investment horizon that we suggest forsuch instruments is 1 month-3 months. 13. Monthly Markets Update - IndiaOctober 2011Investors with a time horizon between 6 - 9 months should consider Short-Term Funds. TheRecommended Funds in this category include Reliance Short Term Fund and Templeton IndiaShort Term Fund 14. Monthly Markets Update - India October 2011 Mutual Funds 15. Monthly Markets Update - India October 2011 Mutual Fund Industry Asset Trends India Fund Industry Assets (Amount in INR Top and Bottom Five AMCs - By Absolute Change in Assets (Q-o-Q), asCrores)of July- September 2011900,000Q-o-Q Absolute Change % Change800,000700,000in Assets (INR in Crores) in Assets600,000Deutsche Mutual Fund 1677.29 15.13%500,000JPMorgan Mutual Fund 1023.57 27.48%400,000300,000IDFC Mutual Fund 778.83 2.73%200,000 Peerless Mutual Fund700.4414.27%100,000 JM Financial Mutual Fund618.5110.57%- Oct-09 Oct-Dec-10 Dec-09 Jan-10 Nov-09 Mar-10 May-10 Aug-10 Jul-10 Jan-Mar-11 Jun-10 Sep-09 Feb-10 Apr-10 Sep-10 July-Sept-11 Apr-June-11Tata Mutual Fund-2372.39-9.49% Birla Sun Life Mutual Fund -3261.01-4.83% ICICI Prudential Mutual Fund -4570.15-5.72% UTI Mutual Fund-6525.23-9.44%Source: AMFI, iFAST Compilations Reliance Mutual Fund -9909.17-9.71%(Average Assets Under Management) Source: AMFI, iFAST CompilationsThe Indian mutual fund industry saw a decrease in its assets (average assets undermanagement) by 4.06% or by Rs. 30,350 crores to Rs. 7, 17,129 crores in the third quarter (July September) of 2011 in comparison to the second quarter (April June) of 2011.In absolute terms, Deutsche Mutual Fund had maximum average assets this quarter; the fundhouse assets increased by Rs. 1,677 crores. JP Morgan Mutual Fund became the second largestfund house in terms of addition in average assets of Rs. 1,024 crores. Peerless Mutual Fundwhich is a relatively new fund house also appeared among top 5 AMCs in terms of absolutechange in assets; it added about Rs. 700 crores this quarter.Reliance Mutual Fund registered the largest drop in average assets; the fund house lost close toRs. 9,909 crores this quarter. This was followed by UTI Mutual Fund which lost around Rs. 6,525crores. Both ICICI Prudential Mutual Fund and Birla Sunlife Mutual Fund after registering anincrease in assets for...</p>