Equity market update
After being on a losing streak (-3.5%) in the last month, the Indian equity markets (BSE Sensex) displayed a rebound of 756.3 points (+4.5%) in the month of June 2010, as the Index of Industrial Production (IIP) numbers for April (data released in June 2010) roared at 17.6%, thus providing a fillip to the buying activity.
Roaring IIP numbers for April 2010 were on account of buoyant consumer demand and higher infrastructure spending. This new level, led to IIP breach its 20-year high of 16.8% achieved in December 2009.
According to the quick estimates released by the Central Statistical Organisation (CSO), this strong up-tick in IIP did reveal the following positives:
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Strong manufacturing growth - The manufacturing index, which is the principal component of the IIP, grew by 19.4% over the last year (April 2009).
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Growth in sectoral output - Output of capital goods grew smartly over the last year (April 2009) by 72.8%, followed by a growth of 10.8% in the output of intermediate goods. Similarly, the output of consumer durables and consumer non-durables also grew by 37.0% and 6.6% respectively, with the overall growth in consumer goods being 14.5%.
BSE Sensex vs. FII inflows
(Source: ACE MF)
The graph above also clearly depicts that the Foreign Institutional Investors (FIIs) were also enthused by these numbers as they bought net to the tune of Rs 10,508 crore in the Indian equity markets; as compared to being net sellers in Indian equities to the tune of Rs 9,437 crore in May 2010.
What should equity investors do?
In our opinion, the sharp vacillation between May (-3.5%) and June (+4.5%) could be the result of opportunistic short term investors trying to still access the risk of a global slowdown and/or a European meltdown.
However, continuity in double-digit inflation, is something to worry about as, this may hurt positive sentiments of the equity markets. Also, while the theme of domestic consumption is working well, one must bear in mind that a deficient monsoon could play truant, on the domestic consumption story.
But having said that, a positive view on the GDP (Gross Domestic Product) growth rate (Finance Ministry’s projection of 8.5% for fiscal year 2010-11) has also bettered the chances of India Inc. posting strong earnings for the fiscal year 2010-11.
(Source: CSO)
In our opinion if earnings could actually materialize (given the GDP growth rate happens) then we could see a reasonable upside for the Indian equity markets over the next couple of years.
We therefore recommend investors to stay invested and invest more (in a phased manner) in equity funds which focus on India’s strong domestic fundamentals. Yes, choppiness and volatility in the equity markets will continue on account of any news flow from China, Europe and U.S.; but that shouldn’t stop you from investing. Infact, any decline in the equity market should be used by investors to buy, as these are opportune times to invest in funds which are driven by strong investment processes and fundamentals.
One should not look at the immediate index levels, as they do not matter for a long-term investor.
Debt market update
In the month of June 2010, the 10-Yr G-Sec yield did inch-up by 3 basis points, (closed the month at 7.55%) on the expectation of a policy rate hike by the Reserve Bank of India (RBI), before its first quarter review of monetary policy 2010-11, scheduled for July 27, 2010.
And interestingly these market expectations did realise, as a couple of days later (on July 2, 2010), RBI intermediately increased its key short-term lending and borrowing rates by 25 basis points each to control spiralling double–digit inflation. The central bank increased the key policy rates as under:
Repo rate from 5.25% to 5.50% and
Reverse repo rate from 3.75% to 4.00%
(Source: Reuters website)
The Wholesale Price Index (WPI) inflation for the month of May 2010 (released in June 2010) climbed up in doubled digits at 10.16%, after showing signs of cool-off in the previous month (9.59% in April 2010).
Moreover, WPI inflation numbers for February and March were also revised upwards to 10.06% and 11.04% respectively. Also, the fact that non-food inflation and fuel price inflation are accelerating, called for this intermediate rate hike. Presently, the Government has deregulated fuel prices, thus resulting into an upward movement in the price of petrol, diesel, LPG and Kerosene, which may again creep in inflation pressures (in our opinion WPI inflation would increase by 63 to 83 basis points).
What should debt investors do?
The month of June 2010 saw liquidity tightening, as redemption pressures did mount on account of 3G auction payments and advance tax commitment. Also the intermediate policy rate hike (25 basis points), will tempt short term interest rate to rise further.
Moreover, in our opinion RBI will certainly continue adopting the calibrated exit path by raising policy rates by 25 basis points at each step to normalise policy rates and make it more relevant to the current high economic growth and spiralling inflation. Hence, RBI in its next policy review meeting (scheduled for July 27, 2010) may increase the policy rates again by another 25 basis points.
Hence, in such a scenario it would be prudent for investors with a short-term horizon (i.e. 3 months or less), to invest in liquid funds or liquid plus funds for the next two months. On the other hand medium term investors with a time horizon of 6-12 months can invest in floating rate funds.
Investors should wait before allocating their money to Fixed Deposits (FDs), as a further increase in deposit rates is expected from the banks, only after the next monetary policy review meeting (scheduled for July 27, 2010). One year FDs would be attractive only above 7.5% so as to obtain real growth, after factoring in inflation. One year bank FDs are currently available at 5.0% to 6.5%.
Gold Update
(Source: World Gold Council)
As the global economic uncertainties also prevailed in the month of June, gold prices continued to increase further by 1.3%, thereby breaching its all time high (USD 1,226 per ounce) in December 2009. It thereby indicates that investors are taking refuge in this safe haven.
For the month of June, gold prices in USD as measured by the London AM Fix leapt higher by 1.7%, as the U.S. dollar strengthened. But it seems that markets have realised that the recent U.S dollar strength is more because of the problems faced by the Euro zone, than on the dollar’s own merit.
In the Indian markets too, gold prices ended at Rs 18,839 per 10 grams (on June 30, 2010), up by 2.3% from its previous month’s close (Rs 18,407 per 10 grams). This marginal increase in gold prices is again nourished primarily by the prevailing Euro zone crisis, depreciation of Indian Rupee against the US dollar and the local demand for the precious metal due to the ongoing marriage season.
What should investors in gold do?
We believe that gold as an asset class is an excellent diversification tool for investors. Also, gold is the classic safe haven in times of prevailing global economic uncertainty. Gold is seen today as an “insurance policy”, on account of the rising concern about “currency devaluation”, ‘’sovereign debt crisis” and “inflation”. Hence in such situations, we suggest that investors should gradually keep allocating to gold and make the most of any declines by increasing allocations to this asset class.
At PersonalFN, we recommend that every investor should have a minimum of 5%-10% allocation to gold. Invest in gold with a long term perspective with a time horizon of 10 to 20 years.
Address questions or comments to: research@personalfn.com
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For Debt Market Update, the inputs were taken from the Fund Manager - Fixed Income of 'Quantum Mutual Fund'."
For Gold Update, the inputs were taken from the Fund Manager - Commodities of 'Quantum Mutual Fund'."
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