Market Overview

The exhaustion of the Indian equity markets as seen in the month of July 2012 (where the BSE Sensex lost -1.1%) had its bearing on the equity market movement for August 2012 as well, since the BSE Sensex reported muted gains of +0.8% (or +144.57 points).

At the beginning of the month, the hint from the Reserve Bank of India (RBI) that it would keep policy rates firm, until inflationary pressures reduce; infused nervous sentiments in the market, in an environment where the economy already slowed down due to negative ripples of the Euro zone debt crisis. It is noteworthy that since a conclusive plan was not yet drawn, the sentiments in the Euro zone remained subdued. On August 6, 2012, Mario Draghi, the president of the European Central Bank (ECB) conditionally said that they might buy Government bonds to help contain Italy's and Spain's spiralling bond yields, but both these nations are yet to revert back whether they would take recourse. At present while, Ms Angela Merkel backs the bond-buying plan, Bundesbank President - Mr Jens Weidmann and some German politicians have lashed out at Draghi's bond-buying plan for Italy and Spain, as they fear that such a plan elevates the respective Government's reliance on central bank and won't solve the Euro zone debt crisis. Members of Merkel's Christian Democratic Union and its Free Democratic Party coalition partner too were of the view that that the ECB could become a risk to the financial system if it sticks to plans to resume bond purchases. Thus given this backdrop, uncertainty continued to linger. In fact the Euro zone manufacturing contracted more than initially estimated in August 2012, thereby suggesting that the economy may struggle to avoid a recession in the third quarter (of their financial year). It is noteworthy that the Euro zone's manufacturing Purchasing Managers' Index (PMI) was at 44.0 in July 2012 (data released in August 2012), being 13 months below 50.0 thereby indicating a contraction. Thus the European manufacturers are feeling the impact of sovereign debt crisis in the region and tougher austerity measures.

Speaking about the U.S., their factory data too for the month gone didn't reveal a very encouraging number at the Purchasing Managers' Index showed only a modest improvement as it inched-up to 51.9 in August 2012 from 51.4 in July 2012. Moreover, it was the third weakest result since the manufacturing sector stopped shrinking in October 2009; thereby indicating that manufacturing in the U.S. continued to take a hit in the backdrop of weak economic conditions in key export markets. Also the increase in jobless claims data revealed that the world's largest economy is struggling to generate enough jobs.

Back home in India, the downbeat domestic economic data too governed the sentiments of the Indian equity markets. The see-saw movement of the Index of Industrial Production (IIP) data (prevailing since quite some time now), made the Indian equity markets quite nervous as it posted a negative growth of -1.8% for the month of June 2012 (data released in August 2012) as various factors such as high interest rate scenario, stiff inflation, poor business environment, unpredictable tax policies and a slowdown in the developed economies (such as Euro zone and the U.S.) weighed heavily on the production index of the country. WPI inflation for July 2012 (data released in August 2012) provided some relief as it slipped to 6.89% (placing it within the comfort zone (of 6.0% to 7.0%) of RBI), but signs of moderation in WPI inflation lacked. However a relief from the WPI inflation data led to the expectations that central bank may reduce policy rates, thereby being considerate that IIP too has turned negative and gloom persists in the backdrop of the debt-overhang situation in the Euro zone. But later while speaking at an even at Cornwell University (in Ithaca, New York), the RBI Governor, Dr Subbarao expressed that inflation risk remains too high, since commodity prices are elevated, fiscal deficit is widening and monsoons are poor. He also said that "some sacrifice to growth is an inevitable price" to pay in order to reduce price pressures. When the Q1FY13 GDP data was announced on August 31, 2012, it did not enthuse the markets (as it was reported at 5.5%); in fact the Indian equity markets lost by 160.9 points as on the date of release of the GDP data. The markets also seemed worried about the political turmoil, as parliament was adjourned over coal block allocation (amongst other issues) several times, as the BJP was hell-bent, demanding the resignation of Prime Minister, Dr Manmohan Singh.

Amid turbulence in the global and domestic economy, the precious yellow metal - gold became bold (gained by +2.5%), as smart investors preferred to take refuge ahead of Fed's meeting on September 19, 2012 where Mr Ben Bernanke is likely to speak about QE3 in order to stimulate the U.S. economy. Stockist too stacking up gold ahead of festive and marriage season also led to the ascend in gold prices, however physical demand was rather dull in the month gone with buyers refraining from buying at elevated levels. Even gold importers in number one bullion consumer market - India, were awaiting a bigger price correction in the precious metal, after it hit a series of record highs in rupee terms.

Speaking about Brent crude oil, after going through a pretty elongated corrective phase, the Brent crude oil prices trended upwards. But unlike the month of July 2012 (where prices rose +17.4%), the gains were to the tune of +5.6%. Concerns over supply from the North Sea and tensions in the Middle East led to the increase, but fears of a global economic slowdown capped the gains.

For the bond markets the month gone was filled with sufficient liquidity. Thus the short-term papers witnessed some drop in yields, whereby the 1-month CD yield mellowed by 25 basis points (bps) while the 3-month CD yield mellowed by 45 bps. However, at the tail of the month gone by with GDP data being announced - and it being quite dismaying, yields of long-term debt papers starting inching up. The 10-Yr G-Sec yield, ended the month at 8.23% increasing by 6 bps from July 2012's close. Thus the bond markets seemed worried over, whether the RBI will maintain policy rates at the present level and also about the rising fiscal deficit in the backdrop of economic slowdown.

Going forward the bond markets are likely to take cue from the RBI stance on policy rates and Government borrowing number for the second half of the fiscal year 2012-13. The current capital formation rate of 29.9% for Q1FY13 doesn't seem to be very conducive for GDP report a substantial uptick, as the investment mood in the country remains downbeat as reforms are delayed on account of political turmoil. This in turn is also likely to make the fiscal deficit target of 5.1% unachievable for the fiscal year 2012-13, in the backdrop of slowdown in economic growth, delayed reforms and political turmoil.

  Monthly Market Roundup

	As on August 31, 2012	As on July 31, 2012	Change	% Change
BSE Sensex	17,380.75	17,236.18	144.57	0.8%
S&P CNX Nifty	5,258.50	5,229.00	29.50	0.6%
CNX Midcap	7,065.85	7,168.50	(102.65)	-1.4%
Gold (Rs/10 gram)	30,720.00	29,980.00	740.00	2.5%
Re/US $	55.53	55.66	0.13	0.2%
Crude Oil ($/BBL)	113.36	107.33	6.03	5.6%
8.15% 2022 (10-Yr) G-Sec Yield (%)*	8.23	8.17	0.06	6bps
1-Yr FDs	7.25% - 9.00%

*The 8.15% 2022 is the new 10-Yr benchmark which was introduced on June 9, 2012
(Monthly change as on Aug 31, 2012)
(Source: ACE MF, PersonalFN Research)  

As Foreign Institutional Investors (FIIs) participation in the Indian equity market is concerned, it was quite heartening to see an ascending trend in the month gone by. Despite the aforementioned economic factors - both global as well as domestic, FIIs exuded confidence in the Indian equity market, as they net bought to the tune of Rs 10,804 crore, thereby continuing with their buying activity as seen in the month of July 2012, where they net bought to the tune of Rs 9,067 crore

  BSE Sensex vs FII inflows

(Source: ACE MF , PersonalFN Research)  

Thus it seems that amid gloomy outlook in the Euro zone and timid economic recovery in the U.S., they (FIIs) were in search of attractive investment destinations in the Emerging Market Economies (EMEs), and India was one of them.

 

Mutual Fund Overview

However, domestic mutual funds on the other hand turned net seller to the tune of Rs 1,543 crore thereby following their July 2012's selling streak where they net sold to the tune of Rs 1,710 crore. Fund managers seemed to be cautious about the Euro zone debt crisis and its rippling and crippling effect on the Indian economy. Moreover, the domestic data too wasn't very encouraging for them to buy in the Indian equity markets and political uncertainty seemed to make them nervous in their intermediate outlook on the Indian equity markets. Redemption pressures too were imminent as investors remained cautious.

  BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)  

As far as the performance of various categories of mutual funds is concerned, despite exhaustion in the market, gains were seen in some of the diversified equity funds category, especially those following mid & small cap bias, and opportunities style of investing.

Among the sector funds, tech funds reported gains as the weakness in the Indian rupee aided the underlying stocks to perform well - especially those who were export oriented in nature. Defensive sector such as pharma and FMCG too did well amid global economic uncertainty, which resulted in gains for pharma funds and FMCG funds. But some of the infrastructure fund and power sector / energy funds ended the month with losses due to detrimental undercurrents for these sectors.

In the Fund of Fund (FoF) schemes, the offshore ones focusing on gold mining and investment in global real assets delivered luring returns despite uncertainty in the global economic environment.

Speaking about the hybrid funds; the balanced funds reported diminutive gains in the month gone by as they remained vulnerable to the underlying currents of the equity markets and the debt markets. Likewise gains were seen in Monthly Income Plans (MIPs) category, aided by drop in yields of shorter maturity papers as liquidity remained sufficient in the system. However, the longer maturity papers came under pressure when yields rose due to dismaying Q1FY13 GDP data.

  Monthly top gainers: Open-ended equity funds

Diversified Equity Funds	1-Mth	Sector Funds	1-Mth	ELSS	1-Mth
Edelweiss Select Midcap Fund (G)	4.47%	Franklin Infotech (G)	7.50%	ICICI Pru R.I.G.H.T (G)	3.60%
Axis Midcap (G)	3.90%	ICICI Pru Technology (G)	6.09%	SBI Tax advantage-II (G)	2.80%
Birla SL India Opportunities (G)	3.80%	Reliance Pharma (G)	5.69%	Edelweiss ELSS (G)	2.59%

(1-Mth returns as on Aug 31, 2012)
(Source: ACE MF, PersonalFN Research)    Monthly top gainers: Open-ended Fund of Funds

Fund of Funds	1-Mth
AIG World Gold (G)	6.61%
Fidelity Global Real Assets Fund (G)	2.55%
DSPBR World Gold-Reg (G)	2.32%

(1-Mth returns as on Aug 31, 2012)
(Source: ACE MF, PersonalFN Research)    Monthly top gainers: Open-ended Hybrid Funds

Balanced Funds	1-Mth	Monthly Income Plans	1-Mth
ICICI Pru Balanced (G)	1.65%	Sundaram MIP-Aggr (G)	1.62%
Reliance Reg Savings-Balanced (G)	1.53%	IDFC MIP (G)	1.17%
Principal Balanced (G)	1.35%	Religare MIP Plus (G)	1.05%

(1-Mth returns as on Aug 31, 2012)
(Source: ACE MF, PersonalFN Research )   Monthly top gainers: Open-ended debt funds

Floating Rate Funds	1-Mth	Income Funds	1-Mth	Gilt funds	1-Mth
Short Term		Short Term		Short Term
Principal Debt Opp Fund-Cons Plan (G)	0.79%	UTI ST Income (G)	0.93%	UTI G-Sec-STP (G)	0.69%
Reliance FRF ST (G)	0.79%	Birla SL ST Oppor-Ret (G)	0.91%	Birla SL Gilt Plus-Liquid (G)	0.66%
L&T FRF (G)	0.79%	Escorts ST Debt (G)	0.87%	DSPBR Treasury Bill (G)	0.63%
Long Term		Long Term		Long Term
HDFC FRIF-LT (G)	0.84%	UTI Dynamic Bond Fund-Reg (G)	1.27%	Sundaram Gilt Fund-Reg (G)	1.57%
Kotak Floater-LT (G)	0.83%	Escorts Income Bond (G)	1.25%	ING Gilt-PF-Dynamic (G)	1.48%
Templeton FRF Income (G)	0.79%	Canara Robeco InDiGo (G)	1.16%	L&T Gilt - Investment (G)	1.13%

 

Liquid Funds	1-Mth	Liquid Plus funds	1-Mth
Escorts Liquid Plan (G)	0.82%	Indiabulls Ultra Short Term Fund (G)	0.83%
IDFC Ultra ST (G)	0.81%	Principal Bank CD (G)	0.82%
Daiwa Liquid-Reg (G)	0.77%	Reliance Medium Term (G)	0.82%

(1-Mth returns as on Aug 31, 2012)
(Source: ACE MF, PersonalFN Research )  

The debt mutual funds, across categories and tenure also showed a decent performance in the month gone by, as yields for short-term debt papers mellowing down (as cited above) due to sufficient liquidity in the system. Long-term debt papers too reported appealing gains until yields came under pressure due to a downbeat Q1FY13 GDP data.

It is noteworthy that FIIs continued to exude confidence in the Indian debt markets, as they net bought to the tune of Rs 265 crore. However, this net buying in the Indian debt market appeared muted when seen in comparison to July 2012's net buying activity, where they net bought to the tune of 3,266 crore.

Domestic mutual funds on the other hand, bought aggressively in the Indian debt market net to the tune of Rs 27,004 crore, thereby accelerating from their July 2012's activity, where they net bought to the tune of Rs 8,543 crore.

  Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on Aug 31, 2012)
(Source: ACE MF, PersonalFN Research)  

The graph above depicts how various categories of mutual funds performed in the previous month. Amongst the sector and thematic funds, banking and infrastructure funds took a beating while tech funds reported gains as the weakness in the Indian rupee aided the underlying stocks to perform well - especially those who were export oriented in nature. Pharma and FMCG funds too generated wealth for investors and depicted their defensive trait in times of economic turbulence. Among the diversified equity funds, mid cap funds and the one having positioned their portfolio as flexi-cap style managed to report decent gains, but large cap fund and funds following a value style of investing reported petite gains.

Tracing with upward movement of prices of precious yellow metal - gold, Gold ETFs too exhibited positive returns for investors (gaining by an average of +2.1%). Likewise debt mutual funds across categories gained from the yield movements of short-term and long-term debt papers (as explained earlier).

Other News

• In order to compete with Unit Linked Insurance Plans (ULIPs) of domestic insurance companies, now domestic mutual fund houses are reviving a scheme, whereby you'll be provided with an insurance cover as you invest in equity mutual fund scheme(s). It is noteworthy that such an investment- cum-insurance scheme was kept on the backburner almost for three years as the capital market regulator - Securities and Exchange Board of India (SEBI) and the insurance regulator - Insurance Regulatory and Development Authority (IRDA), had crossed swords, after SEBI demanded part-regulation of ULIPs (as they were investment products as well). Thus, mutual fund houses that were set to launch an equity-insurance product, too dropped plans to launch such schemes.
  
  But at present with the regulatory impasse easing, domestic mutual fund houses have once again started rolling out insurance-wrapped funds. Asset managers such as Birla Sun Life Mutual Fund, Reliance, ICICI Prudential Mutual, among others have launched funds with an insurance cover over the past two to four months. To know whether you should opt in for such insurance-wrapped funds to take care of your insurance needs, please click here.
   
• Going by its intent to revitalise the mutual fund industry, SEBI has now permitted Asset Management Companies (AMCs) that have managed to bag 30% of their total annual inflows from places beyond top-15 Indian cities to charge an additional 30 basis points (bps) expense ratio. The 30 bps would be charged on the entire fund, in a way, making existing investors and investors residing in top cities to pay for new investors from the hinterlands. This, in effect, would jack up the expense ratio by 30 bps to 2.80% in the case of equity funds with assets over Rs 100 crore.
  
  SEBI has also allowed for fungibility in "expense ratio", whereby the cost bifurcation will cease to exist, and the fund houses will be permitted to charge for the aforesaid expenses at will. To know our view on this news, please click here.
   

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