Dear Investor,

We are pleased to present “NRI Espresso”, a handy newsletter just for our esteemed NRI investors for the month of January 2009. It is our constant endeavour to serve your growing information, investment and servicing needs and the newsletter is created just for this purpose. This newsletter will be a collection of relevant articles of special interest to you. These include latest news, events, regulatory changes, and information on product offerings. 'NRI Corner', an exclusive section has also been created on our website for your mutual fund information and investment needs.

1. Economy News

Infrastructure output contracts
Industrial output slumped by 0.4% y-o-y in October, sharply below forecast of 2.2%, with manufacturing production contracting by 1.2%. Industrial output was 8.1% in the 2007/08 fiscal year and 11.6% in 2006/07. The infrastructure sector output which accounts for 26.68% of industrial output, fell 3.4% y-o-y in October, below a downwardly revised 4.8% in September.

Fiscal deficit exceeds estimates
Fiscal deficit during Apr-Nov stood at 1.77 trillion rupees, or 132.4% of the full-year target of 1.33 trillion rupees.  

Current account deficit widens; BoP in deficit
India’s current account deficit widened to $12.54 billion during Q2 FY09, up from $9.79 billion in Q1. Trade deficit widened to $38.6 billion even though rise in exports was a faster 24.6% y-o-y as against 17% for Q2 FY08. The pace of imports doubled in the Q2 this year as compared with 22.2% in the corresponding period last fiscal. The BOP deficit in Jul-Sept quarter stood at a quarterly record of $4.73 billion, compared with a revised surplus of $29.24 billion last year.

Advance tax payments drop
Corporate advance tax declined 22% to about Rs 42,600 crore in the last quarter over the corresponding period last year.

2. Mutual Fund & NRI News

RBI cuts rates
RBI cut CRR by 50 bps to 5%, LAF repo rate by 100 bps to 5.5% and reverse repo rate by 100 bps at 4%. The LAF rate cuts took effect immediately while lower CRR would take effect on January 17 and infuse Rs.20,000 crore into the system. Through a series of cuts, the RBI has released Rs.300,000 crore since October 2008.

Government announces second stimulus package
The government gave the economy a second stimulus by enabling the industry to borrow more from abroad and FIIs to invest more in the country, besides stepping up public spending. The package provided for liberalisation of external commercial borrowing norms and raised FII investment limit in corporate bonds to $15 bln from $6 bln. The government also plans to set up a separate company to support non-bank finance companies, and plans to make available up to Rs.25000 crore to these companies.

SEBI restricts early exit from close-ended funds
SEBI announced that investors would no longer be allowed for early exit from close-ended mutual funds and have asked the fund houses to list the close-ended funds on the stock exchanges. Moreover SEBI has decided that for the close-ended schemes the underlying assets will not have maturity beyond the date on which the scheme expires. The new rules have been made necessary in the face of increasing liquidity crisis that has been threatening the mutual fund industry. This regulatory obligation will protect the fund managers from distress sale if investors decide to redeem their money before maturity. This would also help to guard the interest of the remaining investors.

3. Market Overview

Indian benchmark indices ended higher - Sensex was up 6.10% at 9647.31, with a brief stay above the 10000 while Nifty ended at 2959.15, up 7.41% - boosted by FII flows, policy impetus, lower inflation and lower bank lending rates. Stock market gains were easily overshadowed by the solid rally in bonds.

Stock markets had a relatively better month in terms of volatility and foreign fund flows as compared to the last several months. FII flows were positive for the first time in eight months. Net purchases were worth Rs 1750.1 crores of Indian equities compared to net sales of Rs 2598.30 crores in November.

However, sectoral differences exposed the underlying uncertainty and edginess prevailing amidst weak economic outlook. Sector-specific developments triggered pressure on certain counters with exports falling for the first time in five years in October and auto sales declining sharply. IT stocks were punished as receding profit margins and likely cut in technology outlays by global firms threatened to impact the bottom line of the sector. The IT index was down 12.93% in December.

Risk appetite improved with the aid of the 100 bps reduction in the LAF rates and the Rs 30,700 crore fiscal stimulus package unveiled by the government, coming on the heels of the Rs 5/lt and Rs 2/lt cut in petrol and diesel prices. The government also promised intent towards accelerating clearances required for infrastructure projects and an additional stimulus plan. Anticipation of further stimulus and monetary policy boost buttressed investors mood in the later part of the month.

Meanwhile, Successive PLR and housing loan rate cuts announced by several banks reflected on the realty sector index which outperformed the overall market with ease by surging 45.68%. The next best sector was metals (18.96%), followed by banks (17.42%) and PSU (15.13%).

Reports of dip in advance tax payments as compared with the last year dented sentiment. Among non-economic factors influencing sentiment were the elections in a few states and the sporadic increase in Indo-Pakistan tensions. The elections passed without affecting markets while the hostile exchange of words between India and Pakistan prompted occasional bouts of selling in stocks.

The rupee barely reacted to the developments but was otherwise volatile through the month, ending at 48.72/$ from beyond 50.00/$. FII flows supported the rupee to an extent as did dollar depreciation across the board.

4. Fund Focus – SBI Magnum Sector Fund Umbrella: Contra Fund

Looking at things differently and moving with calculated steps towards an unnoticed opportunity may prove rewarding, especially in the area of equity investments. Following a contrarian approach, Magnum Contra Fund is a scheme that dares to tread the road less traveled, and goes against the grain of the market thought. The fund invests in undervalued scrips, which may be currently out of favour, but is likely to unlock its hidden value in the long term.

Presenting SBI Mutual Fund’s Magnum Contra fund, India’s first equity fund, with a contrarian approach.

The fund draws its philosophy from ability to distinguish between the fundamentals and the expectations reflected in the stock price. This investment style goes beyond the general sentiments affecting stock prices. It focuses on the opportunity that exists because of the gap between business fundamentals and stock expectations.

In this month’s interview Mr. Pankaj Gupta, Fund Manager, MSFU Contra Fund, gives us insights on the benefits of having the scheme in our portfolio and its potential to generate long term gains even through turbulent markets.

Given the uncertain market conditions what strategy would you adopt for managing the scheme?
Our experience of the market shows that the market goes into extreme in rewarding or punishing the fundamentals of an economy. This is true for the Indian equity markets, where the market participants had ignored the fundamentals while buying, and the same is happening when they are selling desperately ignoring the fundamentals. At this juncture, markets are driven more by liquidity and other technical factors than fundamentals.

At this point of time, we are finding the market at attractive levels (even discounting short term challenges), and there are lot of sectors/stocks which are at their historic low valuations in spite of having strong fundamentals and good management. The fund has adequate cash levels which it intends to deploy judiciously in the current uncertain environment. The idea is to buy good businesses at a reasonable price which are run by competent management and have necessary resources to ward off the short term pressures.

What is the selection process which is taken in the fund’s investment?
The selection process in the funds revolves around three strategies. The first approach is based on the market cap, wherein our allocation to large cap has increased in CY 2008. Currently, many mid & small cap stocks are available at very reasonable valuations and we will look forward to increase our exposure to those stocks having adequate resources (both cash & management) to ward off the short term pressures. The second is based on the sectoral exposure which is an ongoing exercise wherein we take bets on some sectors which are out of favour and offers good value over medium to long term. We also look at stock/theme specific exposure wherein we look to invest in those stocks where extreme pessimism has been set in and they are available at very attractive valuations.

Through this process, the fund intends to identify the stocks before the herd mentality sets in. It may sometimes hold the stock patiently for a considerable period of time before the market starts recognizing their true potential.

Do you feel that the market downturns have brought with it considerable contrarian investing opportunities?
Absolutely.

Currently we are getting many companies at valuations which are guided by their short term results (expected to be under pressure for temporary reasons). The fund will take this opportunity to invest in those businesses/companies which have long term potential but their valuations have been beaten by concerns on short term results.

What are the opportunities, you feel, NRI investors may look forward to through the MSFU Contra Fund?
The markets in recent times have become more volatile and time to reactions is very short. The cycles are becoming shorter but much steeper. The recent carnage which we have seen worldwide is the result of extreme pessimism, de-leveraging, risk aversion and liquidity crunch. These unstable and panic situations generally doesn’t last for long and with the concerted efforts of all the major central banks/governments and the decline in commodity prices, the stability is expected to come sooner than later.

The right time to invest for long term is when there is panic, skepticism and apathy built in the market. Above normal returns mostly come when you invest in panic situations and have the patience to hold for a reasonable period of time.

Kindly tell us something about the risk- return profile of the MSFU Contra Fund?
The fund endeavors to provide consistent and above average return to its unit holders. The fund is very well diversified and offers a low risk profile to its unit holders. The number of stocks in the fund has also increased in line with the increased exposure towards mid/small cap stocks. The fund was able to contain the risk element in both good and bad times as is shown from its performance.

Disclaimer: MSFU: Contra Fund: Date of Inception: 14/07/1999. Returns are as on 31/12/2008. NAV for growth option as on 31/12/2008 is Rs. 29.22. Growth option for MSFU- Contra Fund introduced on 06/05/2005. Returns are CAGR calculated for dividend option and assumed that the dividend declared under the scheme have been reinvested at the prevailing NAV. Please note that past performance may or may not be sustained in future.

What is the time horizon an investor must consider while investing in the scheme?
The fund invests in fundamentally sound companies after thorough research and believes that the market ultimately gives due value to the potential of the company over a time period (though not necessarily over a shorter time period). Hence our advice to our investor is always to look for investing with a medium to long horizon (1 to 3 years). Investing for more than 1 year also brings in the tax efficiency for the investors.

Whats your outlook On Indian economy and the markets?
2008 has been really tough for all of us where we have seen a historic decline of 52.5% in Sensex after having given positive returns in the last 5 years.

If we try to analyze the reasons of the fall, both India specific and international factors have contributed to the decline of this magnitude. What is disturbing to us is that the international factors (liquidity crunch, subprime, high oil & commodity prices, failure of overseas financial institutions and overleveraging) have been the main culprit rather than the domestic factors. There is no denying the fact that the macro conditions in the Indian economy (slowing growth, high interest rates, high inflation etc) had deteriorated, but that does not warrant such a steep fall. Now with the commodity prices & inflation already declined, high interest rate fears subsiding, India is placed much better than its counterparts to rebound its growth prospects.

A basic question which an investor may have - With the markets still volatile, is it a right time to invest in MSFU Contra Fund? Should the investor still wait for the market to bottom out?
The fundamentals of the Indian economy indicate that there is more upside risk than the downside risk over the medium term. The extreme panic situations may still take the markets at a lower level, but whether that level is sustainable is a question mark?

One should analyze situations with a cool head rather than being carried away by excess news flows/pessimism. Rather than completely ignoring the equity market (and taking decisions in panic or apathy), one should take informed decision. History has proved us that investing in these turbulent times for long term is the key for wealth creation.

5. Featured Article – Business & Economic Review - Year MMVIII

The decade beginning in the year 2000 saw a commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. One of the key drivers of the boom was the humungous amount of spending (approx $ 42 billion) in preparation for the Beijing Olympic. But in the year 2008, the prices of many commodities, notably oil and food, got too high and started causing genuine economic damage, threatening stagflation and a reversal of globalization.

In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year. In July, oil peaked at $147.30 a barrel. These high prices caused a dramatic drop in demand and prices fell below $50 a barrel at the end of 2008. In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.

What is this recession?
In macroeconomics, a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.

Warren Buffett, the greatest investor in the world has his own reservation on the definition. According to him the definition of recession is flawed and that it should be consecutive three quarters of GDP growth that is less than population growth.

US in Recession
The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value. The U.S. represents about 21 percent of the global economy, and impact of a U.S. recession had spread globally through the following:

1. Less spending by U.S. consumers and companies reduce demand for imports.
2. The crisis of the U.S. subprime-mortgage market started pushing up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings.
3. Dropping U.S. stock prices drag down markets elsewhere.

Is recession same as Depression?
The world has so-far seen only one full scale depression. The “Great Depression” originated in United States and was a worldwide economic downturn starting in most places in 1929 and extended till the onset of the war economy of World War II, beginning around 1939. The depression had devastating effects in virtually every country, rich or poor. International trade plunged by half to two-thirds, as did personal incomes, tax revenues, prices, and profits. Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas also suffered as crop prices fell by roughly 60 percent.

Recession on the other hand is much softer and is a manifestation of business cycle. According to statistical reports, the average tenure of any recession is around 18 months.

Global Impact of the recession starting in 2008
A few other countries have seen the rate of growth of GDP decrease, generally attributed to reduced liquidity, sector price inflation in food and energy, and the U.S. slowdown. These include the United Kingdom, Japan, Australia, China, India, New Zealand and the Euro zone. In some of these countries, the recession has already been confirmed by experts, while others are still waiting for the fourth quarter GDP growth data to show two consecutive quarters of negative growth.

Trade
In middle October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one week, as the credit crunch made it difficult for exporters to obtain letters of credit.

Inflation
In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations. "Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets," have been named as possible reasons for the inflation.

Unemployment
The International Labour Organization predicted that at least 20 million jobs will be lost by the end of 2009 due to the crisis - mostly in "construction, real estate, financial services, and the auto sector" - bringing world unemployment above 200 million for the first time.

The Counter-Remedial Measures

Economic governance
In the final quarter of 2008, amidst the financial crisis, the G-20 group of major economies summit assume a new significance as a locus of economic and financial crisis management.

Economic stimulus plans were announced or under discussion in China, the United States, and the European Union. Bailouts of failing or threatened businesses were carried out or discussed in the USA, Japan, UK and the European Union.

US Election
In politics the biggest news of the year 2008 was definitely the US election, which saw Barack Obama getting elected as President. In an election that is historic on many levels, Democratic senator Barack Obama wins the presidential election against Senator John McCain. Obama is the first African American to be elected president of the United States. He will inherit a country fighting two wars and an economy in tatters. His election will see fresh set of economic policies giving new directions to the biggest economy in the world.

India
India's economy was growing at an annual rate of 9% or more in the past three years, second only to China among the major economies, and the projections for FY2008 at around 7% pa indicate that India's economic growth has been affected by the economic crisis. The Asian Development Bank predicted India to recover from weakening momentum in 4-6 quarters. At the G20 Summit, India called for coordinated global fiscal stimulus to mitigate the severity of the global credit crunch. Support from the regulators and that India's growing trade with other Asian countries, especially China, will help reduce the negative impact of the crisis. Analysts also said that India's high domestic demand and large infrastructure projects will act as a buffer reducing the impact of the global downturn on its economy. Economists argued that India's financial system is relatively insulated and its banks do not have significant exposure to subprime mortgage.

What happened to India?

1. The Markets declined -- The financial institutions in the US sold in Indian markets converting all available equity assets in to cash which they needed desperately back at home. The result was a steep fall in Indian stock markets.
2. FDI inflows slowed down -- However the Foreign Direct Investments (FDI) is more sticky capital, as they are locked in fixed assets of Indian company. Hence they didn’t find their way out following the hot money trail. Nevertheless there were signs of slow down on further FDI infusion.
3. Rupee weakens vs. Dollar - FIIs were selling equity and convert the same to dollar. This process increases the demand of dollar and made rupee weaker compared to Dollars. This was adversely affecting the countries import led industries and also increased the current account deficit.
4. Liquidity Crisis - When money is getting sucked out from the system due to dollar conversion and higher import bill: there are telling difficulties in finding liquid cash in the Indian monitory system. As credits become dearer and at sometimes out of reach, most of Indian industries particularly real estate got severely affected. RBI intervened to ease the situation by injecting additional liquidity by cutting CRR & SLR requirements and thereby pumping in money. Their effort is giving fruits and we have seen yields are falling.
5. Sub-prime like crisis will not hit Indian banking - primarily because the mortgage lending pattern in India is quite different from the practice in the US: In US weightage is largely given to the value of the property against which loan is taken, while in India we see the repayment capacity of the borrowers before giving any advances. Hence – it is more unlikely that sub-prime crisis like situation will affect India.
6. IT and ITES companies of all sizes and shapes are affected by the meltdown as a major chunk of the revenues come from export of services. However companies who have diversified their portfolios across different countries will be affected comparatively less. Also the steady appreciation of dollar helped these companies to recoup some losses.
7. Service sectors like aviation, hospitality etc. were affected as business travels becomes less. The rise in ATF prices and 26/11 terror strike at Mumbai negatively affected these sectors...
8. Management compensations are cut – the salaries which had also reached astronomical levels have dropped as ambitious targets set for these industries at the beginning of this year is turning out to be difficult to achieve.

Take-away from the year

And finally, what do we take away from this year of crisis. An opportunity to learn from the crisis (the cost we pay for learning) and prepare ourselves for the future. Let us discuss the salient points which we, as Investors should keep in mind before we chart out newer territory.

Plan your debt
Debts can categorized as good, bad or ugly. Home loans are considered good debts as they are used to build useful assets. A home loan makes more sense if you want to switch from a rented to an owned house. Personal loans are “bad” debts, which should be availed of only in emergency situations. On the other hand, credit card debts are termed as “ugly” debt that comes with high interest rate. Bad & Ugly debts should be avoided at all costs.

Typically any investment has its own risk
During good times, investors ignore this basic risk principal and only focus on the returns. Investors in equities stand to lose their entire money, if the company goes down (happened in case of corporate biggies in US). Even debt market products have its own set of risk elements and may get badly hit if the issuer defaults. Therefore we need a scientifically diversified portfolio to balance any contingent scenario.

Link – the world moves in harmony
From the price of a stock to a bond to a mutual fund to an insurance policy, everything is linked. To illustrate the link lets take this chain of consequences: fall in crude prices is linked with inflation, which in line is linked with the interest, which impact the business bottom-line as cost of capital becomes dearer ultimately affecting the stocks of the company which may lead to reversal of rating of the company in the bond market – affecting the price of bonds issued by it. These links are found every-where and anywhere and we need to understand them before we take any investment decision.

Globalization has only established these links in a more solid way.

Cultivate yourself continuously
Cultivate the right kind of skill sets which can be converted into a steady livelihood. The development of these skills and abilities helps to maximize income potential in skill marketplace. This is an investment one should continuously make and assess throughout one’s working careers. Just like an investment that needs constant monitoring and analysis, there is a need to monitor the career and map it with the skill levels required in the future.

Make hay while sun shines
Another lesson is to save the most when you are earning well. Create a reserve during good times that would be adequate enough to take care your rainy days.

It pays to see a little longer

If the investment horizon is sufficiently long the probability is that the situation would eventually turn-around.

Follow a process

Follow the steady and a systematic approach to investing. The process will help you to iron out any volatility in the long run.

Conclusion

Year 2008 – has been a volatile year – which has been marred by a number of economic setbacks. These setbacks were sometimes shocking especially when we see them in the backdrop of those golden years of 2003- 2007. However the most important thing which had emerged out of these spoils is the age old truth - that the trick to win in game of money and investment is nothing but solid discipline.

That I presume is the bottom-line of this eventful 2008.

Disclaimer: This Investment update is for information purpose only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included in this schemes guide constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice.

Risk Factors: Mutual Funds and Securities Investments are subject to market risks and there is no assurance or guarantee that the scheme's objectives will be achieved. As with any other investment in securities, the NAV of the Magnums/Units issued under the scheme(s) may go up or down depending upon the various factors and forces affecting the securities market. Past performance of the Sponsor/AMC/Mutual Fund/Scheme(s) and their affiliates do not indicate the future performance of the Scheme(s) of the Mutual Fund. The names of the scheme(s) do not, in any manner, indicate either the quality of the scheme(s) or their future prospects and returns. For scheme-specific risk factors please refer to the offer document of the scheme. Please read the offer document before investing. Investment Objectives: MSFU: Contra Fund: To provide the investors maximum growth opportunity through equity investments in stocks of growth oriented sectors of the economy. There are five sub-funds dedicated to specific investment themes viz. Information Technology,Pharmaceuticals, FMCG, Contrarian (investment in stocks currently out of favour) and Emerging Businesses. Statutory details: SBI Mutual Fund has been set up as a trust under the Indian Trusts Act, 1882. State Bank of India ('SBI'), the sponsor is not responsible or liable for any loss resulting from the operation of the schemes beyond the initial contribution made by it of an amount of Rs. 5 lakhs towards setting up of the mutual fund. Asset Management Company: SBI Funds Management Private Limited (A joint venture between SBI and Société Générale Asset Management) -191, Maker Tower 'E', 19th Floor, Cuffe Parade, Mumbai 400 005. Trustee Company: SBI Mutual Fund Trustee Company Pvt. Ltd. Mutual Fund investments are subject to market risks. Please read the Offer Document carefully before investing.