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April 2011

The domestic equity market continued to remain under selling pressure in the month of February. The market lost 3% during the month as the FII’s sold equities worth Rs 7,400 cr during the month. The domestic equity markets continued to underperform most developed as well as some emerging markets peers. The NYMEX crude futures for April rose to $107 on back of political turmoil in Libya. The rising crude prices is expected to continue to weight on investor sentiments in month of March as it could add fuel to already high inflation in India.   

 

During the month of February, the FMCG was the only sector that delivered positive return (of 2%) as investor took shelter in the defensive sector in the volatile environment. Realty continued its bad performance and registered the largest decline (-11%) amongst all the sectoral indices. While Oil & Gas index and Bankex outperformed the S&P CNX Nifty, all other major sectoral indices underperformed the broader markets.

The budget 2011-12 announced in the month of February remained low on any significant policy actions. While skepticism on achievement of this target deficit remained, the markets cheered the lower than expected fiscal deficit number of 4.6% for FY12. The government’s estimate of India’s GDP stood at strong 9%. The budget brought positive news for sectors such as infrastructure, education, banking, consumer durables and housing whereas was negative for sectors such as IT, hotels, cement and textiles.  Infrastructure stood as the focus area of the budget with announcement of various measures to easing financing for the sector. The budgetary allocation increased by 23% for the infrastructure sector and by 24% for the education sector. The liberalization of interest subvention on housing loans and enhancement of housing loan limit to Rs 25 lakh for units under priority sector lending would have a positive impact on affordable housing players. The increase in tax exemption limits is expected to boost demand for consumer discretionary items. The positive impact of reduction in surcharge rates was offset by an increase in MAT rate. The removal of STPI exemptions for IT and bringing up of SEZ’s under MAT regime were negative for the respective sectors.

  

The markets typically show higher volatility around the budget time and this time was no exception. Foreign investors continued to remain net sellers in the market while there are signs of increased flows from the domestic  investors. As the budget event is behind us, the market would now focus on cues from global markets and incremental economic data and corporate earnings. Given the backdrop of macro concerns, outlook on corporate earnings growth has weakened. Margins could be under pressure due to increase in raw material prices, wages and interest rates. Higher inflation, rising rates and tight liquidity could also impact discretionary spending. For these reasons, investors have preferred sectors and stocks with higher visibility of earnings like technology. While events in middle-east and domestic economy and political sphere could keep sentiments depressed for some time, we recommend investors to take advantage of volatility by gradually increasing exposure to equity markets as long term fundamentals remain intact and valuations are becoming attractive.

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