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September 2011

Indian equity markets continued the down trend in August. The 8.8% monthly decline in the S&P CNX Nifty was in-line with the other major global indices. Fears of global economic recession along with the downgrade of long-term US credit rating weighed heavily on investor sentiment. Other factors including (a) policy inaction during the monsoon session of Parliament due to the standoff between the government and anti-corruption activist Mr Anna Hazare over the Lokpal Bill, (b) concerns about corporate earnings growth amid high interest rates continued to fuel negative investor sentiments.  Persistent FII selling amid concerns that RBI may raise interest rates because of higher than expected inflation data, added to the downfall in the markets. FIIs were net sellers to the extent of Rs 9536 cr in August compared with a buying of Rs.7411 cr in July. Intermittent profit booking in the month pushed the markets further into the red.

Losses were however cut short to certain extent on the back of short covering amid intermittent positive overseas cues, especially from European and US markets. Sporadic bargain hunting after the recent battering reduced the losses further. Sentiments were also supported on end to the political impasse over the Lokpal Bill, and on release of draft guidelines on new bank licenses. News that the US Fed Reserve had decided to keep the interest rates unchanged near zero for two more years helped the markets further.


All the sectoral indices posted negative returns in August. BSE Realty index was the worst performing index with a decline of 14.8%. Realty stocks witnessed heavy selling on disappointing Q1FY12 results and due to higher interest burden and rising input cost. BSE Metals index fell around 14% in the month due to the Supreme Court ban on iron ore mining in Bellary and Karnataka Lokayukta's report indicating a few top companies for alleged malpractices in mining and exports of iron ore.  BSE IT index declined by 13.3% following concerns over the slowdown in the US and Europe; the two biggest markets for Indian IT firms. 

The inherently defensive FMCG index witnessed the lowest decline of 3.5%. The Auto index was the second best performer with the decline restricted to 4.1%. The decline in car sales led by lower production by the market leader, Maruti Suzuki was compensated by healthy growth in two-wheeler segment as it is impacted lesser by higher interest rates.


Shares of exporters and other companies having an exposure to European and US markets will be under focus as additional global cues emerge over the next month. Brent crude oil prices continue to hover in the range of $110-$115 per barrel. The progress of the monsoon season, its impact on food prices and RBI’s likely policy stance at its mid-quarter review would remain the key monitorables.

We have been maintaing a cautious stance in portfolios given the macro backdrop while focussing on bottom up stock picking. We have been underweight sectors that are leveraged on global growth prospects and also those that are adversely impacted by high inflation. Prefernce has beeen for companies with stronger balance sheets, pricing power and higher visibility of growth. Our portfolios have positive stance on sectors like Healthcare, Telecom and Consumers while underweight on Metals, Infrastructure and Financials. We haven’t really changed our stance very aggressively but are definitely looking into go lighter on Consumers. While consumption remains a secular long term story we are worried about near term upside risks on alternate sectors. We are looking to add quality names in the Industrials space as valuations are turning attractive. Overall valuations are in line with historical average and provide good entry opportunity to long term investors.