Monthly Communiqué
Portfolio Management
July 2010
highlights
# The Value Strategy has
yielded remarkable
returns since its launch
in 2003. Client who
invested 1 crore in
Value PMS in June
2003 is worth 10.22
crores as on 30th June
2010. For the same
period 1 crore invested
in Nifty is worth
5.02 crores.
# Since inception i.e. 10
Jun 03, Value Strategy
has given CAGR returns
of 38.96% vs its
Benchmark Nifty CAGR
returns of 25.77%.
# For the last 5 years
Value Strategy has
given CAGR returns
of 26.12% vs its
Benchmark Nifty CAGR
returns of 19.05%.
# Invest India Strategy is
now an open ended
strategy.
Markets recovered post the sharp fall in May. Amidst a moderate volatility the benchmark index Sensex
finally settled at 17610 (+4% MOM).FIIs turned positive once again and were net buyers with net inflow of
USD 2.3bn as compared to an outflow of USD 2.1bn in the previous month. Domestic mutual funds on the
other hand were net sellers with outflows of USD 120mn compared to USD 160mn of outflow in May'10.
In a major decision to bring petroleum products in line with market rates, the government freed petrol from
all pricing controls and hiked diesel prices by Rs2 per liter. The government increased petrol prices by Rs 3.7
per liter, cooking gas prices by Rs35 per cylinder and kerosene prices by Rs3 per liter. This will have a major
positive impact on profitability of all oil PSU's including HPCL, BPCL, IOC, ONGC, GAIL and OIL India. The
bold measures in this sector will bestow confidence to investors regarding likely major policy reforms in
several other areas, even if there is some delay in the final implementation.
The incremental news flows coming out of US, China, UK and the Euro zone are all negative. The weaker
tone of some of the incoming data has contributed to sharp falls in equity prices and treasury yields overseas
in the past month. This has added to fears that the US is heading for a double-dip recession and for the
Eurozone a much lesser growth than what was anticipated earlier. A brief analysis of a wide range of
economic indicators reveals there are very few signs of an actual Double-dip. And the ominous message
from the ECRI's Weekly Leading Index has more to do with the fall back in equity prices than a renewed
decline in economic activity. Rather than stalling or going into reverse, it appears that the economic recovery
has simply shifted into a lower gear. Markets are also eagerly awaiting news on Eurozone banks stress test,
results to be announced by the middle of next month.
Monsoons have started weak this year. The Cumulative rainfall was excess / normal in 20 and deficient/
scanty in 19 out of 36 meteorological sub-divisions with overall rainfall in country below 11% of Long Period
Average ( LPA). However, the MET is optimistic of the Monsoons and has raised their estimate from 98% of
LPA to 102% of LPA. The impact of normal monsoons have yet to play out on the markets.
The RBI lifted both its reverse repo rate and the repo rate by 25bp to 4.0% and 5.5%, respectively. Liquidity
measures were also extended due to the tighter conditions posed by 3G auction payments and tax bills. The
Reserve Bank of India (RBI) rate hike is a sensible and not an unwelcome move. India's economic upswing is
strong and price pressures are already uncomfortably high. Further monetary tightening is only a matter of
time. We expect the RBI to lift its two key policy rates by another 25bp at its next scheduled review in late
July, and to keep raising rates over the coming year.
The accompanying statement rightly focused on the improving domestic situation. April industrial output
growth, published at the end of last week, picked up MOM in seasonally-adjusted terms while the YOY
change accelerated after slowing in February-March. Capital goods production led the way and this
suggests that investment is finally starting to rise after lagging behind in the recovery so far. What's more,
India's manufacturing Purchasing Manager Index (PMI) for June was strong and remains consistent with
double-digit YOY gains in manufacturing production in coming months. The output and new orders
components of the PMI are both still well above their long-run average levels.
Growth in services will probably remain impressive too while agriculture, notwithstanding recent
disappointing monsoon rainfall, still looks set to have a better year than in 2009. Private sector spending
should keep the recovery impressive, even as stimulus measures are withdrawn and the recent rapid gain in
exports begins to fade. Overall, we expect GDP growth to rise to 8.0-8.5% in FY10-11 (April- March),
which compares to 7.4% in FY09-10. The main risk is that growth may be even stronger.
Wholesale prices accelerated 10.2% YOY in May which was far above consensus expectations. We think
wholesale price inflation will pick up again to 11.0-12.0% YOY in June, with last week's decision by the
government to reduce fuel subsidies adding around one percentage point. There is now little spare capacity
in the economy and the pick-up in investment and in infrastructure spending is too recent to have a major
impact on supply bottlenecks anytime soon. The upshot is that we expect the annual gain in wholesale prices
to slow to 7-8% at best by March 2011, which would still be well above the 5-6% government target.
Accordingly, the RBI has more work to do. We see the two policy rates climbing a further 100bp over the
next 12 months, including the one additional 25bp hike that we envisage at the end of this month
Accelerating economic and corporate profit growth will limit downside in the markets. At the same time,
above-average valuations cap the upside. Expect benchmark indices to remain with a range of 10% from
current levels. Thus, 2010 will be a year of stock-picking, with market contribution to aggregate
performance being the lowest in three years.
Inside...
?
Value Strategy
?
Strategy
Bulls Eye
?
Next Trillion Dollar
Opportunity Strategy
?
Invest India Strategy
?
Strategies
Focused
?
rating
Series I-Re
?
Series III-Target Return
?
Optima Strategy
#
Returns of individual clients may differ depending on factors such as time of entry/exit/ additional inflows in the strategy. The Above returns are calculated on
NAV basis and are based on the closing market prices as on 30 June 2010. Past performance may or may not be sustained in future. Returns above 1 year
are annualized. Please refer to the disclosure document for further information.
Portfolio Management Services
Regn No. PMS INP 000000670
www.motilaloswal.com