economy report september 2009

8/14/2019 Economy Report September 2009

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MAIA Financial Services Pvt Ltd

MAIA

FINANCIALSERVICESPVTLTD

ECONOMY 360 DEGREES INDIA: SEPTEMBER2009


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Index

1. Market View

2. Economic Indicators

i. Leading

1. 10 year Yield

2. Bond Market

3. Commodities

4. Money Supply

5. Credit growth

6. Yield Curve

7. Corporate Bond Spreads

8. P/E ratio

ii. Coincident

1. Inflation

2. GDP3. IIP

4. Core Infrastructure Industries

iii. Lagging

1. Exports

2. Imports


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Market View:

In our previous report of August 2009, we had stated that one could buy on dips as weexpected the market to remain in a range of 4400-4700 and we are very glad to say that it didhappen that way. One who had bought on dips could have earned a return of 7-8% in amonth in a environment where markets virtually had moved nowhere .

As we are writing this report, the Nifty levels stand at 4720 . Most of the people in the marketare of the view that we could see levels of 5000-5300 in Nifty, which indicates an upside of about 6-10% in Nifty from current levels. However we are of the view that we are most likelyheaded towards a downward journey before we see those kinds of levels on the upper side. Our view is derived from signals that we are receiving from our leading economic indicators aswell as Commodities and Bond market. Our leading economic indicators such as yield curve hasinverted once again (see chart below in our section of economic indicators), 10 year

government bond yields are shooting up and have reached the levels of 7-7.5%. The creditgrowth is slowing down and even there is a decline in bank credit to corporate sector for themonth of August 2009. Talking about corporate bond spreads they are almost flat at 170 basispoint.

All these are indicative and are most likely pointing towards a downward move in our Indianmarkets. Chinese markets have been always a leading one and at this point of time, Chinesemarket is showing signs of weakness and are headed downwards . So it is most likely that wecould see a fall from current levels. We suggest a strategy of booking profits at the currentlevels.

One more thing to keep into consideration is that historically, September is the weakest monthof the year for the stock market. The below graph clearly indicates that. The downside effecthas often been more pronounced as the month nears its end. So our view is investors shouldremain very very cautious and alert.

Source: Dow Jones


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Economic Indicators:

As can be seen from the above chart, the market worry on expected policy tightening by RBI onthe back of increasing worry of inflation, is reflected in higher government bond yields. The 10year benchmark bond yields were at 7.35% as on 31 st August 2009 and are likely to cross 7.5%levels if bond auctions continue to see weak response. The rising government bond yields willalso ultimately create pressure on corporate bond yields which in turn could increase the costof borrowing for the corporates.

CCIL Bond Index

As can be seen from the above figure, the CCIL bond index for longer term maturity is showingsigns of weakness. This is very logical as bond prices and yields move in opposite directions. We


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saw in the previous chart that the bond yield was rising and this is supported by fall in bondprices. All these are indicative of the fact that the bond yields could most likely rise further.

Yield Curve:

As can be seen from the above chart, the yield curve for 27 th August 2009 has inverted. This isdue to the fact that the spread between longer term maturity ranging from 0.5-1 years andshorter term maturity ranging from 0.1-0.5 years has turned negative. When yield curve showssigns of inversion it definitely indicates problems for the equity markets.

Corporate Bond Spreads


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As can be seen from the above charts, the corporate bond spreads have been falling from Jan2009. However from previous 2 weeks they have almost remained flat at 170 basis points. Weare of the view that most likely the spreads are going to rise on the back of fears of risinggovernment bond yields as well as inflation. This suggests somewhat bad news for thecorporate sector.

Price/Earnings Ratio

As can be seen from the above chart, even the Price/Earnings ratio for Sensex looks as if it is atdangerous level. Currently as of 28 th August 2009 it stands at 20.85.


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One thing is very evident from the chart is that whenever we enter stage 2 of the businesscycle-a stage where stocks rally and can give a return in the range of 50-70%, the top is mostlikely formed at the levels of P/E of around 20-21. So this is the reason that we should becautious.

Credit Growth:

While the growth in the non-food credit continues to be lower at 14.98%, for the week ended14 th August 2009, the deposits growth remained higher at 21.3%.This implies that the industrystill hesitates in taking additional loans for their investment plans. To put the figure in context,last August i.e. in August 2008, this credit grew by 25%. The persisting softness in credit trendimplies that the rate of gross fixed capital formation, which slipped to 31.6% in the April-Junequarter of FY 10 from 32.4% in the corresponding quarter of last fiscal, will take longer to

recover.

Also these poor figures of Credit growth are indicative of the fact that banks are reluctant toextend financial support to industries that have poor credibility due to slowdown.

Bank Credit to Corporate Sector:


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Money Supply

M3 growth remained high at 20.5% y-o-y, driven by a 21.3% increase in deposits. M3 growthremains well above RBIs revised projection of 18% y -o-y growth, which does not bode well forfuture inflation. Also inflationary concerns would further be elevated because the food priceinflation has already reached 11% and it would be further a cause of worry because of the lowrainfall.

Inflation:


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As can be seen from the above charts of WPI and CPI, the WPI numbers are deceptive. The CPInumbers are telling an altogether different story. The food price inflation is already in doubledigits and remains at 10.5% currently. With lesser rainfall the threat that the inflation would bewould rise further gets elevated. At the moment when economy is on the path of recovery, thiskind of inflation would most likely hurt growth. Thus by September end or October when theWPI also starts reflecting the true picture and it becomes loud and clear that inflation isgripping us all, stock markets would definitely react and that reaction would lead to down movein the equity markets.

Interest rates:

It is unlikely that RBI would further cut any rates with food inflation reaching double digits.Rather, to control the inflation RBI would take liquidity tightening steps which would prove notvery good for the corporate sector as well as for the future growth. With 10 year governmentbond yield already giving us a signal of rising interest rates, it is only a matter of time when wewould see the real interest rates rising.

Exports :

India's exports dropped 28.4 per cent in July, the tenth straight month to record a fall. India'simports fell sharply by 37.1 per cent in July to USD 19.62 from USD 31.18 billion a year ago,largely due to a drop in crude oil prices .

Core Infrastructure Industries:


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The six core infrastructure industries grew 6.5% in June on the back of a robust performance byCement and Steel. A year ago, the Infrastructure sector had grown by 5.1% while the figure forMay 2009 stood at 2.8%. Cement topped the chart with a growth of 12.8%, while Steel rose5.3%, both crucial inputs for construction activity. Sectors like Steel and Cement are very

cyclical in nature. The governments counter -cyclical stimulus measures are showing their resultby way of a pickup in construction activities. Accordingly, the industrial output figures has alsoimproved. However this is not very great news as this might have been already factored inwhen we saw are equity markets rally from 8000 to 16000 levels. This is because the stockmarkets are leading indicators of the health of the economy .

IIP

India's Index of Industrial Production grew 7.8% for this June on a year-on-year basis. Miningsector reported the highest growth rate of 15.4%, followed by electricity (8%) and manufacturing(7.3%). The cumulative growth during the April-June quarter of fiscal 2009-10 was 3.7% on ayear-on-year basis.

Analysis

Economic Indicator Type Comment

Yield Curve Leading Inverted. Bad for Bonds aswell as Equities

Corporate Bond Spreads Leading Almost flat at 170 basis point. However there are manyindicators pointing thatsooner or later the bondspreads are going to risewhich would prove bad forcorporate sector.

Inflation Coincident WPI falling, however CPI

rising in double digits. Goingdown the line, would be badfor equity markets

Currently stable , however


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Interest rates Coincident indicators are signaling thatRBI would sooner or laterstart raising the rates

10 year government bondyield

Leading Rising. With the hugegovernment borrowingprogramme and inflationfears the yields have startedrising. This would be bad forequity markets

Non Food credit growth Leading Declining. It would prove badfor the equity markets since itis indicative of the fact that

either corporates are hesitantof taking more loans for theirexpansion plans or banks arehesitant in giving financialsupport to corporationshaving low credibility

CCIL Bond Index Leading Falling. As the yields arerising, bond prices are falling.This would be bad for theequity markets going downthe line

Price/Earnings Ratio Leading P/E currently at 20-21. This isquite high .

GDP Coincident Growth of 6.1% for the 1 st quarter of the FY10. Better than the same quarter of theprevious year.

IIP Lagging Good. IIP showed a growth of 7.8% for the month of June2009.


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Core Infrastructure Industries Lagging The rosy picture shown by thecore infrastructure industriesin the latest datareleased(June 2009) could

have already being factoredin.

Indices-Shanghai Leading Bad. Weakness visible

Analyst Name: Avani Mehta Company Name: MAIA Finacial Services Pvt Ltd

Email Id: [email protected] Address: C wing, Bsel Tech Park, Opposite

Vashi Station, Vashi, Navi Mumbai.

Contact No: 022 27810674/75/76

Disclaimer: This report is purely for information purpose only. It contains information fromsources which we believe are reliable but we do not guarantee. It also includes analysis andviews expressed by our analysts. This report should not be construed to be investment

recommendation/advice. Investors should not solely rely on the information contained in thisreport and must make investment decisions based on their own independent inquiry,investigation and analysis and shall not have any claim on Maia Financial Services Pvt Ltd.Efforts are made to ensure accuracy and to avoid errors and omissions, but errors and omissionsmay creep in. It is notified that neither Maia Financial Services Pvt Ltd nor its employees willbe responsible for any damages or loss of action to any one, of any kind, in any manner,therefrom. Moreover this report is the property of Maia Financial Services Pvt Ltd. No contentcan be copied, reproduced, republished, uploaded, and/or distributed for any use withoutobtaining prior written permission of Maia Financial Services Pvt Ltd. All legal disputes aresubject to Mumbai jurisdiction only.
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economy report september 2009

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