Cautiously Optimistic in 2010

By FSM Research Team

Economic Indicators

Global Economy Recovers With

Emerging Markets Leading Growth

According to the IMF, the global economy is expected to expand by 3.9% in 2010 compared to a 0.8% contraction in 2009.

Emerging economies are expected to lead the pack, with their growth expected at 6% in 2010 picking up sharply from 2.1% in 2009.

Growth rates have been revised upwards by about 1% in January 2010, from the previous forecast released in October 2009.

Domestic Economy Also Picks Up

Advance estimates put GDP growth at 7.2% in FY 10. The economy is expected to expand by more than 8% in FY 11.

Industrial growth catapulted to a 20 year high of 16.8% in December 09, supported by manufacturing segment (especially consumer durables and capital goods).

Six core industries growth picked up to 6% in December 09 compared to a 0.7% growth in December 08.

Foreign Portfolio Inflows Surge

Foreign inflows surged in 2009, with emerging economies receiving a bulk of the flows.

India received one of the highest foreign inflows in the emerging Asia region during 2009, after Korea.

FII inflow into Indian equities crossed the $17 bn mark in 2009, coming in only a tad bit behind the record high $17.7 bn inflow registered in 2007.

Foreign Trade Recovers

After being in the red for most of 2009 export growth rose into the positive territory , growth clocking in at 9.3% in the month of December 09.

Imports growth, after being in the red for most of 2009, picked up sharply in the month of December 09 to 27%.

Trade deficit for the April – Dec 2009 period improved to U$76 bn from about US$ 106 bn in the same period a year back

Inflation Raises Concerns

Headline inflation (WPI) accelerated to 8.56% in the month of January 2010 compared to 7.3% in the previous month.

Food inflation rose to 17.97% during w/e Feb 6, 2010. Caused due to one of the worst monsoons

in about four decades which hurt farm output. Food articles have about 15% weightage in WPI.

Consumer Price Inflation (Industrial Workers) rose to 14.97% in the month of Dec 09. Food articles have close to 46% weightage in CPI (Industrial Workers).

Fiscal Deficit – A Big Worry?

India’s fiscal deficit is expected to come in at about 6.5% for FY 10, which is the highest in 16 years.

By Nov 09 end, Fiscal deficit has already reached about 77% of the budgeted estimate for the

fiscal, with four months remaining.

Fiscal deficit has risen due to the stimulus packages offered last year to boost demand. Any

sudden spurt in oil prices can play further spoiler.

Rupee Turns In A Good Performance in 2009

The rupee rose 4.64% in the year 2009 (against the dollar) making it the third best performing currency in the Asian region, behind the Indonesian Rupiah and the Korean Won.

Robust foreign inflows and improving economic fundamentals helped in the rise of the rupee.

However, rising fiscal deficit, sudden spurt in oil prices and inflation, and any slowdown in

foreign flows can turn out be dampener in 2010.

The US dollar index fell more than 4% in 2009. However the greenback is expected to appreciate

in 2010.

Equity Markets

International Markets - What went down in 2008,

came up in 2009

Country Index 2009 Returns 2008 Returns

Russia RTSI$ Index 128.62% -72.41%

Indonesia JCI Index 86.98% -50.64%

Brazil IBOV Index 82.66% -41.22%

India SENSEX Index 81.03% -52.45%

Singapore FSSTI Index 64.49% -49.17%

China HSMLCI Index 53.85% -48.89%

Hong Kong HSI Index 52.02% -48.27%

Global Technology CCMP Index 43.89% -40.54%

Germany DAX Index 23.85% -40.37%

US SPX Index 23.45% -38.49%

UK UKX Index 22.07% -31.33%

Japan NKY Index 19.04% -42.12%

Source: Bloomberg; all returns exclude dividends and are in their respective currencies . Data as at 31 Dec 2009

Domestic Markets - What went down in 2008,

came up in 2009

Source: Bloomberg; all returns exclude dividends and are in their respective currencies . Data as at 31 Dec 2009

Sector Index 2009 Returns 2008 Returns

Mining & Metals BSEMETL Index 233.7% -74.0%

Auto BSEAUTO Index 204.2% -56.9%

Technology BSET Index 132.8% -50.8%

Small Cap BSESMCAP Index 126.9% -72.4%

Top 500 Companies BSE500 Index 90.2% -58.1%

Top 100 Companies BSE100 Index 85.0% -55.3%

Banking & Financial

ServicesBANKEX Index 83.9% -52.2%

SENSEX SENSEX Index 81.0% -52.4%

Power BSEPOWR Index 74.3% -59.8%

Oil BSEOIL Index 73.1% -54.5%

Real Estate BSEREAL Index 69.5% -82.1%

Healthcare & Pharma BSETHC Index 69.2% -32.9%

FMCG BSETMCG Index 40.5% -14.3%

Earnings Growth & Valuations: International

Markets

P/E Year

2009

P/E Year

2010

P/E Year

2011

Earnings

Growth

2010 (%)

Earnings

Growth

2011 (%)

USA (S&P 500) 17.8 14.4 11.8 27.5 22.3

Europe (DJ Stoxx 600) 15.3 12.2 10.1 25.3 20.5

Japan (Nikkei 225) 30.0 16.4 13.0 82.8 26.2

Emerging Markets (MSCI EM) 14.7 11.4 9.5 29.0 20.3

Asia ex-Japan (MSCI Asia ex-Japan) 17.6 13.6 11.4 29.7 19.0

Singapore (STI) 17.6 13.7 12.6 29.0 8.9

Hong Kong (HSI) 16.5 13.6 11.0 21.1 23.5

Taiwan (Taiwan Weighted) 28.2 18.0 15.4 56.3 17.2

South Korea (KOSPI) 14.0 10.3 9.1 36.7 13.2

China (HS Mainland Composite Index)+ 16.0 13.2 11.3 20.8 16.6

Malaysia (KLCI) 16.0 14.2 12.4 12.8 14.4

Thailand (SET Index) 12.7 11.2 9.8 13.5 14.5

India (SENSEX) 19.9 16.1 13.6 23.4 18.6

Indonesia (JCI) 15.9 13.4 11.2 17.9 19.7

Technology (NASDAQ 100) 20.7 17.4 15.1 19.3 14.7

Source: iFAST Compilations. Data as at 29 Dec 2009

*Japan and India PE forecasts are based on fiscal year ended March 2010, 2011 and 2012 respectively

Earnings Growth & Valuations: Domestic

Markets

Sector FY09-10 (%) FY 10-11 (%) FY 11-12 (%) Growth (FY10-FY12)

Earnings Earnings Earnings Annualized Earnings growth

2 year forward

Mining & Metal -19.3% 41.9% 23.4% 49.9%

Real Estate -38.6% 38.6% 43.6% 41.1%

Auto 155.8% 34.1% 23.9% 28.8%

Healthcare & Pharma 131.1% 26.6% 18.9% 22.6%

Capital Goods 26.1% 26.4% 21.8% 24.1%

Power 21.8% 25.7% 18.1% 21.8%

Banking 13.3% 21.1% 19.4% 20.3%

FMCG 23.8% 18.4% 18.3% 21.1%

IT 6.0% 12.6% 15.9% 14.2%

Source: iFAST Compilations. Data as at 6th Jan 2010

Fixed Income Markets

RBI Monetary Policy Review – Key Points

RBI hiked the CRR by higher than expected 75 bps, but let other key policy rates

unchanged.

RBI increased GDP forecast for FY10 to 7.5% from 6% earlier.

Inflation forecast for FY 10 revised upwards to 8.5% from 6.5% earlier.

Non Food Credit Growth forecast for FY10 reduced to 16% from 18% earlier.

RBI is trying to tame inflation by managing liquidity and at the same time not

hurting economic growth prospects.

However, the RBI feels that there is risk of inflation spreading from food articles to

other areas.

Further monetary tightening can be expected with possibility in hike in policy

rates if inflation persists.

Liquidity Conditions Are Comfortable

Liquidity conditions are comfortable with Reverse Repo Volumes below their mean levels over

the past one year. Call rates are also normal, in the range of 3- 3.5%.

That indicates that rise in inflation is not being fuelled by surplus liquidity, but more supply

driven.

RBI’s hike in CRR will suck out about INR 36,000 Crores from the system.

Bond Yields Rise and Expected to Harden

Further in 2010

Bond yields harden due to inflationary concerns and pick up in economic activity. With further

monetary tightening expected in 2010, yields are expected to harden further.

The benchmark ten year yield has risen from the 5% mark to 7.8-7.9% levels presently.

The longer end of the yield curve has hardened substantially over the past one year. However

the yields on the shorter end (upto one year) has actually subsided.

India Yield Curve Shift

As of Feb

1, 2010

As of Dec

31, 2008

Mutual Fund Trends

Mutual Fund Assets Trends

Fund Assets (AAUM) in India registered a sharp growth of 90% in 2009, bringing the 5 Year CAGR to a handsome 40% p.a.

Debt funds contributed primarily to growth in assets in 2009, registering a 80% growth during

the year, even after the sharp drop in the month of December. Equity fund assets also grew by

about 80% during the year.

The allocation of debt funds in total assets has been gradually increasing over the years, rising

from 36% in Dec 07 to 55% in Dec 09.

5 Year CAGR of 40% p.a.

Market Cap Exposure of Equity Funds

Equity Mutual funds have been increasing exposure to midcap stocks, with their average

allocation going up from 26% at the end of Dec 08 to 35% at the end of Dec 09.

Average allocation to debt & cash for diversified equity funds has reduced substantially from

almost 17% at the end of 2008 to 5.5% at the end of 2009.

Sectoral Allocation of Equity Funds

Diversified equity funds in India reduced exposure to Banks, FMCG, and Telecom sectors

substantially in 2009.

Exposure to IT, Auto, Capital Goods, Metals and construction stocks has meanwhile been

increased during 2009.

Average Portfolio Maturities of Debt Funds

Top Ten Performing Funds in 2009 - Equity

In 2009, funds having higher exposure to midcap stocks outperformed.

Equity funds having higher exposure to technology, pharma, auto and metal stocks also

outperformed.

In the equity segment, Equity: Technology and Equity: Pharma were the best performing

categories in 2009.

Scheme Name Classification2009

Returns (%)

Principal Emerging Bluechip Fund - Growth Equity: Diversified 147.30

JM Mid Cap Fund - Growth Equity: Diversified 142.63

ICICI Prudential Discovery Fund - IP - Growth Equity: Diversified 137.38

Franklin Infotech Fund - Growth Equity: Technology 136.67

ICICI Prudential Discovery Fund - Growth Equity: Diversified 134.32

UTI Thematic Transportation and Logistics Fund - Gr Equity: Speciality 132.13

Taurus Infrastructure Fund - Growth Equity: Infrastructure 127.18

Tata Life Sciences and Technology Fund - Appr Equity: Pharma 125.21

Sahara Banking and Financial Services Fund - Gr Equity: Banking 124.80

ICICI Prudential Technology Fund - Growth Equity: Technology 123.10

Source: iFAST Compilations

Top Ten Performing Funds in 2009 - Debt

With bond yields spiking up in 2009, short term funds and floating rate funds outperformed.

Six of the ten top performing debt funds in 2009 were short term funds.

In the debt segment, Debt: Short Term and Debt: Floating Rate – Long Term were the best

performing categories in 2009. Debt: Gilt – Long Term was the bottom performing category in

the debt segment in 2009.

Scheme Name Classification2009

Returns (%)

Templeton India STIP - Growth Debt: Short Term 11.95

UTI Short Term Income Fund - Ret - Growth Debt: Short Term 9.51

HDFC HIF - S T P - Growth Debt: Short Term 9.35

ICICI Prudential Income Opportunities Fund - Ret - Gr Debt: Income 9.31

PRINCIPAL Income Fund - STP - Growth Debt: Income 9.17

Reliance Short Term Fund - Growth Debt: Short Term 8.85

Kotak Bond Short Term Plan - Growth Debt: Short Term 8.82

HDFC Short Term Plan - Growth Debt: Short Term 8.68

HDFC F R I F - LTF - Growth Debt: Floating Rate 8.38

Birla Sun Life Floating Rate Fund - LTP - Growth Debt: Floating Rate 8.17

Source: iFAST Compilations

Outlook for 2010

Which stage are we in?

Cautious Optimism for 2010

Economic recovery to continue for most economies, including US,

Europe and Japan.

Asian Development Bank expects Asia to go into a V shaped recovery,

growing 6.6% in 2010.

We think that 2010 will be a good year because:

1) The recession in 2009 formed a low base from which it would be easy

to improve from in 2010, especially with the global economy on the

mend.

2) Earnings growth are expected to be high this year even while

valuations remain reasonable.

3) Many concerns like inflation, weak dollar, double dip recession has

already been raised and the market is aware of these potential pitfalls.

Is it time to invest?

Better now at the start of the year than later as markets

continue to trend up.

Most markets are still well off their all time highs, and positive

economic data expected, including improving earnings from

companies are expected for 2010.

Some concerns like the ending of government stimulus

packages, or rising inflation are potential threats only in the

later part of 2010.

Downside risks are still low compared to the upside potential at

this point in time.

Key Concerns - India

Hardening of interest rates and monetary tightening by the

Reserve Bank of India (RBI) and central banks around the world

Withdrawal of excise duty sops/ incentives and stimulus during

the post budget period

Any sharp rise in oil prices can also be a dampener for the

markets

Concerns of emergence of asset bubble in emerging countries

can lead to risk aversion among investors, especially FIIs.

Re-introduction of Long Term Capital Gains Tax for equities.

Favourite International Market:

Emerging Markets Equities

Low household leverage and healthy balance sheets of

companies mean economic growth can be sustained by domestic

consumption even if export falters.

Growing inflationary expectations to benefit resource rich

countries like Russia, Brazil.

Earnings Growth forecast to be strong at 29% for 2010 and 20%

for 2011.

The PE ratios of these markets are attractive with major GEM

markets like Brazil, Russia trading at PE ratios of 14X.

Favourite Domestic Sector: Capital Goods &

Infrastructure

Strong pick up in industrial activity will support this sector

Capital raising to kick-start the capex cycle in 2010, which will benefit this space.

Any reforms or incentives in the union budget for FY 2010-2011 can provide further boost to these stocks.

Even though valuations may be a bit rich presently, they are still far away from the historical highs seen in end 2007. Further, we expect earnings growth to catch up within this space.

Favourite Bond Class: Floating Rate Funds

Interest rates are expected to go up in 2010 with rising inflation and policy actions by RBI.

Floating rate funds would help to hedge investors in a rising interest rate scenario.

Assets of floating rate funds have increased by 487% over the past one year.

Average Portfolio Maturities have been cut to reduce the interest rate risk.

Conclusion

2009 saw a big rebound in markets, and we will see this carry over

into 2010.

2009 was a recession year, so 2010 will see strong earnings

growth from most companies and strong economic growth from

many countries.

There will be volatility, but downside risks should be limited.

We advise investors:

- Overweight Equities against Bonds

- Upside for equity markets limited to highs seen in late 2007.

- Domestically Capital Goods & Infrastructure looks attractive.

- Don’t overlook adding floating rate funds in your bond portfolio to

hedge against rising interest rates.

Thank You

Disclaimer

iFAST and/or its licensed financial adviser representatives may own or

have positions in the funds of any of the asset management firms or fund

houses mentioned or referred to in the presentation, or any unit trusts

related thereto, and may from time to time add or dispose of, or may be

materially interested in any such unit trusts. This presentation is not to be

construed as an offer or solicitation for the subscription, purchase or sale of

any fund. No investment decision should be taken without first viewing a

fund's prospectus. Any advice herein is made on a general basis and does

not take into account the specific investment objectives of the specific

person or group of persons. Past performance and any forecast is not

necessarily indicative of the future or likely performance of the fund. The

value of units and the income from them may fall as well as rise. Opinions

e x p r e s s e d h e r e i n a r e s u b j e c t t o c h a n g e w i t h o u t n o t i c e .