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Niche Sectors in Equities to experience J-Curve Growth
April 28, 2011

This is a brief outline of the SBI conference call held on 29 April 2011. The article presents an outlook on the equity market considering the impact of the various factors affecting it.

Author : iFast Content Team

 ABC of Fixed Income Investing

The monthly SBI conference call discussed the following key points:

  • Factors affecting Equity Markets
  • Fund recommendations

Macroeconomic issues for the Indian economy

The high inflation is currently the key concern for the economy. The monetary tightening policies of RBI will not have the intended impact beyond a certain point and a decision needs to be made whether to curb growth at the cost of rising inflation or to solace with high inflation. The decisions today carry great importance tomorrow; if the liquidity does not ease out and the investment cycle fails to complete then 2-3 years down the line, we would be exposed to greater inflation.

Liquidity would worsen in the next couple of weeks, largely contributed by the vast spending of the government in March and further, large borrowings from RBI.  Further, the low deposit growth and the high credit growth may not improve the liquidity situation.

Other factors that play an important role in the equity market are:

Corporate Earnings:

Only 30% of the companies have posted returns as expected but, the Sensex companies have announced a profit growth of around 23%. However, maintaining the growth on the profitability side would be challenging for companies in various sectors. Overall, the margins are under pressure as a result of the rise in interest rates, input costs and other expenditure. Therefore, the expected growth may be in line with the revenue but the pressure on the margins needs to be kept in mind.

Oil Prices:

High oil prices have also put pressure on inflation. The government soon needs to announce a hike in oil prices which would consecutively increase the inflation, depending upon the hike, by 50 or 80 basis points with the overall effect resulting in double digit inflation. This adversely affects the equity and the fixed income investors. Therefore, the RBI and the government need to take proper steps in order to combat inflation to avoid its affect on the market.

Chain of unfortunate events:

The political crises in the Middle East, the disaster in Japan and the political gridlock in India have played their part in hurting the economy. The investors in this scenario piled on the risky assets like precious metals, commodities and equities.

The US Federal Reserve in their press conference recently said that they would continue with their monetary ease and would not currently think of interest rate hikes. This is done keeping in mind the high unemployment level in US and the need for volatility stimulus to boost the economy. Given the high amount of liquidity in the market, the FII inflow of approximately US$1.67 billion (till date) is expected to continue.

However,  the global banks are aggressive while dealing with inflation and have been raising interest rates. At the same time, the inflation tolerance level worldwide has increased as seen from the past few month data.

Equity Outlook

  • Keeping in mind the worries on inflation, rising oil and food subsidies, the impact of interest rates and the pressure on the margins the equity market would continue to remain volatile and under pressure.
  • However, the investors should keep it mind that the long-term perspective on the Indian market remains positive.
  • People have already started downgrading next year’s GDP, which will be less than the expected as a result of the current market conditions, but still adequate enough after adjusting inflation. The growth in GDP would result in the demand in niche categories and sectors and the J curve (which depicts the internal rate of return of a fund). According to it the rate of return of a fund is less initially due to the starting expenses of the fund. However, the returns increase overtime as the fund stabilises would be witnessed in such cases.
  • Overall, despite the present market conditions, the market would present good opportunities for patient long-term investors. These opportunities would be seen especially in business which are effectively managed and possess greater competitive advantage than their counterparts.

Therefore, for next couple of months investors can look towards equity market apart from fixed income markets. These markets would provide favourable returns to the investors having a good risk appetite and a long term horizon.

Fixed Income Outlook

In the fixed income space, we expect the bond yields to rise due to the interplay of following factors:

  • The RBI would remain hawkish and the liquidity condition would deteriorate.
  • The high food subsidy bill and oil prices could slowdown the economy and put pressure on tax revenues. 
  • The likelihood of government borrowing overshooting in the second half.

We have been running low duration in our funds only as a tactical trading measure although structurally, we expect bond yields to increase hereafter. We also expect liquidity to tighten further and therefore, we are maintaining surplus cash in our funds. We have very low maturity in all our Liquid, Ultra Short Term and Short Term Funds. The short term interest rates declined due to large government spending in April. Therefore, we would wait till quarter end to re-price our portfolios.

Furthermore, if the market starts pricing in rate hikes at quarter end, the long term investors with risk appetite can look at duration funds. However, at present interest rates one needs to adopt a cautious attitude towards duration funds.

Fund offerings from SBI

Magnum Equity Fund: A pure large cap fund which invests in top 100 stocks. It has a concentrated portfolio comprising 30 stocks with overweight in healthcare and energy (Coal India). The top holdings in the fund: HDFC Bank, Bharti and SBI. The top active weights are: Coal India, Bharti and Bosch.

Magnum Global Fund: A mid-cap fund which invests up to 70% in mid cap sector. It has a clear philosophy of investing in companies which have a strong brand presence or strong business franchise with high returns on capital.  90% of the invested universe has a significant Return on Equity of more than 20% with the companies having a strong domestic or global presence. The top holdings are: Redington, Bosch and Asian Paints. These companies have low volatility and are doing well which is reflected in the fund as well.

Magnum Emerging Business Fund: It has equal proportion of small cap, mid cap and large cap funds with mid and small cap funds being predominant. This is because of the presence of top conviction ideas in mid and small cap.

Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. 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. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.

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