Market Review Market Outlook

HSBC/Global Emerging Markets
INDIA
31 October 2004
31-Oct
1 MO
YTD
End'03
TOYE
End'04
%
End'05
%
Oct-05
%
5,672.3
1.6%
-2.9%
5839.0
72.9%
14.4%
5,584.8
-1.5%
7,260.2
30.0%
6,968.1
22.8%
LC/US$
45.42
-1.3%
-0.4%
45.6
4.9%
3.0%
45.63
-0.5%
43.88
4.0%
44.2
2.8%
EPS (LC)
394.3
387.8
30.0%
465.4
20.0%
558.5
20.0%
543.0
37.7%
EPS (US$)
8.7
8.5
36.7%
10.2
17.5%
12.7
24.8%
12.3
41.8%
P/E (LC)
14.4
15.1
Index (US$)
124.9
Index (LC)
2.9%
P/E range (5-year Low/High):
P12mP/E to P24mEPSgrowth (US$):
-2.4%
8
128.0
12.0
81.8%
17.8%
122.4
13.0
-4.4%
165.5
12.8
35.2%
157.8
26.3%
25
0.45
32.4%
Market Review
•
•
•
•
•
•
•
The BSE Sensex rose (1.6%) in October with the index touching 5,804 on 8 October, a new high post the
announcement of election results on 13 May 2004.
Corporate results for the July-September 2004 indicate continued improvement in performance. The
aggregate results of about 1,001 companies indicate the sales and net profits have increased by 23% YoY
and 21% YoY respectively (Source: Business Standard). This has been the first instance in recent years
when profit growth has lagged sales growth.
The Congress-NCP alliance has retained control of Maharashtra even though they did not get a majority.
This should help Congress consolidate its position at the centre.
The mega-IPO of National Thermal Power Corporation Ltd met with encouraging response. The issue was
subscribed over 12.75 times and received over 1.5 million applications from investors.
The cabinet has approved increase in foreign direct investment in the domestic airline industry from 40% to
49%.
The left parties have consented to increases in price of petrol to offset the recent sharp increase in crude
prices. However, petroleum prices were not increased during the month.
Foreign institutional investors (FIIs) were net buyers worth USD 876 million during October. However,
domestic mutual funds continued being net sellers during the month.
Market Outlook
•
•
•
•
Hedge fund money continues to drive up the market with the technology sector in particularly rising very
sharply. We would underweight this sector.
Key risks going forward are a sharp fall in commodity prices and/or continued government pressure to
reign in prices, a sharp rise in the rupee, a poor monsoon and a sharp rise in interest rates. We have seen the
government proactively cut import duties to rein in inflation and put pressure on industry not to raise
prices, which has reduced pricing power for domestic corporates, especially for commodity producers and
oil marketing companies.
We would continue to monitor the progress the government makes in passing and implementing policy,
specifically the Kelkar Task Force recommendations, VAT and the development of rural India.
We remain positive on the medium to long term outlook for the market. We have withdrawn our short term
unfavourable risk reward call at the end of October. Since we made the call the market rose 2%; excluding
technology the market rose 0.59% (all in rupee terms).
HSBC/Global Emerging Markets
Economics and fixed income
•
The monetary credit policy is negative for growth in the short term as the Reserve Bank of India (RBI) is,
at the margin, willing to sacrifice growth for managing inflationary expectations.
•
Expect another 25bps hike in the repo rate over the next 3 months.
•
To the extent that the policy is negative for growth it is positive for bonds. Even the RBI Governor in post
monetary policy interviews stated that he does not expect a big movement in long term yields.
•
We retain our 10Y G-sec target at 6.25-6.75% for March 2005. We continue to maintain that long term
bond funds are attractive at 10Y G-sec above 6.75%.
Overall, the policy stance has become significantly more hawkish compared to April 2004. The change in
statement is as follows:
•
Provision of “appropriate” as compared to “adequate” liquidity earlier to meet credit growth while
placing equal emphasis on price stability
•
To pursue an interest rate environment that is conducive to macro-economic and price stability as
compared to the earlier stance of maintaining status quo on interest rates
•
And lastly “To consider measures in a calibrated manner in response to evolving circumstances with a
view to stabilising inflationary expectations” suggesting that another 25bps hike in the repo rate is
likely if inflation continues to remain high.
Implications for Bond Markets
We expect the yield curve to flatten as the hawkish stance will result in short term yields moving up whereas
lower supply of G-secs and expectations of falling inflation (on account of RBI policy) are likely to result in
easing of long bond yields. The risk to our view is that if oil and other commodity prices continue to remain
high then yields could move up further.
HSBC/Global Emerging Markets
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Vertrieb durch HSBC Trinkaus & Burkhardt KGaA 2004