Economy Report September 2009

MAIA Financial Services Pvt Ltd

MAIA FINANCIAL SERVICES PVT LTD

ECONOMY 360 DEGREES INDIA: SEPTEMBER 2009 JULY 2009

MAIA Financial Services Pvt Ltd

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. GDP 3. IIP 4. Core Infrastructure Industries

iii. Lagging 1. Exports 2. Imports

MAIA Financial Services Pvt Ltd

Market View: In our previous report of August 2009, we had stated that one could buy on dips as we expected the market to remain in a range of 4400-4700 and we are very glad to say that it did happen that way. One who had bought on dips could have earned a return of 7-8% in a month 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 market are 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 likely headed 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 as well as Commodities and Bond market. Our leading economic indicators such as yield curve has inverted 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 credit growth is slowing down and even there is a decline in bank credit to corporate sector for the month of August 2009. Talking about corporate bond spreads they are almost flat at 170 basis point. All these are indicative and are most likely pointing towards a downward move in our Indian markets. Chinese markets have been always a leading one and at this point of time, Chinese market is showing signs of weakness and are headed downwards. So it is most likely that we could see a fall from current levels. We suggest a strategy of booking profits at the current levels. One more thing to keep into consideration is that historically, September is the weakest month of the year for the stock market. The below graph clearly indicates that. The downside effect has often been more pronounced as the month nears its end. So our view is investors should remain very very cautious and alert.

Source: Dow Jones

MAIA Financial Services Pvt Ltd

Economic Indicators:

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

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

MAIA Financial Services Pvt Ltd

saw in the previous chart that the bond yield was rising and this is supported by fall in bond prices. 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 27th August 2009 has inverted. This is due to the fact that the spread between longer term maturity ranging from 0.5-1 years and shorter term maturity ranging from 0.1-0.5 years has turned negative. When yield curve shows signs of inversion it definitely indicates problems for the equity markets. Corporate Bond Spreads

MAIA Financial Services Pvt Ltd

As can be seen from the above charts, the corporate bond spreads have been falling from Jan 2009. However from previous 2 weeks they have almost remained flat at 170 basis points. We are of the view that most likely the spreads are going to rise on the back of fears of rising government bond yields as well as inflation. This suggests somewhat bad news for the corporate sector. Price/Earnings Ratio

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

MAIA Financial Services Pvt Ltd

One thing is very evident from the chart is that whenever we enter stage 2 of the business cycle-a stage where stocks rally and can give a return in the range of 50-70%, the top is most likely formed at the levels of P/E of around 20-21. So this is the reason that we should be cautious. Credit Growth:

While the growth in the non-food credit continues to be lower at 14.98%, for the week ended 14th August 2009, the deposits growth remained higher at 21.3%.This implies that the industry still 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 trend implies that the rate of gross fixed capital formation, which slipped to 31.6% in the April-June quarter 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 to extend financial support to industries that have poor credibility due to slowdown. Bank Credit to Corporate Sector:

MAIA Financial Services Pvt Ltd

Money Supply

M3 growth remained high at 20.5% y-o-y, driven by a 21.3% increase in deposits. M3 growth remains well above RBI’s revised projection of 18% y-o-y growth, which does not bode well for future inflation. Also inflationary concerns would further be elevated because the food price inflation has already reached 11% and it would be further a cause of worry because of the low rainfall. Inflation:

MAIA Financial Services Pvt Ltd

As can be seen from the above charts of WPI and CPI, the WPI numbers are deceptive. The CPI numbers are telling an altogether different story. The food price inflation is already in double digits and remains at 10.5% currently. With lesser rainfall the threat that the inflation would be would rise further gets elevated. At the moment when economy is on the path of recovery, this kind of inflation would most likely hurt growth. Thus by September end or October when the WPI also starts reflecting the true picture and it becomes loud and clear that inflation is gripping us all, stock markets would definitely react and that reaction would lead to down move in 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 not very good for the corporate sector as well as for the future growth. With 10 year government bond yield already giving us a signal of rising interest rates, it is only a matter of time when we would 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's imports 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:

MAIA Financial Services Pvt Ltd

The six core infrastructure industries grew 6.5% in June on the back of a robust performance by Cement and Steel. A year ago, the Infrastructure sector had grown by 5.1% while the figure for May 2009 stood at 2.8%. Cement topped the chart with a growth of 12.8%, while Steel rose 5.3%, both crucial inputs for construction activity. Sectors like Steel and Cement are very cyclical in nature. The government’s counter-cyclical stimulus measures are showing their result by way of a pickup in construction activities. Accordingly, the industrial output figures has also improved. However this is not very great news as this might have been already factored in when we saw are equity markets rally from 8000 to 16000 levels. This is because the stock markets 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. Mining sector 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 a year-on-year basis.

Analysis Economic Indicator

Type

Comment

Yield Curve

Leading

Inverted. Bad for Bonds as well as Equities

Corporate Bond Spreads

Leading

Almost flat at 170 basis point. However there are many indicators pointing that sooner or later the bond spreads are going to rise which would prove bad for corporate sector.

Inflation

Coincident

WPI falling, however CPI rising in double digits. Going down the line, would be bad for equity markets

Currently stable, however

MAIA Financial Services Pvt Ltd

Interest rates

Coincident

indicators are signaling that RBI would sooner or later start raising the rates

10 year government bond yield

Leading

Rising. With the huge government borrowing programme and inflation fears the yields have started rising. This would be bad for equity markets

Non Food credit growth

Leading

Declining. It would prove bad for the equity markets since it is indicative of the fact that either corporates are hesitant of taking more loans for their expansion plans or banks are hesitant in giving financial support to corporations having low credibility

CCIL Bond Index

Leading

Falling. As the yields are rising, bond prices are falling. This would be bad for the equity markets going down the line

Price/Earnings Ratio

Leading

P/E currently at 20-21. This is quite high.

GDP

Coincident

Growth of 6.1% for the 1st quarter of the FY10. Better than the same quarter of the previous year.

IIP

Lagging

Good. IIP showed a growth of 7.8% for the month of June 2009.

MAIA Financial Services Pvt Ltd

Core Infrastructure Industries

Lagging

The rosy picture shown by the core infrastructure industries in the latest data released(June 2009) could have already being factored in.

Indices-Shanghai

Leading

Bad. Weakness visible

Analyst Name: Avani Mehta Email Id: [email protected]

Company Name: MAIA Finacial Services Pvt Ltd 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 from sources which we believe are reliable but we do not guarantee. It also includes analysis and views 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 this report 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 omissions may creep in. It is notified that neither “Maia Financial Services Pvt Ltd” nor its employees will be 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 content can be copied, reproduced, republished, uploaded, and/or distributed for any use without obtaining prior written permission of “Maia Financial Services Pvt Ltd”. All legal disputes are subject to Mumbai jurisdiction only.