Equity Outlook for the month of December 2008

Global policy rates continued to be cut and US Fed Fund rate dropped to Zero. Inflation continued to be drop globally and in India too. From 6.38%, Inflation is likely to drop steadily and might even be negative by the middle of the 2009. On back of this data, the debt market continued to reflect the optimism on rate cuts in India as well. Meanwhile; the liquidity situation improved substantially and would most likely improve further as we step in 2009. Crude oil dropped below $35, thereby going below 2004 lows. Rupee recovered from levels of Rs51/$ to Rs47/$ mid month before closing the month at Rs48.5/$. Sharp reversal in foreign exchange inflows from NRIs and FIIs was largely responsible for this. FII outflow for CY08 was USD 23729mn. Domestic MF investment for CY08 was USD 3328mn. Exports data of November as expected turned to be negative at -10% yoy.

India’s Industrial production contracted 0.4% YoY in October from an upwardly revised 5.5% in September marking the first YoY contraction since the series began in 1994-95—highlighting the gravity of the current slowdown. Manufacturing contracted 1.2% also its worst showing since the mid 1990s. IIP should however positively benefit from the coming on stream of large capacities in petroleum refining and gas from 1Q 2009.

In December 2008, Indian markets reversed the 3 month trend of negative returns and ended with a 6.1% gain on the Nifty and 7.4% on the Sensex. This trend was in line with global markets where confidence increased on government’s ability to manage the fall out of the credit crisis. CNX midcap and the BSE Small Cap index moved up by 13% and 12% respectively reflecting the fact that the market was slowly recognising the deep undervaluation available in the these segments.There was high volatility though we saw it tapering off towards the end of the month. Interest rate sensitive stocks particulary shone in this period. Trading volumes were though quite low. The outperforming Sectoral Indices for this month, were BSE REALTY (45.68%) and BSE Metal (18.96 %), whereas BSE IT (-12.93 %) and BSE Teck (-2.73 %) were the under performers.

The stocks markets have been very volatile over the last few months as they try to find a future direction for themselves. The silver lining is that there has been a sharp fall in the commodity prices including crude which recently fell to sub USD35 / barrel levels. It is believed that in the current scenario most of the negative factors have been priced in. As such the probability of the markets going back to their earlier lows is low. Performance of the markets in December has been quite encouraging with first signs of stabililty emerging. The contributors to supporting the markets would be falling inflation and therefore interest rates declining. Sustainable bounce back in economic and corporate sector profit growth over the next couple of years should start towards the later part of 2009. Overall it is believed that we are in the last phase of a cyclical downturn in a long drawn structural upturn in the Indian economy and the next few months present good investment opportunity in capital market for investors with long term outlook. (Source: Bloomberg)

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