May 2009

Equity markets surprised everyone with a staggering performance during the month, on the back of the strong mandate given to the new Congress government and, more importantly, a very strong inflow of funds by foreign investors into the Indian equity markets. Our portfolios also benefited from the sharp uptrend in equities over the month. What surprised several investors was the strength of the rally when all economic indicators points to a continuing tough environment. Stocks that were cheap less than 2 months back are not cheap any more.

The strong mandate given to the Congress government and hopes of sweeping reforms in areas like infrastructure is attracting capital towards India. The Congress government has put together an excellent team to implement some of the policies that got a tame treatment in the previous 5 years. One can look forward to some progressive steps in areas like roads, power, PSU divestment, insurance and few other areas. Focus on rural development will stay. FII fund inflow into India in May 2009 was over $ 4 billion, the highest single month figure seen. This also coincides with a similar movement of funds towards equities across the world, and specifically into emerging markets like India. There is a significant easing in global liquidity after the recapitalization of banks in US. In addition, several foreign investors believe in the domestic demand led growth opportunities in India.

Globally and inIndia, level of consumer sentiment and business confidence has improved. On the other hand, the economy has still have several hurdles to cross and it is far from being out of the woods. Though people are getting back to buying homes, nobody is rushing to buy a house, a syndrome that we witnessed in 2007. Corporate results continues to be weak. The source of the change in global sentiment was the huge fiscal stimulus plan undertaken by various governments including the Indian government. This, in simple terms, is based on huge borrowings by government to dig themselves out of the current problem. The global economy seems to have been fairly successful in digging itself out of the problem, or at the least find a bottom to the global recession, but at some stage the world needs to foot the bill for the stimulus plans.

Though equity markets are currently focusing on the end of the recession, the time is not far when people have to focus again the getting the fiscal situation in order. The Indian government fiscal situation is precarious and the coming budget may have to see some tough decision taken – especially with respect to reversal of some of the recent tax sops given. The finance minister may try and delay some of these measures, but they would need to be faced up to soon.

In this environment, where business environment continues to be tough, not too comfortable a fiscal situation and an increasingly expensive equity market, we believe one should be liberal in selling stocks as and when one sees expensive prices. We have started this process over the last few days.