This is a brief outline of the conference call held on 13 December 2010 with Mrs Srividhya Rajesh, Fund Manager, Sundaram Mutual Fund. The article covers Sundaram Mutual Fund views on Economy and Markets
Sundaram Mutual Fund views on Economy and Markets!
Sundaram Mutual Fund views on Economy and Market
This is a brief outline of the conference call held on 13 December 2010 with Mrs Srividhya Rajesh, Fund
Manager, Sundaram Mutual Fund. The article covers Sundaram Mutual Fund views on Economy and
Author: iFAST Research Team
• Economic growth in second half of the financial year could be moderate.
• Bullish on long-term India story but in the short term, market looks expensive as compared to
• Expects market to remain range bound for some time now.
• Liquidity in the equity market is totally driven by FIIs and reversal could happen depending upon
risk aversion in the global markets.
• Expect liquidity in the economy to remain tight for some more time.
• Expect earnings growth for FY12 to be around 20%.
• In terms of valuation, large cap stocks are more expensive than mid cap stocks.
Overview of the Equity Market and Indian Economy
Sundaram Mutual Fund was of the view that in the month of November, equity markets started
correcting towards the end of the month on the back of the Debt Crisis in Europe as well as some of the
peripheral European countries like Portugal and Spain. The markets were risk averse due to the crisis
and therefore India underperformed the other emerging and also developed markets. Because of the
crisis and risk aversion, the dollar also strengthened during November. As China started hiking rates on
the back of rising inflation and cooled down the investment boom, it also led to fear in the minds of
investors of an upcoming slowdown and this has resulted in impacting commodity demand and prices.
Ms Srividhya Rajesh was of opinion that macroeconomic indicators in India are showing some sign of
fatigue. Diesel consumption has been slowing down, Purchasing Manager and Manufacturing Index
numbers are hovering in a flat zone for the last few months, normal imports have come down in the last
few months primarily because of the base effect, and growth numbers are also looking slightly
dampened. Ideally, in the second half of the year, all the indicators should show growth, but due to
higher base, numbers will find it difficult to show very high growth. However, Sundaram Mutual fund
also views that the growth in economy should not come off significantly as consumption and investment
story continues to show improvement and hence will give support to growth numbers.
Investment numbers are showing conflicting signs, as GDP capital formation is looking favourable, but
the IIP numbers announced for September were disappointing. According to Business Outlook and
Confidence survey, capacity utilisation is very high, and corporate sector intends to start capital
expenditure though not in very high earnest right now. However expenditure by Government on
Infrastructure sector has been very slow especially in roads.
Performance of the Market
In the month of November the Indian market underperformed developed as well as other emerging
markets. November 2010 month performance as compared to past November months has been lower
than median return. Small and mid cap stocks have underperformed large cap companies in the month
of November, though mid cap and small cap stocks outperformed large cap in many months in this year.
Ms Srividhya Rajesh was of the view that the flows in Indian equity market continue to be driven by
Foreign Institutional Investors and domestic institutional flows have been very lacklustre. Insurance and
MF flows have been positive after several months, though still very meagre. Hence the concern is that
current liquidity is totally driven by foreigners and there is hardly any backing from domestic corporates
Bond Yield and Earning Yield Spread
Ms Srividhya Rajesh felt that the valuations after the recent correction are looking less expensive but
still high as compared to historical numbers and India continues to trade at a premium as compared to
other emerging markets. In comparison to bonds yield, equity valuations are looking stretched and
hence it could discourage further flow from foreign institutions.
Looking at earning numbers for the second quarter, she was of the view that sales growth continues to
be impressive across large and midcap companies in the second quarter whereas profit growth was
fairly strong in mid cap companies as compared to large cap companies. Cost pressure as well as
employee costs are rising for the companies. Consensus earnings growth for FY12 is around 20%.
Earning will be mainly driven by sectors like Energy, Material and Industrial and any rise in commodity
prices should help sectors like energy and materials.
Market liquidity is very tight and it is expected to remain tight as the next few months have lots of Initial
Public Offers lined up from the government and this will continue to keep stress on liquidity. Unless
foreign flows continue to supplement the demand, there will be some more tightness; however foreign
flows can be very volatile on the back of global risk aversion, like we saw in November. Ms Srividhya
Rajesh was of the view that government balances with Reserve Bank of India are huge and if the
government spends some of it on public expenditure it could ease the liquidity condition in the market.
Overall View on the Market
Markets across various aspects, be it liquidity, earning, flows and valuation, after some correction has
started looking a little bit reasonable from valuation perspective but still rich in comparison to history
numbers. There are signs of some improvement in developed markets as reflected in numbers but it is
too early to take a view on that. Long term issues like unemployment, pension liability gap still remain.
Developing markets showed strong recovery but will find it little bit difficult to continue to show strong
growth on higher base. Moreover, from India markets perspective, issues like high equity issuances, high
valuations and slightly slower growth on Y-o-Y basis can lead to some more correction in the market.
Domestic inflows have been weak and if there is some correction, risk aversion will reduce and we
would see some flow from domestic institutions. The view therefore is that the market will not give a
huge breakout on either side and will trade in a narrow range for some time now.
In the long term, money will keep on flowing from developed markets to developing markets, given
higher growth and hence there is a very optimistic view on the Indian market for longer term.
Valuations are higher for larger companies but in current environment quality is preferred due to
extreme risk aversion; investors prefer companies with good track record and strong corporate
governance. Hence some mid cap and small cap companies have underperformed significantly as
compared to their larger counterparts. There can be some reversion of this trade as risk taking capacity
of investors’ increases, which could result in some of the lower quality stocks coming up given the fall
they have suffered.
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