Transcript money market funds that saw inflows of US$140bn

Rise and fall of stock markets/prices is
guaranteed!
A Basic Reminder
• Invest for the Long term
• Price of the company will change daily but not
the value of the company. It’s the value that
finally drives the price.
• Do not follow the herd – draw your own path
• Be disciplined
• Markets in the long run will depend upon
a) Macro Factors – Economy
b) Corporate India performance
Boom…bang…crash!!
Sensex peaks at 21000 levels in Jan 2008
Euphoria
Sensex crosses
18000 in Oct 2007
(sharp rally of 4000
pts in 1 ½ mths)
Crash
Belief
Sensex crashes to
15332 on Jan 22 2008
thereby retracing to
Aug 2007 levels
(within 7 trading
sessions of
achieving a peak)
Disbelief
Last Leg for Up Move was backed by
- Liquidity
- Leverage
- Rumour mongering
- Huge Retail participation
But was not backed by FUNDAMENTALS
2000 - Statistics
Feb 2000 – Sensex Peak
Jan 2004 – Sensex Bounce back
5933
Flows
% of Stock Fall
% of Stock Rise
> Sensex
> Sensex
51%
54%
Flows
•FIIs – Rs 43 bn
•FIIs – Rs 484 bn
•Domestic –Rs 4 bn
•Domestic – Rs (75) bn
3920
May 2000 – Trough
4 yrs
• Dotcom bubble
Source: Bloomberg
6026
2001 - Statistics
Aug 2001 – Sensex Peak
Nov 2001 – Sensex Bounce back
3318
Flows
% of Stock Fall
% of Stock Rise
> Sensex
> Sensex
56%
33%
Flows
•FIIs – Rs (4.5) bn
•FIIs – Rs 9.6 bn
•Domestic –Rs 1.1 bn
•Domestic – Rs (10.7) bn
2600
Sep 2001 – Trough
3 months
• September 9 /11
Source: Bloomberg
3322
2004 - Statistics
Apr 2004 – Sensex Peak
Nov 2004 – Sensex Bounce back
5925
Flows
% of Stock Fall
% of Stock Rise
> Sensex
> Sensex
69%
29%
Flows
•FIIs – Rs (25) bn
•FIIs – Rs 124 bn
•Domestic –Rs 13.3 bn
•Domestic – Rs (17) bn
4505
May 2004 – Trough
7 months
• NDA government collapsed
Source: Bloomberg
5973
2006 - Statistics
May 2006 – Sensex Peak
Oct 2006 – Sensex Bounce back
12612
Flows
% of Stock Fall
% of Stock Rise
> Sensex
> Sensex
80%
34%
12736
Flows
•FIIs – Rs (103) bn
•FIIs – Rs 144 bn
•Domestic –Rs 56 bn
•Domestic – Rs 17 bn
8929
Jun 2006 – Trough
•
5 months
Concerns that US will raise rates and draw overseas investors away from
emerging markets and surging commodity prices will hurt company
earnings.
Source: Bloomberg
2008 - Statistics
Jan 2008 – Sensex Peak
Sensex Bounce back - ??
20812
% of Stock Fall
Flows
> Sensex
81%
•FIIs – Rs (149) bn
•Domestic –Rs 54 bn
15357
Mar 2008 – Trough
?? months
• Sub-prime crisis
Source: Bloomberg
2008 Crash – Most Vicious
Date
SENSEX INDEX
change
From
To
From
To
%
1
Jan-08
Mar-08
21206
14677
-30.79%
2
Feb-07
Mar-07
14723
12316
-16.35%
3
May-06
Jun-06
12671
8799
-30.56%
4
Apr-04
May-04
5979
4227
-29.30%
Date
BSEMDCAP Index
change
From
To
From
To
%
1
Jan-08
Mar-08
10113
5805
-42.60%
2
Feb-07
Mar-07
6187
5114
-17.34%
3
May-06
Jun-06
6033
3721
-38.32%
4
Apr-04
May-04
2337
1768
-24.35%
Source: Bloomberg
Key Question in Investors Mind
• Is the 2008 stock market crash similar to
2000 crash and would this mark the
beginning of the bear market?
2000 v/s 2008
2000-01
*2007-08
35x
16x
Savings
(as a % of GDP)
23.7%
34.7%
Investments
(as a % of GDP)
24.3%
35.9%
GDP growth
4.35%
8.73%
Inflation
7.16%
7.21%
Earnings growth
4.43%
17-20%
Fwd P/E ratio
Other comparisons:
• Only driver of markets in 2000 was the TMT sector
• Rally & the crash now much more broad based
• Tata Motors, Tata Steel, M&M making losses in 2000
• IT cos much stronger and much bigger
* estimates
Corporate Profits Surpass Index Growth
Date
Sensex
Agg BSE 500 Net Profit (Rs Crs)
Apr-98
3993
33755
Apr-99
3519
31101
Apr-00
5053
37019
Apr-01
3566
45487
Apr-02
3506
45371
Apr-03
3117
70028
Apr-04
5788
90077
Apr-05
6604
119719
Apr-06
11747
136909
Apr-07
12455
195769
Mar-08
16217
254500
10 yr growth
4.1 times
7.5 times
10 year data reveals that ….
Source: Bloomberg; Edelwiess
…profits in the broader market have grown faster than the Sensex
Consistent Earning Growth
EPS
Growth (%)
Sensex
Sensex growth
FY98
247.0
6.9
3,969.6
15.8%
FY99
240.5
(2.6)
3,686.3
-7.1%
FY00
274.4
14.1
5,001.3
35.7%
FY01
235.8
(14.1)
3,604.4
-27.9%
FY02
251.3
6.6
3,500.2
-2.9%
FY03
293.7
16.9
3,081.0
-12.0%
FY04
354.1
20.6
5,740.9
86.3%
FY05
435.7
23.1
6,605.0
15.1%
FY06
478.4
9.8
11,280.0
70.8%
FY07
653.3
36.6
13,072.1
15.9%
FY08
865.0
32.4
15,800.0
20.9%
FY09E
1,012.1
17.0
?
?
• Indian corporates have been delivering consistent growth for last 5-6 years
• Markets have been rising from levels to 1200 in Fy01 to 4900 in Fy08 at a CAGR of 20% p.a.
• In FY07 and FY08; Sensex has grown slower than the Sensex EPS growth; thereby anticipating a slowdown in
future earnings
• As the growth outlook improved; Sensex likely to give disproportionate returns
Source: Bloomberg; Edelwiess
Economic Fundamentals - Robust
Real GDP
Inflation
Investments as a
% of GDP
Savings as a
% of GDP
% Y-o-Y
% Y-o-Y
%
%
1997-98
4.30
4.40
25.3
23.80
1998-99
6.68
5.95
23.3
22.26
1999-00
6.44
3.27
25.9
24.81
2000-01
4.35
7.16
24.3
23.74
2001-02
5.81
3.60
22.8
23.47
2002-03
3.84
3.41
25.2
26.40
2003-04
8.52
5.46
28.2
29.81
2004-05
7.45
6.48
32.2
31.77
2005-06
9.40
4.38
35.5
34.28
2006-07
9.62
5.42
35.9
34.77
2007-08
8.73
7.21
36.3 *
35.05*
Source: CSO, CMIE, RBI, Edelweiss, * estimates
• Economic fundamentals have been robust and key metrics have consistently improved
• Current level of Saving and investments can sustain 8% growth
Is There Enough Liquidity?
•
•
•
•
•
Record US$100bn of outflows from global equity funds, 80% of which
pertains to developed markets, 20% to emerging markets
Taiwan, Russia, Middle East, Africa are the only market-funds that saw
inflows
Money is moving to money market funds that saw inflows of US$140bn. MM
funds have ballooned to US$3.5trn in the US. A lot of money is thus now on
the sidelines; these will flow into riskier assets once climate improves
Commodity funds saw inflows of US$3bn, 3x YoY. There is over-heating
here, commodities look very vulnerable
More than 50% of the 25-top US mutual funds have seen outflows in their
equity funds
• The above statistics show that the risk aversion is at a peak in equities
• Liquidity is ample but there seems to crisis of confidence
• Commodities cooling will release liquidity into oversold equity markets
The Crash and Carnage was backed by
- Low Liquidity
- Heavy Shorting/hedging activity
- Rumour mongering
- Problems with US financial system
But again driven more by fear than only
fundamentals
Fundamentals are still strong
Where can the Sensex go?
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
EPS growth
20
20
20
17
17
17
15
15
15
12
Sensex EPS
1010
1212
1454
1702
1991
2329
2679
3081
3543
3968
12
12120
14544
17453
20420
23891
27953
32146
36967
42512
47614
13
13130
15756
18907
22121
25882
30282
34824
40048
46055
51582
14
14140
16968
20362
23823
27873
32611
37503
43129
49598
55550
15
15150
18180
21816
25525
29864
34941
40182
46209
53141
59517
16
16160
19392
23270
27226
31855
37270
42861
49290
56683
63485
17
17170
20604
24725
28928
33846
39600
45539
52370
60226
67453
18
18180
21816
26179
30630
35837
41929
48218
55451
63769
71421
19
19190
23028
27634
32331
37828
44258
50897
58532
67311
75389
20
20200
24240
29088
34033
39819
46588
53576
61612
70854
79357
21
21210
25452
30542
35735
41809
48917
56255
64693
74397
83324
22
22220
26664
31997
37436
43800
51246
58933
67773
77940
87292
P/E
Pls note: the above calculations are based on hypothetical assumptions about the EPS growth rate and the P/E ratio
Technical View - Crude oil
•The crude oil prices are looking heavily overbought on the charts
•The most likely scenario is a correction to USD 90 levels
•A breach of this level is likely to take crude oil to USD 80 levels
•Crude oil would lead the fall in other industrial metals and gold
Source: Reuters
Technical View - BSE 500
•The BSE 500 index has climbed back after breaching the long term support line in early March
•A move above the trend line will indicate that the long term trend remains intact
Source: Reuters
Technical View - BSE Midcap
•The BSE Midcap index has breached the long term trend line thrice over the last three years
•Typically this happens during times of panic
•The index is looking oversold in term of stochastics
•The index should bounce back over the long term trend line over the next three weeks
Source: Reuters
Technical View - MSCI Emerging Markets Index
•The Morgan Stanley emerging markets index is showing the formation of a double bottom on the
charts
•This reflects that the index might have bottomed out in the near term
Source: Reuters
Technical View - BSE Sensex Index
•The long term chart of the sensex reflects that the index has been able to come back into
the long term channel
•As long as this index remains in the channel the positive trend will remain intact and the
index should rally to the upper end of the channel over the next few weeks
Source: Reuters
Higher September - Way to go?
Sensex Values
Year
31-Mar
30-Sep
growth
2003
3,049
4,453
46.1%
2004
5,591
5,584
-0.1%
2005
6,493
8,634
33.0%
2006
11,280
12,454
10.4%
2007
13,072
17,291
32.3%
Source: Bloomberg; Edelwiess
Synopsis
• Indian markets are cheap and trading below fair value
• Indian markets can move up by 20% in the next 3-4
months
• Subsequently, markets will be driven by movements in
commodity prices and RBI’s credit and monetary
measures
• Q1 results in developed economies should bring out the
most of the losses in the balance sheets of the global
financial majors.
• Thus we believe that the worst of the sub-prime crisis will
be behind us post the Q1 results
• There is no change in the long term trend of the market