MAIA Financial Services Pvt Ltd

MAIA
FINANCIAL ECONOMY 360 DEGREES
SERVICES INDIA: SEPTEMBER 2009
PVT LTD
JULY 2009
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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
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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

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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
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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

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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.
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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:

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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:
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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:

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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

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Interest rates Coincident indicators are signaling that

RBI would sooner or later
start raising the rates

10 year government bond Leading Rising. With the huge

yield 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.
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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 Company Name: MAIA Finacial Services Pvt Ltd

Email Id: avani_513@yahoo.co.in Address: C wing, Bsel Tech Park, Opposite

Vashi Station, Vashi, Navi Mumbai.

Contact No: 022 27810674/75/76

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