MARKET OUTLOOK May 2011 P R I VAT E W E A LT H
KEY HIGHLIGHTS
• The stock markets rose in April on news of a good monsoon,
which would help contain food inflation and boost rural
income. However, markets ended low on May 3rd due to a
50bps hike in interest rates by the Reserve Bank
• The Reserve Bank of India (RBI), on May 3rd, raised its key
lending and borrowing rates by 0.5% to 7.25% and 6.25%,
respectively, and said that fighting inflation is its priority
• The central bank has also hiked its savings account deposit
rates by 50 bps from 3.5% to 4%
• Economy grew to 8.2% on an annual basis in the Oct-Dec’
‘10 quarter. Fourth quarter is estimated to record a GDP
growth rate of ~ 8% YoY.
• India’s industrial production remains low at 3.6% YoY;
de-growth in capital goods continues.
• Even withstanding the persistently high inflation, consumer
non-durables growth reached a 16-month high of 12.5%
YoY in February
• Crude remains high at US$ 123/bbl on supply side issues,
and high prices are hurting India since the Govt. is unable to
pass on the price increase due to political-fiscal
compulsions.
• FII flows have touched US$ 4bn mark YTD.
• Corporate earnings continue to be released with
EQUITY OUTLOOK
Source: Religare Capital Markets Ltd. (RCML), RBI website, CRISIL, Religare Commodities Limited (RCL)
Domestic Markets
• Markets shine in April on monsoon forecast: With the first
official monsoon forecast released in April, signalling a
normal rainfall, the expectation is for a good kharif crop in
2011. Agriculture, which contributes 14-15% to India’s GDP,
is now expected to grow at ~4% in FY12. The stock markets
cheered the news in April on the hopes that a better rainfall
would help to tame food inflation and boost rural income.
• However, Markets markets ended low on May 3rd: As we
went to print, markets ended with 2% losses due to a 50bps
hike in interest rates by the The Reserve Bank of India
(RBI)Reserve Bank.
• Inflation and RBI Monetary Policy: The Reserve Bank of
India (RBI) on May 3rd, raised its key lending and borrowing
rates by half a percentage point to 7.25% and 6.25%
respectively, and said that fighting inflation is its priority,
even at the expense of short-term growth. The rate rise was
its 9th since March 2010, and met our expectations since
the case for stronger action had been building since March
headline inflation reached nearly 9% and RBI’s earlier baby
steps to contain inflation through monetary policy have been
less sufficient. In another major development, the central
expectations of strong earnings growth, but with significant
margin pressures.
• Helped by the highest ever monthly export levels in March,
India’s merchandise exports exceeded the government
target of US$ 200bn to end FY10 at US$ 245.9bn, rising
37.5% from a year ago.
• Inflation concerns have now become a global phenomenon
and have become the predominant concern in the policy
makers’ mind across the globe
• Liquidity seems to have improved in the new fiscal as the
average borrowing amount has decreased from Rs. 834mn
in March to Rs. 39.7mn in April 1st week.
• A shrinking trade deficit, led by faster growth in exports
along with improvement in net invisibles (software exports
and remittances) has limited India's Current Account Deficit
(CAD) to US$ 9.7bn in Q3FY11.
• The new benchmark, 2021 10-year government bond yield,
rose to a new high of 8.02%.
• Gold accelerated to its all-time high of $1519.2/oz as
inflation fear perturbed the global financial markets
• Silver rocketed as much as 31.5% in the month of April,
moving closer to its 1980’s all-time peak, lifted by a weak
dollar and strong physical demand
bank has also hiked its savings account deposit rates by 50
bps from 3.5% to 4%. This will help the common man as the
returns on their savings will go up, but could result in a rise
in the bank’s cost of funds.
• Indian Economy: Economy grew to 8.2% on an annual
basis in the Oct-Dec’ 10 quarter. The fourth quarter is
estimated to record a GDP growth rate of over 8% YoY as
well. The FY11 and FY12 GDP growth estimate of 8.5% and
8.9%, respectively, is still maintained.
• Index of Industrial Production (IIP): India’s industrial
production remains low at 3.6% YoY; de-growth in capital
goods continues. The manufacturing sector, which
constitutes ~80% of the IIP, rose by just 3.5% as against
3.6% in the previous month. The headline YoY growth
number is likely to remain subdued until April’ 11.
• Consumer non-durables at 16-month high: Even
withstanding the persistently high inflation, consumer
non-durables growth reached a 16-month high of 12.5%
YoY in February as against a growth of 7.7% in January. This
augurs well for private consumption on the demand side of
GDP and the conviction in India’s consumption- led growth.
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 • Crude Oil: Crude remains high at US$ 123/bbl on supply
side issues with signs of demand destruction creeping in.
High oil prices are hurting India and we see rising
under-recoveries as the Government of India is facing
challenges to pass on the price increase, possibly due to
political-fiscal compulsions. Price hikes are likely, with
easing inflation and completion of key state elections in the
next 4-5 months.
• Institutional Foreign Flows (FII): FII flows have touched a
US$ 4bn mark YTD. Of this, US$ 2.5bn has been in debt
instruments. Jan and Feb’ 11 had seen significant exodus
from equities, counterbalanced by flows getting into debt
instruments. The reversal in this trend that started in March
has continued in April, with the foreign investor’s charm
returning back to equities in India. Almost US$2bn has flown
into equities, while flows into debt have remained almost
negligible.
• Corporate Earnings: With the Sensex (ex-Oil) firms
continuing to release their earnings in April and May, the
expectations continue for strong earnings growth (~16%),
but with significant margin pressures. Sectors that are
expected to continue to lead the earnings are primarily
Autos, Banking and Telecom.
• Shrinking trade deficit: Helped by the highest ever monthly
export levels clocked in March (US$ 29.1bn; 44% YoY
growth), India’s merchandise exports exceeded the
government target of US$ 200bn to end FY10 at US$
245.9bn, rising 37.5% from a year ago, despite the strength
in Rupee and economic growth in traditional export markets
remaining subdued. The base effect also played a part in the
stellar performance. Exports had contracted 3.5% in FY10.
The surge in exports, primarily due to diversification in
composition and destination (exports to Latin America and
Africa, along with traditional markets of US and Eurozone),
will ease concerns over the trade deficit (US$ 104.4bn in
FY11), and limit the current account deficit below 3% of
GDP in FY11. The exports/imports are expected to reach
US$ 310bn/420bn in FY12. Prolonged recovery in
Source: Religare Capital Markets Ltd. (RCML), RBI website, CRISIL, Religare Commodities Limited (RCL)
developed economies, demand destruction from the Japan
earthquake, high crude and commodity prices pose
downside risks to export demand.
Global Equities
• Indices: With the news on May 2nd, of the world’s most
feared and wanted terrorist – Osama bin Laden dead,
shares on Wall Street and around the world were lifted. The
Dow Jones industrial average climbed to a three-year high of
12,876 after the opening bell, as investors reflected the
euphoria of crowds gathering a few blocks away at the site
of the infamous terror attacks of 2001. However, like many
euphoric bounces, this was also short-lived, especially given
the possibility for reprisal attacks from extremists.
• Global Inflation: Inflation concerns have increasingly
converged between emerging and developed market
economies and have become the predominant concern in
the policy makers’ mind across the globe. The central banks
in Eurozone (ECB) and China (PBoC) have tightened policy
rates, accompanied by aggressive statements. Crude oil and
commodities have been heading northwards. However, any
continued strength is likely to lead to demand destruction.
• US: US economic growth slowed sharply in the first quarter
to a rate of 1.8%.
• Europe: The European Ccentral bank Bank (ECB) increased
the interest rates by 25bps to 1.25%; while the Bank of
England kept rates unchanged at 0.5%. The ECB move is
the first from major central banks and signals the end of the
cheap money era.
• Japan: On the other hand, the Bank of Japan introduced a
special facility of 1 trillion yen that makes more cheap loans
available for banks to lend to companies for post-quake
reconstruction.
• China: The People's Bank of China raised benchmark
lending and deposit rates to one-quarter of a percentage
point. China has taken a variety of policies to curb inflation,
including successive increases in banks'
reserve-requirement ratios and four increases in interest
rates, since October 2010.
Equities – Future Outlook
• Inflation a key risk: While it is true that the moving parts in
global macro-environment (MENA unrest, Japanese
earthquake and Tsunami etc.) are beyond the central bank’s
sphere of influence, the persistently high inflation is
worrisome; since this does not yet factor in the pass-through
impact of crude prices that have remained elevated for quite
some time now. The bigger problem now is that larger doses
of policy tightening, if administered now, may unfortunately
hurt growth significantly and policy makers cannot afford to
push too hard at this stage.
• India’s consumption-led growth story: Given the
international uncertainties and despite the mounting
macro-economic domestic challenges of high inflation,
India’s economic growth remains positive at 8 to 9%, led by
the strong consumption growth story. Valuations still remain
reasonable at ~15x FY12E and in FY12, growth is expected
at ~19%. However, it would be prudent to stagger
investments over time and look out for short-term market
pullbacks that might provide a good opportunity to buy.
How to Participate
• Direct Equity: The markets are providing an opportunity to
buy strong, large blue chip stocks which are still trading
below their 52 week highs. It would be prudent to review the
market leaders in sectors providing opportunity i.e., Auto,
Banking, Telecom and Real estate Estate, since they would
be the first to react with any upside in the market.
• Mutual Funds: In terms of mutual funds, the focus should
be to stay invested in equities via good quality, diversified
equity mutual funds that offer stability to the investor
portfolio in the next 12 months.
The following equity diversified funds in RMPW’s Model
Portfolio are selected on the basis of both quantitative and
qualitative research:
o HDFC Equity Fund; Reliance Equity Opportunities Fund;
Birla SunLife Dividend Yield Plus Fund
Investors with long term horizon of 2-3 years can also
participate through well managed midcap funds such as:
o ICICI Prudential Discovery Fund; DSP BlackRock Small &
Midcap Fund; IDFC Small & Midcap Fund
• PMS: Religare Sector Opportunities PMS which plays out
the theme of rotating sectors for generating alpha in this
volatile environment
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 • Structured Products: One can participate in the markets by
investing in (i) NIFTY- linked structure like Milestone SPS 44
principle protected 14/15 month structure (ii) NIFTY-linked
DEBT OUTLOOK
• Inflation refuses to cool off: March inflation is above RBI’s
March-end target of 8%, set in February policy. With the
revisions seen in provisional estimates, we are likely to be in
the double-digit territory already. What is hurting investment
cycle recovery the most, is the uncertainty in inflation and
interest rate trajectory, rather than the high levels
themselves. This uncertainty is now also a function of global
geo-political factors on which RBI has no influence. RBI’s
inflation-fighting credibility has been dented severely. That’s
the reason that RBI has taken an aggressive stance and
raised rates by 50bps, sending out the message that they
cannot afford to remain unaware of the inflation-growth
issue anymore and must tighten it aggressively.
• Liquidity improving in the new fiscal: Liquidity seems to
have improved in the new fiscal as the average borrowing
amount has decreased from Rs. 834mn in March to
Rs.39.7mn in the first week of April. Not much stress
expected on the liquidity in financial markets until the credit
growth picks up in Q2.
• Current Account Deficit (CAD): A shrinking trade deficit,
led by faster growth in exports, along with improvement in
net invisibles (software exports and remittances) has limited
India's CAD to US$ 9.7bn in Q3FY11. The CAD for FY11 and
FY12 is estimated to be 2.8% and 3.2% of GDP
respectively.
• New benchmark yield crosses 8%: The new benchmark,
2021 10-year government bond yield, rose to a new high of
8.02%. Government bonds are constantly under selling
pressure since prices continued to fall in April in anticipation
of the RBI rate, and is now a reality with the rate hike of
Source: Religare Capital Markets Ltd. (RCML), RBI website, CRISIL, Religare Commodities Limited (RCL)
GOLD OUTLOOK
• Gold continued to shine: In April, gold accelerated to its
all-time high of $1519.2/oz, as inflation fear perturbed the
global financial markets and downgrading of Portugal's
credit rating, boosted the safe-haven demand in the metal.
• Currency markets: Action in the currency markets added
fuel to a rally sparked by concerns over the U.S. economic
outlook, rising inflation, worries over euro zone debt and
historically low interest rates in the United States. The Euro
strengthened against the dollar and reached to a 15-month
high on concerns that a budget impasse in the United States
may lead to a government shutdown.
• US Stimulus Program: Bullion prices broke out on upside to
hit new highs after Federal Reserve chairman Ben Bernanke
suggested that he is committed to complete a $600 billion
stimulus program, as scheduled in June. Prices have almost
doubled since the US Fed cut interest rates to the bone in
2008, in an attempt to shock the economy back to life after
the worst financial crisis since the Great Depression.
customised structures can be designed for clients investing
more than INR 2.5cr.
50bps on May 3rd. The yield is expected to spike, when
supplementary demands for additional government
expenditures are likely to be introduced in the parliament,
around August.
Debt – Future Outlook
The bond yield continues to be inverted and therefore yields in
the short to medium term continue to offer attractive
investment opportunities wherein investors can resort to
lock-in yields via 1 year papers or Fixed Maturity Plans (FMPs).
Investors may also invest in ultra-short term/lLiquid bond funds
and capital- protected debt funds.
How to Participate
• Fixed Maturity Plans (FMPs): 1 year papers are good short-
term investments
• Liquid and Ultra Short-term Mutual Funds:
o Liquid Funds: DWS Cash Management Fund
o Debt Ultra Short Term Funds: HDFC Cash Management
Fund – Treasury Plan; Reliance Money Manager Fund;
IDFC Money Manager Fund - IP
• Capital- Protected Debt Funds: These schemes are closed
ended and seek to provide downside protection by investing
in debt securities: Subject to availability
• Long dated bonds offering attractive yields: Subject to
availability
• Non-Convertible Debentures (NCDs): For clients with a
relatively higher risk profile, NCDs can be reviewed: Subject
to availability
• Widening global unrest: Prices were also supported by the
widening unrest in the Middle East, as the oil prices
breached 30-month highs and due to worries over, both
European and US government debt levels.
• Supply/demand imbalance: An ongoing supply/demand
imbalance underpins the market as healthy demand for gold
jewellery and investment bars and coins in Asia outweighs
mine supply.
• Negative sentiment on the dollar: The Dollar was
negatively impacted on signs of a slowing U.S. economy and
Standard & Poor's warning, that it might take away the
United States' coveted AAA credit rating within two years, if
Washington fails to achieve a the plan to slash its $14 trillion
debt load.
• Inflation increasing the metal prices: Many central banks
have indicated that they are planning to implement the
tightening of monetary policy in response to mounting
inflationary pressures.
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 • Market gains: Gold steadily notched up further gains during
April. The market managed to trade north of Rs. 20500/-
10gm mark for the entire month and scaled towards to Rs.
22000/- 10gm level during the third week. On technical
charts, the yellow metal is now seen trading in an upward
sloping trend channel. With the market nearing the upper
end of this channel, some kind of profit booking in gold
could be anticipated during the month ahead. In the
international market as well, $1520-1540/ ounce represents
a crucial resistance barrier for the yellow metal.
How to Participate
• Mutual Funds: Invest in gold via mutual funds that invest
into Gold Exchange Traded Funds (ETFs) or gold mining
companies:
• Reliance Gold ETF (for clients of all risk profiles)
• AIG World Gold Fund (for clients with an aggressive risk
profile)
• E-Gold: Via the Religare Commodities (RCL) desk
• Gold Structure: A customised structure can be developed
taking advantage of the Gold movement on the index, along
with capital protection and good participation

SILVER OUTLOOK

• Silver outshines: Silver rocketed as much as 31.5% in the
month of April, moving closer to its 1980’s all-time peak
lifted by a weak dollar and strong physical demand.
• Gold Silver ratio: The Gold-Silver ratio has dropped to 29,
unseen since the early 1980s and way below its average in
the past three decades.
• US news helps metal rally: The main impetus for the rally
came from S&P’s downgrade of the US Credit rating
outlook. Drop in risk appetite for U.S. instruments had
weakened the dollar and created greater demand for
safe-haven assets, including silver.
• China boosting silver demand: China raised the key rates
by 25 basis points, also signaling potential for further
tightening to check rising prices, which boosted the demand
for silver. Chinese demand for silver is promising, as its
economic growth is expected to remain at an elevated level,
and imports, including powder, unwrought
Source: Religare Capital Markets Ltd. (RCML), RBI website, CRISIL, Religare Commodities Limited (RCL)
steadily climbed from under $30/oz to $49/oz in nearly two
months. There is not a great deal of reasons to sell it at the
moment, apart from concerns that there are a lot of longs in
the market, and there is a risk of sell-off at some point. Even
though, output of silver from new mines is forecasted to rise
by 8% from a year ago to 800 million ounces in 2011, but
silver is still in a clear bull trend that targets above $50.00/oz.
• Markets: Silver prices ballooned to extreme levels in April as
the market neared $50/ounce in the international spot, very
near to its lifetime high, seen in 1979. As a result, the gold
silver ratio moved out of proportion to get near the 30 mark,
from around 60 in 2009. This clearly indicates the fact that
silver has become very expensive with respect to gold &
even the base metals. Hence putting in further money into
the commodity on the long side at these extreme levels
would definitely be quite risky.
and • Silver bubble: With the weekly & and monthly relative

semi-manufactured silver, have risen sharply in the recent strength index (RSI) above 84, we are in an extreme
past. Moreover, increasing consumption from the overbought zone for the metal1. For a historical reference,
electronics and jewellery industries remains supportive for since 1994, all sharp upward moves in silver have ended

the metal. with the weekly RSI around the 88 mark, and the monthly
RSI around the 84 mark. These levels have been hit in April
• Industrial demand: Recovery in industrial demand for silver,
on the weekly and monthly charts. Hence at best, the bubble
record U.S. coin sales, strong investment demand for
in silver can last for some more time. For May, we expect
silver-backed exchange traded funds, and a surge in
some stiff resistance near a $50 mark (MCX-Rs.76000/kg
demand from mining companies to borrow the metal for
approx).
hedging purpose have led to a squeeze in the physical silver
market. How to Participate

• A steady climb: Bears are weak now, after silver has • E-Silver: Via the Religare Commodities (RCL) desk

1. RSI is the Relative Strength Index where a value of 70 indicates an overbought situation and below 30 indicates an oversold situation.

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