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The Wise Investor May 2010 Sundaram BNP Paribas Asset Management

The Wise Investor May 2010 Sundaram BNP Paribas Asset Management

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Published by: sachakin on May 05, 2010
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Vol 4 - Issue 2
May 2010
sprinklingofwhatcouldbegenuinelydescribedaslarge-capstocks.Themostimportanttakeawayforinvestorsshouldbeforassetallocationpurposes.Todaythetop50stocksaccountforabout62%ofthemarketcapontheNSEandthetop100stocksaccountforabout77%.ThisprofileofthemeansItisimportanttohaveanallocationofbetween65%80%inthelarge-capspace.Letusnotforgetthatthispartofthecapcurveislessrisky,moreliquid,andlessvolatile,sufferstoalowerdegreeindownwardphasesandismadeupofmoreestablishedandvisiblenameswithseveralpossessingrobustfinancials.Themid-capspacecan,however,nolongerbeignored.Evenifweignorestocksbelowthe300thbymarket-capontheNSE(thereareseveraldecentnamesinthesub-300category,too),thereistodayroomfodedicatedmid-capandsmall-capportfolios.Aswemovefromthetop50totheentiremarket,thereisanincreaseof 3.5percentagepointsincompoundedannualreturnovera10-yearplusperiod.Ifyouwanttoperforminlinewiththebroadmarket,youcannotignoreapartofthecapcurvethatisalmost25%ofthemarket.Aninvestorshouldhaveexposurestothissegment;thelevelwilldependonriskappetite.Risksinthispartofthemarketarehigher,butacrossmarketcyclesoverthelongterm,returnsshouldadequatelycompensate.Thisisclearevenovertheperiodcoveredinthisanalysis,whichhadatleastfourdifferentcycles.Thenumberspresentedherearerelevantfortheequitypartofaninvestorsportfolioandnotthecompleteportfolio,whichmusthaveasizeablefixed-incomecomponent.First50Stocks420667375558226.779.862.1-17.7Next50Stocks5054290136936.59.614.95.3Top100471209465695128.189.477.0-12.4Next100(#101-#200)Stocks3190263690438.
Theshareofthetop50stocksontheNationalStockExchangehasdeclinedbyamassive17.7percentagepointssinceDecember2000.Therehasbeenanenhancementateverysubsequentbucketof50and100stocks.TheaccompanyingtableprovidesasnapshotofwhathashappenedbetweenDecember2000andMarch2010ontheNSE;amoredetailedyear-by-year analysisisavailableonpage27ofthispublication.Theseshiftshaveimportantimplicationsforinvestors.Therehasbeenasignificantenhancementinmarketdepthandbreadthacrossthecapcurve.InDecember2000wewerestillunwindingfromthetech/media/telecomboomthathadaglobalfootprintitwouldhavebeenachallengetoeven thinkofasizeablemid-capallocationinalarge-caporientedportfolio.Thisisnolongerthecase.Tohave100large-capstocksisanadditionalsourceofcomfortfoinvestors.Thiswasnotthecasein2000.Eventhetop50hadonlya
World47123497223190160880100.0100.0100.0100.0-5.255.9-47.6-22.6UnitedStates1448213748104551766030.727.732.829.05.331.5-40.8-18.0Canada1777160999217493. Japan37603488326845458.
Data Source: Bloomberg;The last available figures for each year have been taken;Analysis: Sundaram BNP Paribas Asset Management. End December 2007 figures have been reckoned as a proxy for the peak as different countries reached the point on different dates.
Region/CountryMarketCap($Billion)ShareinWorldMarketCap(%)Returns(%)DistancefromPeak (%)
Economy has a strong and sustained recovery, rates rise,market falls, but basically alliswell
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Noreal market shocks, speculation and market prices riseto October 2011 to dangerous levels, then soon break withsevere consequences
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Sundaram BNP Paribas Asset ManagementThe Wise Investor
 May 2010
India ViewEquity
Indian markets put up an uninspiring performance last month, andunderperformed US markets as we had suggested it might as a near-term trend. That trend is expected to continue for some more time, as theearnings recovery in the US and improved economic data are yet to befactored in fully by markets. India continues to outperform China and Brazil.This is primarily because of lower levels of concern as compared to Chinaand Brazil, whose economies are highly correlated on account of theChinese commodity demand from Brazil. There is also the larger questionof Europe’s smaller countries enmeshed in debt traps for which solutionsseem difficult.Indian markets’ out-performance of peers in the emerging markets spacehas been on account of strong FII inflows as well as concerns about Chinesemomentum swell. Further, local institutions have also bought into stocks onaccount of lower exposure to equities. This has kept market momentumgoing.Inflation in India remains high and is an area of concern, but there areindications that the monsoons this year will be better resulting in a higher crop output and lower prices. We are witnessing this trend in wheat andsugar already and may see this play out in other crops as well.India will remain short on edible oil and pulses and hence movements incurrencies or changes in output of oil seeds will impact the price levels.There is an ongoing discussion that the level of subsidies for fuels needs tobe limited implying that prices will have to be increased sharply by as muchas 15-20%. Whether the government has the resolve remains to be seen. Should this take place then inflation will remain higher for a longer period of time, butgovernment borrowing costs could drop quickly, enabling banks tooutperform on account of their large portfolio of government bonds.The wheels-within-wheels suggest that the market will not perform onaccount of several contradictory factors – Large foreign inflows could reduce inflation but could also cap marketearnings growth as commodity companies’ and technology earningssuffer Lower foreign inflows would on the other hand imply that inflation andfiscal deficit concerns would outweighThere are similarly, several other contradictory forces in the market whichimply that there is a lack of clarity in any trend emerging.Further, India’s infrastructure project is not picking up as much as expectedand performance in railways and highways leave much to be desired. Thesilver lining is that power projects in the private sector are gathering steamand there seems to be a higher degree of visibility in this segment. An early resolution of KG-D6 gas pricing would also pave the way for some morepower output to come on stream. We are nowhere close to potential infrastructure spend or build out, asclearances still take time and the regulatory process complex.Consequently, we have seen delays in road projects. We could also witnesshigher foreign competition in infrastructure projects.As regards the European debt crisis, a risk of default still exists, as there are too many countries on the brink. There is a belief in the market that IMFcan resolve this issue, but a default and a hair cut in debt would perhaps be the final resolution. Many of these countries have high borrowings with lowearnings and high unemployment implying a resolution of this crisis in not ashort one but could prolong for a sustained period of time.The silver lining, if there were one, is that this problem is within Europe, andis in a way a set off between the richer and poorer countries.The European crisis, should serve as a reminder that the “spend and get outof the slowdown” policy may boomerang for a variety of reasons, and that there is no substitute for fiscal prudence. The current government strategy  to spend and subsidize could invoke a sharp uptick in borrowing costsimpeding growth. These events occur suddenly and can impact marketsentiments sharply.As of now, the Government’s plans to raise capital from 3G auctions anddivestment are proceeding smoothly indicating that interest rates in thesystem will be under check. With overall government debt above 80% of GDP, there will be issues from time to time that the government needs toresolve.Consumption in India ended FY2010 on a strong note with record sales of cars, televisions, phones, bicycles on the back of a confluence of factors-higher farm incomes, lower interest costs, and pent up demand due to delay in purchases. Benefits of the Sixth Pay commission and other governmentschemes have resulted in this high growth. Will this sustain?Historically, our studies suggest that growth is sustainable albeit on a lower level. This is a year of some achievements – for the first time, two wheeler sales crossed bicycle sales. Penetration levels remain low for mostconsumer durables, as electricity is not available in most areas. Withelectricity becoming accessible, it would be reasonable to assume that thenext consumption boom is shaping up.
Lacklustre trends
Satish Ramanathan
Head-Equity Sundaram BNP Paribas Asset Management

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