Standard Chartered Investment Services Market Update February 2006

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Standard Chartered Investment ServicesMarket
Update February 2006
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Market Update - February

• Equities (Neutral)
• Markets in the midst of strong positive momentum
• Strong liquidity inflows from both domestic and
  foreign institutions positive momentum expected
  to continue into February
• Valuations beginning to look a little rich
• Third quarter results have largely met
  expectations
• Fixed Income (Underweight)
• RBI increased repo rates surprised markets
• Liquidity continues to be tight, call rates
  ranging between 6.50-7.00
• Concerns on inflation and US interest rate
  outlook
• Cash (Overweight)
• High cash to protect against uncertain market
  outlook especially in fixed income

Source Broker poll conducted by Iris
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Model Asset Allocation
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Asset Allocation - Explanation

• Strategic Asset Allocation
• Constructed to guide an investor to choose an
  investment strategy that matches his risk
  tolerance limit
• Use various asset classes that have low
  correlations and distinct levels of risk
• Subjectivity/ambiguity of market timing is
  avoided in the decision making process
• Tactical Asset Allocation
• Small Modifications to SAA model portfolios
  taking into account short-to-medium term market
  views
• Expressed as Neutral/Overweight/Underweight
• Changes of /- 5-10 from the SAA allocations
  based on TAA

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Equity Model Portfolio
Satellite PortfolioMid-cap Schemes- Sundaram
Select Midcap Fund
Core PortfolioLarge Cap Diversified- HDFC
Equity Fund- HDFC Top 200 Fund
Satellite PortfolioConcentrated Schemes-
Reliance Vision Fund- Tata Equity Opportunities
Fund
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Model Portfolio - Equities

• The one-year returns for the model portfolio
  equities
• The summary statistics of the model portfolio

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Indian Markets A Summary
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GDP Growth
GDP Growth momentum has continued thanks to
strong performances from Industry and
Services.government estimates FY06 GDP growth at
8.1
Real GDP (y/y)
Source RBI
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Industrial Production
Strong showing by manufacturing sector has helped
drive growth in Industrial Productionthe star
sector in terms of growth rates has been Capital
Goods
Source RBI
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Services
Momentum in services sector has continuedits
the key contributor to the GDP growth rates given
that services account for about 52 of the Indian
Economy
Source RBI
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Trade numbers have been growing at a smart pace
reflecting the buoyancy on both the internal and
external frontslow numbers for November are
likely to be a blip..and should get corrected
when the December data comes out
Foreign Trade
Source RBI, SCB Research
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Rupee Yield Curve and Inflation
UST INR TSY Co-relation

Onshore Yield Curves

Consumer prices leading wholesale prices

• 10 year G-Sec yields expected to head towards
  7.5 by March 06
• High GOI borrowing to exert upward pressure on
  bond yields
• Inflationary pressures exist in the domestic
  system demand side pressures in pipeline, oil
  prices still a concern
• We maintain a bearish stance on USTs, higher US
  bond yields may have a rub-off on INR bond yields

Source Reserve Bank of India, Reuters, SCB
Global Research
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Liquidity Outlook and Credit Growth
Current tight liquidity likely to persist even
though RBI has the ability to ease
Tight liquidity conditions have kept call rate
above repo rate
Rising credit demand a worry

INR bn

• Brisk pace of credit growth (30plus since Nov
  04) has pushed c/d ratios to unprecedented highs
• RBI has raised rates by 100bps since Oct 04
• Liquidity conditions have tightened more
  amounts being borrowed in repos and call
• Tight liquidity conditions to persist next
  years borrowing program, credit growth to keep
  liquidity tight
• We assess, RBI would be keen to keep liquidity
  neutral than in surplus/deficit

Although liquidity overhang is there
INR bn
Source Reserve Bank of India, SCB Global Research
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Corporate Performance
Net Profit growth remains robust although the
growth rates are expected to come off from the
high numbers seen in the last three years
Net Profit for Nifty 50 (ex-oil) over the last 16
quarters
Source ABN AMRO Asset Management
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Global Fund Flows
Emerging Markets saw heavy inflows in 2005 and
the trend has continued in 2006 India has been a
key beneficiary in the EM story
Net fund flows by fund category
2005
2006 -YTD
Source emergingportfolio.com
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Institutional Inflows in Equity Markets
While FIIs were much bigger buyers over the last
year, MFs came in as an important force are
likely to be much more significant in the current
yearcollections in MF NFOs in January alone was
more than Rs 8,000 cr

Source RBI, MutualfundsIndia
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Valuations Index P/E Ratios
PE ratios are up following the rally of the last
7-8 months but still seem to be within the
historical range.although valuations have
started to look a little rich
Source NSE
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Equity Markets - Relative performance
Over a medium term perspective midcaps are higher
on the risk return matrix as compared to the
frontline stocksalthough the Sensex has
outperformed in the last 1 year
RISK RETURN MATRIX
1-YEAR RELATIVE PERFORMANCE
Nifty Junior
Monthly Standard Deviation
CNX Midcap
SP Nifty
Sensex
Mean Monthly Returns
Source MutualfundsIndia
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Equity Markets - Relative performance
Capital goods and consumer discretionary have
been the sectoral winners.Metal, Healthcare and
PSU have been the laggards
Source MutualfundsIndia
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Sectors PE versus Net Profit Growth
Engineering and equipment manufacturers are
quoting at high P/E following their strong
performance over the last year
Cement
Electrical Equipment
Net Profit Growth
Sugar
Engineering
Oil Gas
Auto ancillaries
Petrochemicals
Textiles
Pharmaceuticals
Steel
Banks
Construction
Agrochemicals
Food products
Power
P/E Ratio
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Thank You
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Disclaimer This document is issued by Standard
Chartered Bank (SCB). While all reasonable care
has been taken in preparing this document, no
responsibility or liability is accepted for
errors of fact or for any opinion expressed
herein. Opinions, projections and estimates are
subject to change without notice. This document
is for information purposes only. It does not
constitute any offer, recommendation or
solicitation to any person to enter into any
transaction or adopt any hedging, trading or
investment strategy, nor does it constitute any
prediction of likely future movements in rates or
prices or any representation that any such future
movements will not exceed those shown in any
illustration. The contents of this document are
not made with regard to the specific investment
objectives, financial situation or the particular
needs of any particular person. Any investments
discussed may not be suitable for all investors.
Past performance is not necessarily indicative of
future performance the value, price or income
from investments may fall as well as rise. SCB,
and/or a connected company, may have a position
in any of the instruments or currencies mentioned
in this document. You are advised to make your
own independent judgment with respect to any
matter contained herein. The opinion on the
markets is based on a broker poll conducted by
Myiris.com, and SCB takes no responsibility of
the accuracy and conclusions of same.