Title: Morgan Stanley Mutual Fund
1Morgan Stanley Mutual Fund
Current Equity Market and Post Budget Scenario
March 2010
2Budget 2010 Highlights
Impact
Fiscal consolidation. Change in Income Tax
Structure 2 increase in excise duties across
the board, plus the increase in import tariff and
prices of petroleum products could lead to
inflation. The move to re-capitalize public
sector banks and induce more competition by
giving banking licenses to private sector and
NBFCs.
The finance bill seeks to bring down the fiscal
deficit to 5.5 of GDP by FY11 and more
importantly lay down road map for the next two
years, to bring it further down to 4.1 of GDP
by FY 13. This should boost consumption,
particularly discretionary spend items and
benefit sectors such as housing, autos, retail
and others. While inflation may remain high for
sometime, higher non food inflation will be
balanced by lower food inflation on account of
softening of food prices. Capital infusion to
strengthen the banking system so that it can
stimulate economic growth by supplying credit.
3Budget 2010 Impact on Key Sectors
Infrastructure thrust to continue Auto
Sector Pharma Sector Energy
Allocation for infrastructure continues to remain
high - positive for Infrastructure sector
companies. Excise Hike and Increase in Fuel
Prices to be offset by increase in disposal
income Thus no adverse impact on demand An
increase in weighted deduction in RD, a lowering
of the surcharge on income tax, higher
expenditures for healthcare infrastructure, and
no increase in excise duty will be a beneficial
move across the sector. 5 Import duty on crude
(Nil earlier), Increase in import duty on Petrol
and Diesel from 2.5 to 7.5 Negative for OMCs.
Excise duty on Petrol and Diesel has gone up by
Re. 1/litre is inflationary.
4Indian Equity Markets Current Scenario
Current rally has build-up on
Risk Factors
- Improvement in sentiments and
- risk-appetite globally
- Better than expected economic data
- supporting the view of global recovery
- in 2010 and faster growth in India
- Enthusiasm coming in from government
- reforms, growth oriented policies
- Corporate earnings picking-up on
- back of improvement in economic activity
- Prospects of high inflation in 2010 on the
- back of high food commodity prices
- Valuations no-longer cheap, significant risks
- remain as the recent rally has taken
valuations - back above their long term averages
- Correction in global equity markets,
- particularly USA and China
5 Post recovery in 2009 equities remain in
consolidation phase
BSE SENSEX
Source Morgan Stanley
6Indian equities have delivered attractive
returns over the long term
Source Bloomberg
7The market performance in 2009-10 seemed to be
tracking what we experienced in 2003-04..
Are we at the beginning of a new bull phase for
equities ? An outcome similar to 2003-2004 was
quiet evident in 2009 and the current rally could
extend for a medium to long term period from now.
Source Morgan Stanley Research
8Global Economic Themes for 2010
BBB G10 recovery Bumpy, Below-par and Boring
Growth in EM (6.5) becomes more balanced and
will by far outpace growth in the G10 (2).
AAA liquidity cycle remains intact
Central banks to crawl rather than rush towards
the exit, so global liquidity continues to be
ample, abundant and augmenting.
Source Morgan Stanley Research
9Indian Economy to sustain 7 real GDP growth for
next few years
A tale of two worlds..
It is expected that the global GDP growth rate
would revive back to the 3 mark in the next 2-3
years and the Indian GDP growth on the back of
global revival would scale up to the 7 mark.
Source Morgan Stanley Research Estimates
10Trends in Industrial production indicating sharp
uptick in economy
Vertical rise in IP from May 09
India has surprised on domestic demand with
almost a vertical rise in IP in the last few
months after remaining largely flat between March
2008 and March 2009.
Industrial production (IP) growth accelerated to
11.7YoY in November 2009, highest in two years.
Source Morgan Stanley Research
11 Corporate earnings are back in positive,
exhibiting growth
Source CLSA Asia Pacific Markets
12BSE Sensex earnings growth to compound at 18
annually to F2012
Source Morgan Stanley Research as of Jan 10
13Valuations close to long term average
SENSEX P/E (x)
The Sensexs current one year forward P/E is 16x.
SENSEX P/B (x)
The Sensexs current one year forward P/B is 3x.
Source Motilal Oswal
14Equities finish the decade as the best asset
class and may continue to outperform
Asset Class Returns as on Dec 2009.
5Y Returns Gold Sparkles on a Risk-adjusted basis
Post Tax Returns Post Tax Returns Post Tax Returns Post Tax Returns Post Tax Returns Post Tax Returns
Asset Class 5 Yr CAGR Volatility in annual returns 10 Yr CAGR Volatility in annual returns 15 Yr CAGR Volatility in annual returns
Gold 19.5 4 13.1 8.9 8.8 8.4
10 year treasuries 4.4 0.1 6.5 0.8 5.9 2.1
Bank Fixed Deposit 5.2 0.9 4.8 1.1 5.4 2.1
Property (across 7 cities) 21.1 19.9 12.3 15.9 7.1 16.8
Equities (BSE Sensex) 23 50.2 15.2 43.7 12.2 40.1
15Y Returns Equity at the top, Property at the
bottom
Over the past 5, 10 and 15 years equities has
been the best performing asset class in India.
Surprisingly, property was the worst performing
asset class for the 15-year period.
Assumption 10-year treasuries For the return
from 10-year treasuries, we assumed that the
annual coupon was reinvested in one-year bank
deposits post the payment of tax at the marginal
tax rate. Bank FD The bank fixed deposit return
is the sum total of returns in annual bank fixed
deposits together with the return on the
reinvestment of post-tax interest earned on the
deposit. The tax rate used is the marginal tax
rate for individuals. Gold The return on gold is
the delta in the domestic gold price, which is
determined by the import tariff on gold, the
exchange rate and the global gold
price. Equities For equities, we have taken the
BSE Sensex as the proxy for returns and
reinvested post-tax dividends into the
Sensex. Property For measuring return on
property, our sample consists of residential
properties in various localities across seven
cities (Mumbai, Bangalore, Delhi, Kolkata,
Ahmedabad, Pune, and Chennai). The gains on
property, equities and gold are reduced by the
long-term capital gains tax of 10 at the end of
the period.
Source Bloomberg, Morgan Stanley Research
15Attractive Medium to Long Term Outlook for Equity
Markets
Sustaining strong corporate earnings growth