Investment Strategy

JM Financial Mutual Fund Investor Connect Programme April 2008 Rise and fall of stock markets/prices is guaranteed! Boom…bang…crash!! Sensex peaks at 21000 levels in Jan 2008 Euphoria Sensex crosses 18000 in Oct 2007 (sharp rally of 4000 pts in 1 ½ mths) Belief Crash Sensex crashes to 15332 on Jan 22 2008 thereby retracing to Aug 2007 levels (within 7 trading sessions of achieving a peak) Disbelief Last Leg for Up Move was backed by - Liquidity - Leverage - Rumour mongering - Huge Retail participation But was not backed by FUNDAMENTALS JM Financial Mutual Fund Analyzing – Falls & Bounce back for Individual Years 2000 - Statistics Feb 2000 – Sensex Peak 5933 % of Stock Fall > Sensex % of Stock Rise > Sensex 51% Jan 2004 – Sensex Bounce back 6026 Flows •FIIs – Rs 484 bn •Domestic – Rs (75) bn Flows •FIIs – Rs 43 bn •Domestic –Rs 4 bn 54% 3920 May 2000 – Trough 4 yrs • Dotcom bubble Source: Bloomberg 2001 - Statistics Aug 2001 – Sensex Peak 3318 % of Stock Fall > Sensex % of Stock Rise > Sensex 56% Nov 2001 – Sensex Bounce back 3322 Flows •FIIs – Rs 9.6 bn •Domestic – Rs (10.7) bn Flows •FIIs – Rs (4.5) bn •Domestic –Rs 1.1 bn 33% 2600 Sep 2001 – Trough 3 months • September 9 /11 Source: Bloomberg 2004 - Statistics Apr 2004 – Sensex Peak 5925 % of Stock Fall > Sensex % of Stock Rise > Sensex 69% Nov 2004 – Sensex Bounce back 5973 Flows •FIIs – Rs 124 bn •Domestic – Rs (17) bn Flows •FIIs – Rs (25) bn •Domestic –Rs 13.3 bn 29% 4505 May 2004 – Trough 7 months • NDA government collapsed Source: Bloomberg 2006 - Statistics May 2006 – Sensex Peak 12612 % of Stock Fall > Sensex % of Stock Rise > Sensex 34% Oct 2006 – Sensex Bounce back 12736 Flows •FIIs – Rs 144 bn •Domestic – Rs 17 bn Flows •FIIs – Rs (103) bn •Domestic –Rs 56 bn 80% 8929 Jun 2006 – Trough 5 months Concerns that US will raise rates and draw overseas investors away from emerging markets and surging commodity prices will hurt company earnings. • Source: Bloomberg 2008 - Statistics Jan 2008 – Sensex Peak 20812 % of Stock Fall > Sensex Sensex Bounce back - ?? Flows •FIIs – Rs (149) bn •Domestic –Rs 54 bn 81% 15357 Mar 2008 – Trough ?? months • Sub-prime crisis Source: Bloomberg 2008 Crash – Most Vicious Date From 1 2 Jan-08 Feb-07 To Mar-08 Mar-07 SENSEX INDEX From 21206 14723 To 14677 12316 change % -30.79% -16.35% 3 4 May-06 Apr-04 Jun-06 May-04 12671 5979 8799 4227 -30.56% -29.30% Date From To BSEMDCAP Index From To change % 1 2 3 Jan-08 Feb-07 May-06 Mar-08 Mar-07 Jun-06 10113 6187 6033 5805 5114 3721 -42.60% -17.34% -38.32% 4 Source: Bloomberg Apr-04 May-04 2337 1768 -24.35% Key Question in Investors Mind • Is the 2008 stock market crash similar to 2000 crash and would this mark the beginning of the bear market? 2000 v/s 2008 2000-01 Fwd P/E ratio Savings (as a % of GDP) Investments (as a % of GDP) GDP growth 35x 23.7% 24.3% 4.35% *2007-08 16x 34.7% 35.9% 8.73% Inflation Earnings growth Other comparisons: 7.16% 4.43% 4.21% 17-20% • Only driver of markets in 2000 was the TMT sector • Rally & the crash now much more broad based • Tata Motors, Tata Steel, M&M making losses in 2000 • IT cos much stronger and much bigger * estimates Corporate Profits Surpass Index Growth Date Apr-98 Apr-99 Sensex 3993 3519 Agg BSE 500 Net Profit (Rs Crs) 33755 31101 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 5053 3566 3506 3117 5788 37019 45487 45371 70028 90077 Apr-05 Apr-06 6604 11747 119719 136909 Apr-07 12455 195769 Mar-08 16217 254500 10 yr growth 10 year data reveals that …. Source: Bloomberg; Edelwiess 4.1 times 7.5 times …profits in the broader market have grown faster than the Sensex Consistent Earning Growth EPS Growth (%) Sensex Sensex growth FY98 FY99 247.0 240.5 6.9 (2.6) 3,969.6 3,686.3 15.8% -7.1% FY00 FY01 FY02 FY03 FY04 274.4 235.8 251.3 293.7 354.1 14.1 (14.1) 6.6 16.9 20.6 5,001.3 3,604.4 3,500.2 3,081.0 5,740.9 35.7% -27.9% -2.9% -12.0% 86.3% FY05 FY06 435.7 478.4 23.1 9.8 6,605.0 11,280.0 15.1% 70.8% FY07 FY08 FY09E 653.3 865.0 1,012.1 36.6 32.4 17.0 13,072.1 15,800.0 ? 15.9% 20.9% ? • Indian corporates have been delivering consistent growth for last 5-6 years • Markets have been rising from levels to 1200 in Fy01 to 4900 in Fy08 at a CAGR of 20% p.a. • In FY07 and FY08; Sensex has grown slower than the Sensex EPS growth; thereby anticipating a slowdown in future earnings • As the growth outlook improved; Sensex likely to give disproportionate returns Source: Bloomberg; Edelwiess Economic Fundamentals - Robust Real GDP % Y-o-Y 1997-98 1998-99 1999-00 4.30 6.68 6.44 Inflation % Y-o-Y 4.40 5.95 3.27 Investments as a % of GDP % 25.3 23.3 25.9 Savings as a % of GDP % 23.80 22.26 24.81 2000-01 2001-02 2002-03 4.35 5.81 3.84 7.16 3.60 3.41 24.3 22.8 25.2 23.74 23.47 26.40 2003-04 2004-05 2005-06 8.52 7.45 9.40 5.46 6.48 4.38 28.2 32.2 35.5 29.81 31.77 34.28 2006-07 2007-08 9.62 8.73 5.42 4.21 35.9 36.3 * 34.77 35.05* Source: CSO, CMIE, RBI, Edelweiss, * estimates • Economic fundamentals have been robust and key metrics have consistently improved • Current level of Saving and investments can sustain 8% growth Is There Enough Liquidity? • • • • • Record US$100bn of outflows from global equity funds, 80% of which pertains to developed markets, 20% to emerging markets Taiwan, Russia, Middle East, Africa are the only market-funds that saw inflows Money is moving to money market funds that saw inflows of US$140bn. MM funds have ballooned to US$3.5trn in the US. A lot of money is thus now on the sidelines; these will flow into riskier assets once climate improves Commodity funds saw inflows of US$3bn, 3x YoY. There is over-heating here, commodities look very vulnerable More than 50% of the 25-top US mutual funds have seen outflows in their equity funds • The above statistics show that the risk aversion is at a peak in equities • Liquidity is ample but there seems to crisis of confidence • Commodities cooling will release liquidity into oversold equity markets The Crash and Carnage was backed by - Low Liquidity - Heavy Shorting/hedging activity - Rumour mongering - Problems with US financial system But again driven more by fear than only fundamentals Fundamentals are still strong Where can the Sensex go? FY2009 EPS growth Sensex EPS P/E 20 1010 FY2010 20 1212 FY2011 20 1454 FY2012 17 1702 FY2013 17 1991 FY2014 17 2329 FY2015 15 2679 FY2016 15 3081 FY2017 15 3543 FY2018 12 3968 12 13 14 12120 13130 14140 14544 15756 16968 17453 18907 20362 20420 22121 23823 23891 25882 27873 27953 30282 32611 32146 34824 37503 36967 40048 43129 42512 46055 49598 47614 51582 55550 15 16 15150 16160 18180 19392 21816 23270 25525 27226 29864 31855 34941 37270 40182 42861 46209 49290 53141 56683 59517 63485 17 18 19 17170 18180 19190 20604 21816 23028 24725 26179 27634 28928 30630 32331 33846 35837 37828 39600 41929 44258 45539 48218 50897 52370 55451 58532 60226 63769 67311 67453 71421 75389 20 21 20200 21210 24240 25452 29088 30542 34033 35735 39819 41809 46588 48917 53576 56255 61612 64693 70854 74397 79357 83324 22 22220 26664 31997 37436 43800 51246 58933 67773 77940 87292 Pls note: the above calculations are based on hypothetical assumptions about the EPS growth rate and the P/E ratio JM Financial Mutual Fund Technical Analysis Technical View - Crude oil •The crude oil prices are looking heavily overbought on the charts •The most likely scenario is a correction to USD 90 levels •A breach of this level is likely to take crude oil to USD 80 levels •Crude oil would lead the fall in other industrial metals and gold Source: Reuters Technical View - BSE 500 •The BSE 500 index has climbed back after breaching the long term support line in early March •A move above the trend line will indicate that the long term trend remains intact Source: Reuters Technical View - BSE Midcap •The BSE Midcap index has breached the long term trend line thrice over the last three years •Typically this happens during times of panic •The index is looking oversold in term of stochastics •The index should bounce back over the long term trend line over the next three weeks Source: Reuters Technical View - MSCI Emerging Markets Index •The Morgan Stanley emerging markets index is showing the formation of a double bottom on the charts •This reflects that the index might have bottomed out in the near term Source: Reuters Technical View - BSE Sensex Index •The long term chart of the sensex reflects that the index has been able to come back into the long term channel •As long as this index remains in the channel the positive trend will remain intact and the index should rally to the upper end of the channel over the next few weeks Source: Reuters Higher September - Way to go? Sensex Values Year 2003 2004 2005 2006 2007 Source: Bloomberg; Edelwiess 31-Mar 3,049 5,591 6,493 11,280 13,072 30-Sep 4,453 5,584 8,634 12,454 17,291 growth 46.1% -0.1% 33.0% 10.4% 32.3% Key Statistics - JM Schemes JM ELF P/E ratio (FY09) Profit growth (FY09) Source: JM Financial MF research JM Basic 12.4x 51.7% JM HIFI 10.4 40% JM Equity 13.6x 38.5% BSE Sensex 15.3 17.0% 10.8x 65.0% Synopsis • Indian markets are cheap and trading below fair value • Indian markets can move up by 20% in the next 3-4 months • Subsequently, markets will be driven by movements in commodity prices and RBI’s credit and monetary measures • Q1 results in developed economies should bring out the most of the losses in the balance sheets of the global financial majors. • Thus we believe that the worst of the sub-prime crisis will be behind us post the Q1 results • There is no change in the long term trend of the market A Basic Reminder • Invest for the Long term • Price of the company will change daily but not the value of the company. It’s the value that finally drives the price. • Do not follow the herd – draw your own path • Be disciplined • Markets in the long run will depend upon a) Macro Factors – Economy b) Corporate India performance JM Financial Mutual Fund Thank You !!