Market Review - Feb 2009

The past few months have been extremely volatile in respect of all asset
classes be it equity; debt or commodities (gold in particular). The equity
markets have moved from 9,648 to 8,822 in the last one month, before
settling in at a close of 8,892 on 27 February, 2009. The bond yields have
fluctuated during the month, with 10 yr Gsec currently trading at 6.20% and
Gold has oscillated between Rs. 13,938 to Rs.15,979 per 10 gms in the last
one month; currently trading at Rs. 15,350 per 10 gms.

We are now entering the Election phase and should not expect any more Policy
announcements from the Government. The Interim Budget presented on 16
February, 2009 was a lot on hype and less on deliverance. The Finance
Minister kept on raising the hopes of making some changes but I guess the
code of conduct prevented him from doing anything dramatic. The alarming
part however, has been the level of fiscal deficit. This has reached a
significantly high level (expected to be around 6% of GDP against the target
of 2.5%) and is quite alarming. As a consequence the Government s borrowing
program is fairly large and this is having an extremely negative impact on
the bond yields.

World over we are witnessing a softening interest rate policy and in India
this just does not seen to be happening. The cost of borrowing is still very
high despite the fact that the corporates need access to cheaper funds.

Inflation, as expected has been steadily going down and has reached 3.36%
for the week ended on 14 February, 2009 and we expect it to touch 0% by June
end and will not be surprised if the level is even in negative territory.
GDP for Q3 has dipped to 5.3% against an expectation of 6 - 6.3%. This was
in line with the Industrial Production Index (IIP) which saw a dip 2% from
the corresponding period last year. So our PM & FM who have been harping on
7% GDP is all gone to the dogs.

The other myth which has been shattered is that our economy is inclusive and
the domestic consumption will drive our growth. It is high time we realize
that we are an integral part of the global economy and what better indicator
one needs then the substantial fall in the GDP from 9% to 5%; fall in the
equity markets and the rise in the US dollar vis a vis Indian Rupee.

So what does one do Going Forward from here? Expect the pain to continue for
atleast the next 2 quarters of the Financial Year 2009-10. We have not
created this crisis, so nothing much can be done at our end to solve it. We
need to let the storm subside. Markets may test new lows in the coming
months.

In the present market, if one is skeptical of all instruments, one can look
at Arbitrage Funds which will give reasonably good returns with a time
horizon of 3 months. Moreover, the present levels make it extremely
attractive to start a SIP in an Index Oriented Fund. Consider the following
example:

If one assumes that the markets would go down @ 5% every month for the next
6 months from the present level (8,607 to 6,660) and thereafter it would
start rising @ 5% every month for the next 6 months. The Index would thus be
at 8,924. Simple maths would tell us that Index has gone down by 30% (5% *
6) and again up by 30% (5% * 6), so there is NO GAIN or LOSS, RIGHT. Do you
know, the annualized return of the portfolio would be 30.50% p.a.

THINK ABOUT IT!