Retrospective – October 2010: Macro Pause, Micro Flux: Morgan Stanley

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Retrospective – October 2010: Macro Pause, Micro Flux

After outperforming global indices in September, MSCI India underperformed almost every major index around the world during October. In

2010, so far, India has outperformed the global indices in 8 out of 10 months (with the exception of July and October). Thus, India’s

performance ranking plunged to 16th position (among 22 EMs) from 4th position in the previous month. Year to date, India continues to be the 9th-bestperforming

EM. Despite the underperformance in October, India is still outperforming emerging markets year to date, 12M, 6M and on a 3M trailing

basis. BSE Sensex was down 0.2% MoM, in line with the historical performance in October. It underperformed the mid-cap and small-cap indices by a

significant margin. The large-cap index continues to underperform the broader market ( mid-cap and small-cap indices) on a 3M, 6M, 12M and year-todate

basis

 Sector performance: Healthcare was the best sector for the month
(for the first time in 12 months), while Consumer Staples slipped to
the bottom (after remaining among the top-five-performing sectors
for five successive months). Year to date, Financials leads, while
Utilities lags. Year-to-date, relative to their respective EM sector,
Technology is the best, and Materials is the worst. Sector rotation
was at its highest level since January 2003, with nine sectors
changing relative positions MoM.
 Institutional flows: FII inflows in the cash market remained strong –
second-best in history (at US$5.4 bn). FIIs sold in the futures market
(second-worst ever). In 2010, FIIs have been buyers in the cash
market in eight out of 10 months, while domestic institutions (mutual
funds + insurance companies) have been sellers for five consecutive
months. During the month, domestic institutions sold shares (worth
US$2.5 bn) – second-worst ever. Year to date, FIIs have bought
stock worth US$24.6 bn in the cash market (a new record), whereas
domestic institutions have sold US$5.2 bn (domestic insurance
have bought US$1.1bn and mutual funds have sold stock worth
US$6.3 bn).
 Equity market activity: Market activity was strong, underscored by
record volumes in the derivatives segment (breaching the previous
high of Sep-10 by 7ppt) and 9% higher cash volumes. While intraday
volatility rose, inter-day volatility fell (to its five-year low).
Average open interest was off highs and breadth and put-call ratio
fell MoM.
 Currency: The rupee appreciated 1.2% MoM against the USD to a
26-month high, while it depreciated 1% MoM vs. the euro
 Valuations and Earnings Expectations: MSCI India’s valuations
touched a 32-month high and are trading at a 67% premium to the
MSCI EM valuations. The consensus revised the F2012 Sensex
earnings growth expectations downward by 0.2ppt, while F2011
growth expectations were up 0.3 ppt. They expect earnings growth
of 23.6% and 18.6% for F11 and F12, respectively.
 Bond Market: Short-term yields rose a further 50bp during the
month, taking the cumulative rise to 290bp since May and further
narrowing the yield curve to a 20-month low. Significantly, India’s
bond spreads with US treasuries are at multi-year highs.
 Corporate Activity: M&A was marginally down in September. Year
to date (Jan-Sep), debt and equity issuances are at US$42 bn and
US$18.9 bn, respectively.
 Macro Indicators: IIP growth for August saw a sharp MoM
deceleration. The latest data seems to confirm that inflation has
peaked. Forex reserves touched a 25-month high. Credit growth
maintains its upward trend – now at a 22-month high. Deposit
growth also rebounded and touched a six-month high.