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Morgan Stanley Mutual Fund

Morgan Stanley Mutual Fund. Current Equity Market and Post Budget Scenario. March 2010. Impact. Budget 2010 Highlights. Fiscal consolidation. Change in Income Tax Structure

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Morgan Stanley Mutual Fund

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  1. Morgan Stanley Mutual Fund Current Equity Market and Post Budget Scenario March 2010

  2. Impact Budget 2010 Highlights 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 NBFC’s. 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.

  3. Budget 2010 Impact on Key Sectors 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 R&D, 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. Infrastructure thrust to continue Auto Sector Pharma Sector Energy

  4. Indian 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

  6. 3Yrs Returns = 40% CAGR Nifty Best returns in the early part of bull run 5 Yrs Returns = 24% CAGR Indian equities have delivered attractive returns over the long term Source: Bloomberg

  7. 2004 The 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

  8. Global 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

  9. Indian 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

  10. Trends 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 11.7%YoY in November 2009, highest in two years. Source: Morgan Stanley Research

  11. 60 YoY change in Sensex Free Float PAT (%) 47 50 44 41 41 40 35 34 34 32 31 30 28 28 27 30 24 23 21 21 16 17 16 20 15 12 12 9 10 4 0 (5) (10) (6) (20) 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q10 2Q10 3Q10 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 1Q09 2Q09 3Q09 4Q09 Corporate earnings are back in positive, exhibiting growth Source: CLSA Asia – Pacific Markets

  12. BSE Sensex earnings growth to compound at 18% annually to F2012 Source: Morgan Stanley Research as of Jan 10

  13. Valuations close to long term average SENSEX P/E (x) The Sensex’s current one year forward P/E is 16x. SENSEX P/B (x) The Sensex’s current one year forward P/B is 3x. Source: Motilal Oswal

  14. Equities 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 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

  15. Double Digit Income growth driving consumption One of the fastest growing economies in the world, averaging 7% GDP growth Rise in risk appetitive globally on back of improved economic conditions Equities to deliver above average returns Positive sentiment of FIIs towards Emerging Markets & India Massive pent-up demand for infrastructure spending & consumption Stable government, Economic reforms Stable Government, Economic reforms Attractive Medium to Long Term Outlook for Equity Markets Sustaining strong corporate earnings growth

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