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Agenda
Consumption
Led Growth & Availability of
Asset Price Easy Money &
Bubble. Excess Liquidity.
Higher
Borrowing by US
Households
What has happened in the Global Markets?
Sub-prime Issue:
• Sub Prime lending is lending to people who have very poor credit
history.
• In US, a lot of loans, particularly mortgages, were extended to a wide
target group including people who had very low repayment capacities
and paid very low margin.
• These loans then were bundled into packages by Investment Bankers
and were sold to investors like pension funds, insurance companies,
hedge funds etc. Today these loans constitute the largest component of
the US Debt Market.
There are mainly two reasons why this market became so large:
• Sustained Lower interest rates in the US saw most asset prices going
up for long time. This encouraged prospective home buyers to take
loans and buy houses.
• Around the same time, a lot of financial innovations took place, main
being securitization of assets. In this, mortgage companies used to
extend loans to home buyers and sell these loans onwards to investors.
• Since mortgage companies were not holding these mortgages, basic
due diligence of creditworthiness of home loans deteriorated. On the
other hand, due to lower interest rates, there was a lot of demand for
mortgage bonds as they were yielding attractive yields.
Leverage Game in US
Rate Of
Particulars Income
Return
Investments 3000 10.00% 300
Loan 2900 8.00% 232
Capital/NW 100 68.00% 68
Return of Capital 68.00%
Leverage ratio of US Banks
Bear Stearns 35 to 1
Fannie Mae & Freddie Mac 24 to 1 When markets were booming,
borrowed money fueled
Lehman Brothers 36 to 1 record earnings. Investors
showed few signs of concern.
Merill Lynch 32 to 1 The ugly flip side of leverage
is now obvious, and massive
Morgan Stanley 33 to 1 write-downs have shattered
confidence in Wall Street's
Goldman Sachs 28 to 1 risk-management machinery.
Bank of America & Wachovia 11 to 1
How Mortgage Market Shaped Up in the USA
By the end of 2006, share of sub-prime in total lending had crossed 20%. And
by Q2 of 2007 out of the total mortgage bond market of $6.8 trillion, distressed
debt was of $2.8 trillion.
US Housing Price Trend
Indian Banks
BOI 16.9 x
• Indian banks leveraged positions are way PNB 16.2 x
below their western counterparts. SBI 14.7 x
Axis Bank 12.5 x
HDFC Bank 11.6 x
ICICI Bank 8.6 x
Solvency Issues or Quality of Lending
Consumer Loans /
GDP(%) Credit Cards / GDP (%)
60 58 140
121.9
50 120
100
40 India India
36 82.4
Thailand 80 Thailand
30 Malaysia Malaysia
26 60
Taiwan Taiwan
20 Korea
Korea 40
13
10 8 20
9.8
0.4 2.8
0 0 India Thailand Malaysia Taiwan Korea
India Thailand Malaysia Taiwan Korea
• Consumer loan/GDP ratio in India is at 8% compared to over 137% in the USA. Even
among Asian countries it is at the lowest level. Source: Bank of Baroda – Data as of2006
Corporate Loans/Leverage has come down:
• Crude and Commodity prices have come off sharply in the past 8 months. This
would help ease pressure on the fiscal deficit and inflation.
Commodit y High Low Gain/Loss
Crude 146.2 69.85 -52.20%
Copper 8720 4630 -46.90%
Aluminium 3317 2130 -35.80%
Zinc 2365 1180 -50.10%
Period: Feb-08 to Oct-08
Positive Macro Indicators
• Growth Rate: No doubt a global
slowdown will affect our growth rate.
But India will still continue to grow at
7% p.a., a high growth rate in itself
and will also continue to be the
second fastest growing economy in
the World. . Indian exports are only
18% of the GDP so we are not
dependent on US to drive our growth.
This is where we
are.
Impact on Indian Markets –
Liquidity
• The fall in the Indian Markets has been mainly because of FII outflows
at least the journey from 15000 to 8500.
• FIIs have remained net sellers by pulling out $12 bn from Indian
markets in first 10 months of 2008 but we have witnessed surge in FDI
inflow in 2008.
• Compared to $8.5bn received during April-August 2007 we have
received more than $16bn during the same period in 2008 in form of
FDI.
Strong Domestic Ability to Bring Inflows
• India is a Savings Economy
• India’s saving rate is close to 36% ($410 bn) of GDP of $1.18
trillion.
• Outstanding Fixed Deposits with Banks of Indian Consumers
31.13 Lac Crores (As on 26 Sept 2008)
• In FY08, FIIs invested $16 bn in Indian equity but compared
with this, insurance & MF inflow were of $19 bn
• The inflows from Insurance Companies and MFs shall only
increase in coming years.
Strong Domestic Ability to Bring Inflows
• A strong debate has been going on for a long time now whether
Pension Funds should be allowed to invest at least 5% of their
corpus into Indian Equities.
•Under the New Pension Fund Scheme it has been decided that the
subscribers shall have the following options:
•Invest fully in Government Securities
•Investment of funds upto 5% in equity and upto 10% in equity
linked mutual funds.Pensions shall be privatised and allowed to
invest in equities.
• Out of total of $15 bn pension and PF money, at least 5% is
expected to come into equities. Measures such as these are expected
to increase the flow of funds to equity markets once the New
Pension System is fully operational.
Trend of Institution Investment in Equities:
Equity Fund Inflows
60000
55000 53933.1
40000
24218.5 25000
20000
20000
9062 11982
7962.2
0
2006-07 2007-08 April 08-Oct 08
-20000
-40000
-40706.4
-60000
Insurance Cos Mutual Funds FIIs
All figures are in Rs Cr. Insurance cos figure for April-Oct 08 is industry estimate.
Indians are Under Invested in Equities:
3000
2500
2000
1500
1000
500
0
31st 31st 31st 31st 31st 31st 31st 31st 31st 31st 31st
March 98 March 99 March 00 March 01 March 02 March 03 March 04 March 05 March 06 March 07 March 08
1400
1200
1000
800
600
400
200
0
31st 31st 31st 31st 31st 31st 31st 31st 31st 31st 31st
March 98 March 99 March 00 March 01 March 02 March 03 March 04 March 05 March 06 March 07 March 08
15
20
25
30
35
40
45
50
55
0
5
Jan-91
Apr-91
Jul-91
Oct-91
Jan-92
Apr-92
Jul-92
Oct-92
Jan-93
Apr-93
Jul-93
Oct-93
Jan-94
Apr-94
Jul-94
Oct-94
Jan-95
Apr-95
Jul-95
Oct-95
Jan-96
Apr-96
Market PE Chart
Jul-96
Oct-96
Jan-97
Trailing PE
Average
Apr-97
Jul-97
Oct-97
Jan-98
Apr-98
Jul-98
Sensex Trailing PE
Oct-98
Jan-99
Apr-99
Jul-99
Oct-99
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
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Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Current Valuations Offer Great Opportunity:
Sensex Levels
Current EPS assumed at 800 with SENSEX of 9771 and earning growth of 20%.
Sensex Levels
Price Earning Ratio \ Years 1 2 3 5 7 10
For Long term horizons, there is no difference between lowest, average and
highest return Source: ICICI Prudential Mutual Fund
Answers to Investors
Q. You never told us to sell when the markets were at 21,000 levels?
Rather you were saying that in long term one can get 15%-20%
returns?
Mkts slightly overvalued @ 21000( P/E 24-26) written in FW ( article NOV,
DEC,JAN)
Exit calls cannot be given unless markets are unreasonable valued (P/E 45-50)
seen in past (i.e. Mkt levels above 30000)
Profit Booking rather comes from Asset Allocation
Profit booking is a function of total exposure to equities.
SIP / STP is always a better way which we have been emphaisisng
There are all possible chances of getting 10% returns from peak for an
inv.horizon of 5 – 7 years
There were hardly FIIs inv. between 1979 -2001 however markets gave 17%
CAGR
Answers to Investors
Q. At 14,000- 15,000 levels you aggressively came to us and said there is
a limited downside and you should start investing; markets are
looking very attractive?
The journey of 21,000 to 15,000 was on account of:
- Rise in commodity prices mainly oil price which touched 150 dollar per
barrel
- Rise in commodity prices brought inflationary pressure resulting into slower
growth rates.
Oil was lloking speculative ( Covered in FW editorial BOILING OIL – Month
June 2008)
Mkt still looked attractive below 14000 and oil price rise was factored for
lower growth
With oil price and commodity price correction market looked very attractive
below 14000
We expected the mkt to double in next 5 years( WE still continue to believe
the same)
Answers to Investors
Q. Today also you are saying to invest but people say the economy has
entered into a medium to long term recession. We have already lost
significant portion of our capital, how do you expect us to invest
now?
The fall from 14,000 to 9,000 has been on account substantial liquidity issues
rather than any fundamental issues.
It started from the announcement of bankruptcy of Lehman Brothers on 15th
September at 11.30 hrs IST and markets were at 13,500.
FIIs pulled out close to Rs 20,361 crores of Equity investments in the month of
Sept-Oct. If we see the YTD 2008 figures, FIIs have pulled out Rs. 48,875
crores of Equity Investments. This is one of the reasons for the sudden fall in
the markets. (Data as on October 24, 2008).
Major selling of FIIs is over , however we may see some corrections further
Market available at extremely low valuations 10 P/E
Why Mutual Funds?
NAV of various MF
Particulars Date Levels PE ratio EPS Reliance Reliance HDFC HDFC Sundaram
Growth Vision Top 200 Equity Sel. Focus
Sensex 24-Oct-02 2908.05 12.58 231.16 26.87 23.63 15.00 19.87 9.68
Sensex 24-Oct-03 4757.37 17.10 278.21 55.67 49.74 31.63 41.69 18.09
Sensex 24-Oct-08 8701.07 10.63 818.54 201.51 126.41 86.23 105.29 51.21
Absolute Returns (%) 2002 - 2008 199.21 254.09 649.94 434.96 474.87 429.89 429.03
Absolute Returns (%) 2003 - 2008 82.90 194.22 261.97 154.14 172.62 152.55 183.08
CAGR (%) 2002 - 2008 20.04 23.46 39.91 32.25 33.84 32.04 32.00
CAGR (%) 2003 - 2008 12.83 24.09 29.34 20.51 22.21 20.36 23.14
If invested Rs.100000 2002 299206 749944 534956 574867 529894 529029
than the value shall be 2003 182897 361972 254142 272621 252555 283085
From 2002 to 2008, Sensex went up by 199% but the funds have gone in the range of
389% to 649% in absolute terms. Earnings of Sensex went up so did the Price. This
is where the OPPORTUNITY lies. Right now Equities are at hefty discount.
Why Mutual Funds?
POINTS TO BE NOTED:
• From 2002 to 2008 Sensex went up by 20% but the funds have up in
the range of 30% to 39% in CAGR terms.
From 2003 to 2008 Sensex went up by 12% but the funds have gone
up in the range of 20% to 29% in CAGR terms.
• If you compare the period of 2003 to 2008 the earnings have gone up
by 24% (CAGR) but the Sensex has gone up by just 12%. Prices will
catch up on the earnings. This is where the Opportunity lies.
• If Sensex is the benchmark for equities than MF outperform the Sensex
by wide margin and in multiplication times.
• The Best Vehicle for Wealth Creation is Equities……that too
Investments by way of Mutual Funds.
How Investment Gurus have behaved in Crisis
.
Sir Warren Buffett has always said:
As an independent company, we are free to concentrate on the best interests of our investors.
And throughout our history, we have focused single-mindedly on investment, rather than
expanding into other financial areas.
If you are planning for your future, you may want to talk to a financial adviser.
If you would like copies of any of our free guides about key investment topics,
reach us at
Risk Factors: • Mutual funds, like securities investments, are subject to market risks and there is no guarantee against
loss in the schemes or that the schemes’ objectives will be achieved. • As with any investment in securities, the NAV of
the Units issued under the schemes can go up or down depending on various factors and forces affecting capital
markets. • Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the
Schemes. Please read the offer document/scheme information document/statement of additional information of
respective schemes before investing.
Thank You.