July – A mixed month (as are all results months)

The month of July was a difficult month for the markets where there were wild swings in individual stocks driven by the reported results for the quarter ended June 2010. While individual performances varied a log the indices remained more or less stagnant with a 1% move for the benchmark indices. Companies that reported strong results were immediately rewarded and vice versa.

The news flow from the global markets continued to be mixed. The Chinese markets which were cause of concern for the global markets over the last couple of quarters bottomed out and showed a strong up move in the month of July with an xxx% up move. This up move was backed by reducing fears of overheating and extremely low valuation relative to historical valuations. The Chinese markets should continue to trend up over the next few weeks as funds flow into China continues to be strong.

The news flow from Europe that dominated headline in May and June dropped significantly and infact became positive with the bond auctions of most of the countries that are believed to be stress going through easily and growth numbers surprising on the upside. The Credit Default spreads continued to narrow during the course of the month and so did the LIBOR rates. The EURO and the British pound staged a remarkable recovery vis a vis the dollar during the month with the Euro moving from 1.22 to the USD to levels of 1.30 and the pound from 1.50 to 1.56.

The factor that negatively impacted the markets infact came from the US where economic numbers showed signs of slackening and the employment situation continued to be grim. The results of US companies continued to be robust with most Financial firms showing improvements in balance sheet parameters and most Global MNC’s outperforming expectations.

The economic numbers coming out of India continue to be robust and the growth expectations have been revised up to around 8.5-9% levels for the current year. With the monsoons turning out to be strong agricultural growth should also contribute significantly to the overall growth numbers and also lead to a reduction of food inflation. The trajectory of inflation has become very important at this stage as the RBI is fast moving towards neutral policy rates and any further tightening can result in a slowing down of economic activity. Given the fact that global commodity prices have been flat over the last few months and food prices have started coming down the overall inflation should remain controlled going forward.

One of the key features of the results season has been that top line growth is pretty robust and there has been a strong resilience in terms of margins despite the kind of commodity price inflation we have seen. For a majority of capital goods companies’ execution is likely to pick up and that should lead to strong profit growth. The results of Financial sector stocks in general have been very robust with the NPA’s being well under control. The Automobile sector continues to be a key beneficiary of rising consumerism. Commodity companies had a weak quarter with commodity prices coming off over the last two quarter. Companies in the Pharma sector continue to show robust results and Consumer Goods companies have seen some margin compression.

The other important observation of the current results season has been the strong performance from a vast majority of mid cap companies thus providing enough opportunities of stock specific investing. I believe that mid caps will continue to outperform the benchmark indices for the foreseeable future.

Overall the outlook of the markets continues to remain positive with the markets likely to rally by 10-15 % by the end of 2010.

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