>INDUSTRIAL ANALYSIS ON PERFORMANCE OF STOCK EXCHANGE

CONTENTS

1. INTRODUCTION
2. HISTORY OF STOCK EXCHANGE
3. STOCK MARKET ANALYSIS
4. PERFORMANCE OF STOCK EXCHANGE
5. COMPARISON AMONG VARIOUS INDUSTRIES
6. COMPARISON OF GDP AND INFLATION TOWARDS INDUSTRY
7. GOVERNMENT CONTROL OVER INDUSTRIES
8. COMPENSATION PACKAGE IN INDUSTRIES
9. TRAINING AND DEVELOPMENT IN THE INDUSTRY

To see the full report: STOCK EXCHANGE

>GLOBAL STRATEGY (MORGAN STANLEY)

Mid-Cycle Valuations – Finding the “Value” in Global Cyclicals
Mid-Cycle Earnings: What Looks Cheap and Where

• The rally in global equity markets has seen the Global cyclical sectors (Discretionary, Industrials, Materials and Information Technology) rise 77% from the low set on March 9th, outperforming Global defensive sectors by 40%. The rally has been largely driven by multiple expansion, with the forward P/E of the MSCI World index up 40% for the cyclical sectors, in comparison to forecast earnings which are up 13% over the same period.

• We think the multiple expansion phase of the cycle is now largely over (see our report titled “Global Equity Strategy: A Rally, But One to Sell Into”). Consequently, our focus is now on how quickly earnings can ramp up to support further price performance and how stocks are priced on a return to more trend-like earnings. This is particularly important for Materials, Industrials and Consumer Discretionary, where arguably year-ahead earnings are likely to be below trend. Technology is different: current consensus forecasts expect the IT sector to reach a new earnings peak in 2010.

• We create estimates of trend earnings for the major regions: the US, Europe, Asia ex-Japan, and Japan. (This is based on work by Toby Walker, our Australian Equity Strategist. See his note “Who Continues to Look Cheap on Mid-cycle Value”, dated October 1, 2009). Based on the past four cycles (73-75, 80-83, 90-91, 00-02), earnings take an average of two years to recover to mid-cycle levels (see page 10). Consensus expects this cycle to be different. In the current cycle, consensus expects earnings to trough in 2009 and get back to the 2007 cycle peak in 2010. We believe this is highly optimistic, and history supports this view. Our base case calls for earnings to bottom in 2009, with a return to mid-cycle ROE’s by 2011.

• Our analysis suggests that Japanese cyclicals are trading at the largest discount to mid-cycle earnings, followed by Europe. The cyclical sectors in the US are the least attractive at only 9.4% below their trend earnings valuation despite having to wait until 2011/12 before reaching this earnings level.

• Among the sectors, Industrials and Materials are most attractive in Japan, Consumer Discretionary is most attractive in Asia Pacific ex-Japan, and Technology is the best value in
Europe. None of the US cyclical sectors show strongly on a trend earnings valuation basis, which fits with the relative performance of US over rest-of-world cyclicals since markets bottomed in early March.

To see the full report: GLOBAL STRATEGY

>RE-PLUMBING THE FINANCIAL SYSYTEM (CITI)

OVERVIEW

■ Identifying the leak

• The shadow banking system
• Bank sector leveraging
• Corporate & consumer leveraging
• Global regulatory mismatch
• Liquidity risk
• Global imbalances
  

■ Repairing the pipes

• Supply and demand for credit
• Bankers’ compensation
• Liquidity constraints
• More stable, but much less liquidity
• Bank losses

■ Ready for a new shower?

• The ‘new normal’
• Where do bubbles form?
• Where will the money go?
• Is there a bubble yet?

To see all graphs and report: FINANCIAL SYSTEM

>Higher the rise, harder the fall (ICICI SECURITIES)

Based on the performance of BSE-100 stocks in the past five rallies and subsequent significant corrections (since May 1999), we conclude that a considerable proportion of stocks that lead a rally decline the most in the subsequent correction. However, the laggards of the rally are less likely to be the best performers in the subsequent correction. Since March ’09, the Sensex has doubled; in the past two months, it has become increasingly difficult to justify the rally on fundamentals and valuations. For the rally to continue or even the markets to sustain at current levels, we believe that Q2FY10 results need to be considerably higher than expectations and FY10/FY11 earnings revisions significantly positive. This report assumes relevance if this does not happen.

■ Conclusions. On an average, 46% of the rally leaders are the top underperformers in the subsequent correction. In two of the five time-periods considered, 60% of the leaders have given up their gains the most in the correction. The conclusion is less compelling for the laggards of a rally. On an average, less than one in three laggards feature among the top performers during the correction phase and in two of the five time-periods, the number was less than one in four.

■ Methodology. We have considered five time-periods since 1999, when the Sensex rallied at least 50% and subsequently corrected at least 15%. We have taken the BSE-100 constituents (at that particular time period) as our universe and define the top-25 performing stocks among them as ‘leaders’ and the worst 25 performers as ‘laggards’.

Top-25 leaders and laggards in the recent market rally
Current Bull Run from March 12, ’09 to October 15, ’09

To see the full report: MARKET STRATEGY