1. ADVICE for the WISENewsletter September10

2. IndexPage No.Economic Update 4Equity Outlook8Debt Outlook 14 Forex16Commodities 17Alternative Assets 18 2 3. Dear Investor, The present investment climate for an Indian investor, while beingIn the months to come, Index investing itself is unlikely to bepositive, can still be quite confusing. Equity markets have significantly rewarding. To stay invested in the long term Indiaremained range-bound for an extended period of time and are story though, a diversified managed portfolio would be alikely to remain so. Interest rates are still on the rise. Real estategood idea. This can be through mutual funds with stablemarket has revived from its nadir. To sum up, the going is good but returns and proven track record. To build further on thethere are no quick wins anywhere. The opportunity to benefit by equity returns in the medium term, investing in specificbeing greedy while others were panicking seems more or less sectors or managers with stock picking skills would help.closed now in the Indian context. Where do we go from here? Sectors such as consumer goods, banking and power are likelyIt is time to move beyond the shadow of the crisis in makingto be outperformers in this horizon.investment decisions. Through the crisis, we went throughrepeated bouts of panic. Subsequently as the financial storm in On the debt front, investing in medium term quasi-the developed economies subsided there were opportunistic government debt (e.g. PSU bonds) is likely to be remunerative.investments and a gradual return to normalcy for Indian investors.Also high yield corporate paper with relatively low credit riskThrough the recovery period, simply showing faith in thecan further boost debt returns. As interest rates start torobustness of Indian economy paid off in getting good returns.plateau in the months to come, building a good long tenorNow onwards, however, returns would be closer to long termbonds portfolio can help generate superior debt returns inaverages in most asset classes. Hence investments should be the next year.looked at in two parts one part being the simple strategies thatInvestors would also do well to redefine the conventionalwill pay off in a relatively longer term and the other part being approach in classifying assets and selecting managers. Formore nuanced strategies that will generate superior returns in theexample, high yield debt would fall between the conventionalmedium term as well. The trick of course is to control the risk indebt and index investing. Also quantitative strategies can bethe latter since often enough a risky strategy comes disguised as looked at as alternatives to human fund managers and thusthe rare opportunity. can form part of the universe of managers. This will prepareus for the investment strategies of the future. Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.20 3 4. As on Change over Change overAug 31st 2010last monthlast year 120 100 BSE Sensex 17,971 0.6% 14.7%Equity S&P Nifty5,4020.6% 15.9% 80 Dec-09Mar-10 Apr-10May-10Jul-10 Jan-10 Jun-10 Oct-09 Aug-09Sep-09Nov-09 Feb-10marketsS&P 5001,049(4.7%)2.8%Sensex NiftyNikkei 225 8,824(7.5%) (15.9%)S&P 500Nikkei 225 8.3 10 Yr. Gsec7.810-yr G-Sec Yield 7.97% 17 bps53 bps 7.3 Debt marketsCall Markets5.09% (21 bps) 209 bps 6.8 Fixed Deposit*6.75% 75 bps (25)bpsMay-10Sep-09 Feb-10 Jan-10 Mar-10Jun-10Aug-09Dec-09 Apr-10 Aug-10 Oct-09Nov-09 Jul-1020000Gold 18000 CommodityRICI Index3,147(1.2%)7.3% markets Gold (`/10gm)18,9156.5% 24.8%16000 Crude Oil ($/bbl)75.50.0%9.4%14000 50 49 `/$ Forex Rupee/Dollar 47.11.3% (3.4%)48 47 46marketsYen/Dollar 84.8(1.8%) (9.4%)45 44Aug-09Aug-10Jan-10Jun-10Sep-09Nov-09Feb-10Mar-10May-10Apr-10 Jul-10 Oct-09 Dec-09 * Indicates SBI one-year FD4 5. The Conference Board Consumer Confidence Index which had declined sharply in the last two months, increased by 2.5 points to 53.5 in August. ThisUS indicates positive expectations about future economic activity, though overall evaluation still shows apprehensions of the consumers about the future. US m-o-m unemployment rate remained unchanged at 9.5 per cent in July 10. Euro-zone purchasing managers index slid to 55.1 from 56.7 in July indicating a cooling of the sector after the buoyant growth rates seen earlier this year.Europe Unemployment in the Euro zone remained stable at 10% in August but Germany saw significant improvement with unemployment falling at 7.6% and returning to pre crisis levels. The unemployment in Spain reached a staggering 20.3%. Japans industrial production rose by 0.3% in July from the previous month but manufacturing PMI hit a fourteen-month low of 50.1 in August, as new orders Japan fell and output growth slowed. Japans unemployment rate decreased in July 10 (m-o-m) to 5.2% from 5.3% in June 10 . The HSBC China Manufacturing Purchasing Managers Index, increased to 51.9 in August from 49.4 in July due to surging domestic demand. Last month,Emerging after its weakest performance in 16 months, the increase indicates economies stabilization of the economy. Chinas exports may be hurt by moderation in growth of Europes services and manufacturing industries last month and may slow down.5 6. 19.0% IIP monthly data The GDP growth rate for Q1 FY11 came in at 8.8% 14.0%backed by a strong growth in manufacturing andagricultural output.9.0% The Manufacturing sector grew by 12.4 per cent4.0%during April-June, 2010, against 3.8 per cent in the 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec 1-Jan 1-Feb 1-Mar 1-Apr 1-May 1-Junsame period last fiscal while agricultural outputwitnessed a growth of 2.8 percent (y-o-y) due toimproved harvests. The services sector saw a Breaking an eight month trend of double digitmoderated growth over last year with business growth, Industrial output as measured by the services growing at a rate of 8% against 11.8% last Index of Industrial Production (IIP) grew by 7.3%year. (y-o-y) in June 10. The Finance ministry is targeting FY11 growth at Growth in manufacturing, which constitutes ~8.50% - 8.75%. We believe the current target issustainable as we expect manufacturing and around 80 per cent of the IIP fell to 7.3 per centservice sectors to continue to drive growth in the from 8 a year ago as the pace of new ordersnext few quarters, even as farm output stages a cooled following a slowdown in exports.turnaround. The manufacturing PMI fell to 57.25 in August 10GDP growth9 from 57.6 in July indicating a strong growth but 8 at a weakening pace. 76 We believe the growth in IIP will remain robust54 but will eventually moderate out and may endFY09 (Q1) FY09 (Q2) FY09 (Q3) FY09 (Q4) FY10 (Q1) FY10(Q2) FY10(Q3) FY10(Q4) FY11(Q1) lower than that seen in the first part of the fiscal.6 7. Growth in credit & deposits of SCBs Bank CreditAggregate Deposits 25.0% 23.0% Inflation as measured by WPI stood at 9.97% 21.0%(y-o-y) for the month of July-10 as compared to 19.0% 17.0%10.55% during June 10 driven by expectations of 15.0%a good harvesting season. 13.0% 11.0%9.0% We expect WPI inflation numbers to moderate7.0%in m-o-m inflation numbers due to the expected5.0%Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10decrease in food inflation and the monetarytightening stance by RBI. This will also happendue to the base effect coming into play. Bank credit growth further improved in the month of July as it increased by 19.7% as compared to 19.6% in the month of June 2010 12.0% We expect credit growth to further improve in the 10.0%Inflation next few quarters and settle at ~20% levels on the 8.0% back of improving business confidence and decline6.0% in risk aversion on the part of banks. 4.0%2.0%0.0% Jun-09 Oct-09Jan-10Mar-10 Jun-10May-10 Aug-09 Apr-10Jul-09Sep-09Nov-09 Feb-10Jul-10 Dec-09 -2.0% -4.0% 7 8. Indian equity - tapping to the global tuneThe markets remained flat in the month of August, groping for a direction amidst a volley of global and domestic news flow. It is apparent that the global developments hold the key to near term market movements. After hitting a 30 months high during the month, Sensex reacted to a global risk aversion caused by the fears of a double-dip US recession. The downward pressure on the markets was mostly due to a steady offloading from the domestic investors. Domestic risk capital allocation pattern is showing a high correlation to global market movements. It may be recalled that during the global credit crisis in 2008-2009, the domestic financial system also suffered from risk aversion. Cost of capital soared and capital market funding almost came to a grinding halt. Companies, particularly small and medium sized entities lost access to capital irrespective of fundamentals.Valuations How expensive?According to the Reserve Bank of India, a combination of strong growth outlook for India and the probability of monetary exit being delayed by the advanced economies, could lead to acceleration of capital inflows. On the flip side, in the event of a global risk aversion, FIIs may dump Indian stocks. The selling could be aggravated by redemption pressure at their home countries the US or Europe. It may be noted that all this has to do with market movements and not economic performance of India. The fundamentals of Indian economy have gotten better with a resilient domestic demand, strong capital inflows and some game changing reforms on the anvil. The GDP growth for Q1FY11 was a strong 8.8% yoy robust, and in line with the expectations. promising attention to quality.Given the sustained capital efficiency, growth prospects and strong balance sheets of the corporate sector we subscribe to the India premium thesis. We maintain our stance that Indian equity is not too dear at the current levels. Despite the overall flat performance, markets have demonstrated a preference towards safety and predictability. We do believe that this is likely to continue in the near future.8 9. FII & MF data Sales growthFIIMF 2000010000 Substantial improvement in sales was witnessed in Q2 & Q3Rs. (Cr) mainly in consumption oriented sectors of the economy. 0 Current Results by corporates show a strong Sales growth Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-1 Aug- for the current quarter while consolidated figures are yet to -10000 09 09 09 09 09 10 10 10 10 10 10 0 10come. We expect improvement in sales in upcoming quarters; -20000especially in the manufacturing space as domestic demand picks up. 80 FIIs invested ` 11,687 Cr. in equities in the month of August 60 Profit growth 40 alone as the markets remained relatively stable throughout20(% ) the month on cues of stable macroeconomic indicators. 0 -20 FY07 (Q1) FY07 (Q2) FY07 (Q3) FY07 (Q4) FY08 (Q1) FY08 (Q2) FY08 (Q3) FY08 (Q4) FY09 (Q1) FY09 (Q2) FY09 (Q3) FY09 (Q4) -40 Mutual Funds sold around ` 2,996 Cr in the month of -60 August as Corporates and Banks exited the markets. Banks are currently gaining a higher rate of ~5.1% (Call rate) as Recent Q3 & Q4 numbers have beaten estimates with compared to returns given by Liquid funds.higher sales and better operational efficiency aiding profit growth. Margins are expected to remain stable in the following quarters as lower interest costs are offset by higher raw material costs9 10. RecommendationSector Rationale Higher credit growth, well managed NPAs, improved capital marketBFSIactivities and expectations of reformsIndustrialsFocus on infrastructure spend intactOverweightDiscretionary Robust domestic demand, income growth, favorable demographics,Consumption rapid urbanization Resilient demand in CRAMS, generics opportunity getting better and Healthcare strong pressure on governments to reduce public healthcare costs Lower volumes, affordability issues and the leverage on the balance Real Estatesheets of the companies Positive steps in the direction of fuel price deregulations, increased E&P Oil & Gasactivities but under recoveries still loom large Neutral CementSignificant overcapacity build up and slow down in North, West andSouth India markets.Despite the macroeconomic opportunity, we are concerned about theTelecom ongoing price war and significant leverage post 3G & BWA auctions10 11. Tenets of our investment philosophy Efficient diversification Economic themes Sectors Capital efficiency Companies & groups Size of opportunity Volatility factor Reasonable gearing Quality management Capital allocationQualityActive riskFocusmitigation Fundamental researchResearch Analytical rigorIntensity Margin of safety Low churn Management meetings Long only approach No cash calls High conviction drivenLong termSuperior compounding11 12. Stock Selection PortfolioPortfolio Review ConstructionInvestment InvestmentDeviation ToleranceUniverse ObjectiveRisk quotient bandDegree of diversificationPortfolio Valuations Attribution AnalysisPsychographics MacroeconomicPerformance Quality filters View Appraisal ManagementGradingBuy / sell note DocumentationIndependent Audit12 13. Basic Theme A diversified portfolio of stocks that seeks Alpha through superior stock selection. The Portfolio Management adopts a comprehensive approach and invests across sectors, investment themes and market capitalization categories. Portfolio Details Absolute Returns (%) Entry LoadNilComparatives 3 Month Since Inception Exit Load Nil (Full management fee to be levied if redeemed before 1 yr) Management Fee1.5% p.a.Alpha Portfolio 7.04% 13.70% Profit Share20% of Outperformance over 12% 6.21%7.35%S&P CNX NiftyTop 10 Holdings Sector Allocation PerformanceReliance Industries11.3% State Bank of India 6.1% HDFC6.0% ICICI Bank6.0% Infosys 6.0% BHEL5.9% Larsen & Toubro 5.9% Bharti Airtel 4.3% Nestle4.3% Opto Circuits 4.2%Top 10 Stock Concentration 60.0%13 14. 10.00 Yield curve9.00 The benchmark 10 yr G-sec yield increased from8.007.8% in July to settle around 7.97% in the month7.00of August. This was due to the RBI tightening itsmonetary stance in the July Review.6.00 5.00 We believe that future monetary tighteningmeasures are unlikely to have a major impact on (%)Maturity (years)the longer end of the yield curve and once theinflation drops, the yields may peak out around We expect yields at the longer end of the yield8% levels. We expect the 10 yr G-sec yields to curve to remain stable. High inflation, monetary remain in the broad range of 7.5 8.5% in the tightening and rising credit growth will keep thenext few quarters. yields at the longer end range bound.8.210-yr G-sec yield 8 Short term liquidity concerns arising from 3G7.8 auctions and advance tax payments will keep7.6yields at the shorter end at elevated levels.7.4 7.2 Due to rising inflationary expectations, there may7 be further interest rate hike by RBI but will6.8 stabilize around 7.5 8.5% levels by year end.14 15. CategoryOutlook DetailsWe recommend short term bond funds with a 6-12 month investment horizon as we expect them to deliver superior Short Tenurereturns due to high YTM and concerns over credit quality easeDebt as the economy recovers, thereby prompting ratings upgrade.Positive economic climate has reduced credit risks without acommensurate decrease in credit spreads. Some AA and selectCreditA rated securities are very attractive at the current yields. Asimilar trend can be seen in the Fixed Deposits also.We expect yields at the longer end of the yield curve to top outLong Tenure soon. Yields may move to the broad range of 7.5 8.5% in the Debt next few quarters. As the inflationary pressure settles downtowards the end of the fiscal, these may be an attractiveinvestment. 15 16. Rupee movement vis--vis other currencies (M-o-M) Trade balance and export-import data Singapore DollarExport ImportTrade Deficit 0 (Mn) 100 Euro50Japanese Yen -100000(%)British Pound-50 Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr-1 May- Jun- Jul-1-20000 US Dollar 09 09 09 09 09 09 10 10 10 0 10 10 0-6.0%-4.0% -2.0% 0.0% 2.0% 4.0%(%) Exports for the month of June increased by 13.2% y-o-ywhile imports increased by 34.3% increasing the tradedeficit to USD 12,930 Mn. The Rupee depreciated v/s the US dollar in the month ofAugust due to uncertainty in the global markets.Capital account balance $ (Mn)40000 Our medium term view is that the rupee is likely to3000020000strengthen further in 2010. Higher interest rates in India100000would attract large capital flows. Moreover the government is-10000FY08 (Q2)FY08 (Q3)FY08 (Q4) FY09 (Q1) FY09 (Q2)FY09 (Q3)FY09 (Q4) FY10 (Q1) FY10 (Q2)FY10 (Q3) expected to simplify the rules on foreign inflows to facilitatelarger foreign capital inflows in the form of FDI Capital account balance was positive in the first ninemonths for FY10 We expect the capital account balance to remain positiveas higher interest rates would make investment in theIndian markets attractive hence drawing investments intothe market. 16 17. India and China will continue to provide the main thrust of20000overall growth in demand, particularly for gold jewellery, for the 19000 Gold spot remainder of 2010. Retail investment will continue to be a 18000Precioussubstantial source of gold demand in Europe. Added to this the 17000 16000 forthcoming festive season in India is expected to keep theMetals demand strong during the seasonally strong 4Q. The ongoing15000 14000 nervousness in the global financial market would further aid the May- Sep-09 Jan-10Feb-10Mar-10Aug-09Dec-09 Apr-10 Jun-10 Aug-10Oct-09 Nov-09 Jul-10 safe haven buying. Any correction thus should be treated as an opportunity to hold this metal. 90 Crude The crude prices remained stable in August and there was no8580 change from July prices though during the month, prices moved75 between $70-$83 per barrel. These are expected to be steady in Oil & Gas70Q2 due to no significant seasonal demand (Q2 is the6560 maintenance season for refineries) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Natural gas prices to trade lower in Q2 owing to speculation over09 09 09 09 09 10 10 10 10 10 10 10 10weak demand.1,050RICI Agri Prices of primary food articles saw an increase of 0.9% in the last 1,000 950month. But, due to expectations of higher production output, 900Agri we see the prices declining in the coming months 850 A favorable Kharif output to further cool prices in the medium 800Aug-09 Oct-09Dec-09Aug-10 Nov-09 May-10 Jan-10Mar-10 Jul-10 Sep-09Feb-10Apr-10Jun-10term 17 18. Karvy Principal Protected Note Linked to MCX Gold priceIssuerKarvy Financial Services Limited Tenor 36 / 40 months Index MCX Gold price Minimum InvestmentRs. 5,00,000 Principal Protection100% Upside Participation Rate 115% of gold appreciation Upper Cap Level 150% of initial gold level PayoffMax { 0%, PR* Min( Cap, (Final Level/Initial Level -1))} Outcomes at Maturity Note Return65%50% return x 115% participation rate57.50%35%35% return x 115% participation rate40.25% -40%Full principal protection below zero 0%This example is for illustrative purpose only and does not constitute a guaranteed return or performance. 18 19. Leveraging breadth of related businesses that KARVY is in KARVY is an integrated financial services group, with Karvy Private Wealth being one of its arms. The entire groups strengths are leveraged to provide end-to-end wealth advice to Karvy Private Wealth clients. For example, SME clients can receive advice on their personal wealth while also getting investment banking advice from the I-banking arm of Karvy.Maximum choice of products & servicesKARVY Private Wealth offers the widest breadth of products and services, providing clients a variety of options through a single contact. Products and services include equities, debt instruments, commodities, Mutual Funds, Insurance, Structured Products, Financial Planning, real estate advice, etc.Product-neutral adviceWe ensure that our recommendations are 100% product-neutral and unbiased because unlike other players, we are neither tied up with any one particular insurance company nor do we have our own mutual funds.All-India presence Set to have business in 20 - 25 cities we are poised to cater to families and businesses spread across multiple cities in India providing them with combined and integrated advice. For one-off services, if required, we can also leverage KARVY Groups presence in 400 cities. 19 20. The information and views presented here are prepared by Karvy Private Wealth or other Karvy Group companies. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it.The investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned here, investors may please note that neither Karvy nor any person connected with any associated companies of Karvy accepts any liability arising from the use of this information and views mentioned here.The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned companies from time to time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd.The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws once the new Direct Tax Code is in force this could change the applicability and incidence of tax on investments20 21. Bangalore080-26606126 Chennai044-45925925 Delhi011-43533941 Hyderabad040-44507282Kolkata 033-40515100 Mumbai 022-33055000 Pune 020-66048791 Email: wealth@karvy.comSMS: HNI to 56767Website: www.karvywealth.comCorporate Office : 702, Hallmark Business Plaza, Off Bandra Kurla Complex, Bandra (East), Mumbai 400 051 21