December 2011

Equity Outlook FROM CIOs DeSk

EQUITY OUTLOOK FROM CIOS DESK

November was a poor month for risk assets in general, across the globe. Once again, events in Europe dominated the risk-off trade and except for a very sharp rally (~4%) in Europe and USA on November 30th (on the back of the cut in funding rates for US$ swap lines between the US Fed and 5 other large central banks) equities and commodities (except for Brent oil) ended the month down. For Indian equities, November was a very poor month indeed. FIIs turned net sellers and sold US$ 860mn of equities. Their YTD net selling is US$ 500mn. The Nifty was down -9.3%, the BSE500 fell -9.6% and the BSE Mid and Small cap indices fared worse and were down -10.6% and -12.6% respectively. Compounding the problem was the -6.7% depreciation of the INR vs. the USD taking it to a new life-time low. In USD terms, the MSCI India was down -16% and India was the worst performer in EMs tracked by MSCI. With the ~16% fall in the INR this calendar year, YTD MSCI India is now down -34%. Fortunately we saw some buying by domestic MFs whose November month net purchase of US$ 150mn takes their YTD tally to US$ 1.24bn. For India, 2011 has so far been one of the worst years in history (1995, 1998, 2008 were worse) for equity markets. Lack of governance, lack of policy initiatives and the worsening fiscal situation have spooked investors. Growth in India is visibly slowing down. Credit growth is slipping. The September 2011 quarter GDP (2Q) is now at 6.9% and GDP growth in 3Q and Q4 is likely to slip further before bottoming out. Given that headline inflation is likely to come off, we should start seeing the RBI becoming less hawkish on inflation and given the growth pangs, change its stance and start easing (perhaps with a CRR cut first and then with a rate cut) in a quarter or two. Responding to the policy paralysis accusations, the government did attempt to bring reforms by bringing in 51% FDI in multi-brand retail and 100% FDI in single brand retail. While the step was very welcome and would have sent out a very strong signal to the business community and markets both in India as well as outside, mistiming its introduction during the parliament session and without working out a strategy to bring the allies on board meant that the opposition parties got a great window of opportunity to put the government on the back foot and well meaning effort got wasted. Infact, the handling of the Anna Hazare Lokpal issue earlier in the year as well as now the FDI in retail fiasco shows that lack of co-ordination and strategy has meant that the government continues to shoot itself in the foot. Another classical faux pass was when the Deputy Governor of RBI openly said that we would not support the falling rupee. Even if that were the strategy (and we are not debating the merits of such a strategy or otherwise) it is was probably unpragmatic for central bankers to not be nuanced and allow speculators to take advantage of the fragile macro situation. So where do we go from here? What are the continuing challenges and are there any silver linings? The continuing challenges are the situation in Europe which may continue to keep global markets in a risk-off mode and hence may keep the rupee under pressure thereby delaying the transmission of lower commodity prices to soften inflation. At home the fear is that there will be no meaningful reforms until the UP elections in April-May and that the government will continue to be fiscally profligate (eg. The Food Security Bill) Also there is a fear as to what strategy will the government adopt to compensate for its disinvestment target. If it resorts to steps which impound the cash with cash rich PSUs to the detriment of the companies and the minority shareholders it would send out a wrong signal. Then there is this slowdown in the economy, consumption demand is slowing down and investments have virtually come to a standstill especially infrastructure and industrial capex. Last but not the least could be geopolitical tensions with Iran which could lead to a spike in oil prices.

Equity Outlook FROM CIOs DeSk

EQUITY OUTLOOK FROM CIOS DESK

So where are the silver linings? For one, the upshot to slow growth is that interest rates have peaked and it is not just because of base effect as is popularly touted. The fundamental reason for interest rates to have peaked is that at the current rates of interest there is no demand for money for new projects whether private capex or infrastructure other than for working capital where companies have no choice. Secondly, with global synchronization it has been observed that monetary policy also moves in tandem, albeit with a lag. Many countries (Australia, Brazil, China etc) have already begun to cut and India will follow suit but with a lag. Secondly, I do believe that we have reach a nadir as far as policy paralysis is concerned and while I agree that I might be in a small minority. While I concede that we are not naturally pre-emptive reformers but there is empirical evidence to show that we are reactive reformers. Most reforms have happened when the economy is in crisis or in near crisis mode. I am hopeful that the government will eek out some meaningful reforms with some deft political give and take and with the some laborious and frustrating consensus building that is the hallmark of our politics. The recent sharp depreciation in the INR has forced the RBI to act. They have increased the debt limits for foreign institutional investors who invest in Indian debt paper, by 20%, from US$50bn to $60bn. This should help ease the pressure on the INR as the bulk of the US$ 10bn proceeds are expected over the next few months. The European crisis is going to be a long drawn affair with no quick fix solutions and we can only hope that the key players including the central banks of EU, Fed and others are able to avoid a systemic risk. But I think any investment strategy has to take cognizance of the fact that the sword of Europe will keep hanging. Lastly, most sell side strategists have been aggressively cutting earnings estimates and their index targets. The adverse fx impact will be priced ahead of the Q3 results and maybe whatever cuts are left to be made to earnings will be done by the end of Q3 earnings season. As I mentioned in my last communication, it would be fair to assume that the markets will now trade in a wide range of between 14,500 to 20,000 for the next 18-24 months. There could be exceptions on either side but at the lower end of the range there will be valuation support and the risk reward favorable for long term investors. Historically, the process of bottoming out starts with the peaking of the interest rate cycle and the markets finally bottom out ahead while the loosening cycle is under process. Our strategy over the last 12-18 months has been to be overweight quality and consumer discretionary as well as non-discretionary businesses. They have largely outperformed in difficult markets. But as is always the case, towards the end of the correction cycle the strongest stocks/sectors correct. While we have trimmed some of our holdings there, we will continue to hold them and take the short term pain as we believe that over the medium to long term the leaders will continue to outperform. So in effect we should be ready to take short term underperformance for long term structural gains. We also have some cash in our portfolios which we intend to deploy systematically as the markets correct. We would either add positions in the same/similar quality names or companies which should benefit from a reversal in the interest rate cycle. While 2011 has been a poor year for Indian equities, 2012 may well end up quite differently.

Hiren Ved Chief Investment Officer Alchemy Capital Management Pvt. Ltd

DEBT OUTLOOK
November was an eventful month for debt market. RBI started OMOs to ease liquidity. GDP growth slowed down dramatically but high inflation still persisted. In an unexpected move China slashed its reserve requirement for the banks first time in last three years. US Federal Reserve, European central bank, Bank of Canada, Bank of England, Bank of Japan and Swiss national bank coordinated with each other to offer cheaper swap lines, where local currencies are exchanged for dollar with the US Fed to ease the dollar crunch. All these events helped 10 year G-sec yield to ease by 14bps to 8.74%. Adding to the global woes, the domestic data hasnt been too encouraging either. The government has run a fiscal deficit of 74.4% of the full-year estimates in the first seven months of the current year, almost confirming it will miss the target of 4.6%. The April- October fiscal deficit was well ahead of the five-year moving average of 64.1%. Indias economy slowed down further and grew 6.9% in July-September, the slowest in over two years mainly to a contraction in mining and a steep decline in manufacturing growth. Eight infrastructure sectors coal, crude oil, steel, petroleum products, natural gas, fertilizers, electricity and cement virtually came to a halt in October 2011, a situation seen only six years ago. These industries grew a mere 0.1% in the month as compared to 7.2% in the same month last year. Indias headline inflation as measured by WPI for October came slightly higher at 9.73% compared with 9.72% for the previous month, marginally above market expectations of 9.65%. Primary articles inflation declined to 11.40% (Y-o-Y) from 11.84% in the previous month due to sharp fall in non food prices, fuel & power inflation though climbed to 14.79% (Y-o-Y) from 14.09% in September. Manufacturing continues to remain a concern with at it stood at 7.66% (Y-o-Y) against 7.69% in September. Core Inflation (non-food manufacturing) that RBI closely monitors remained unchanged at 7.63% from 7.62% in September and continues to remain well above RBIS comfort level. The domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario would play a major role in shaping the inflation path ahead. As per RBIs guidance for the inflation it should certainly decline from the present level of around 10% by the end of March 2012 to around 7%. The INR continues its weak run in November as it moved in the 48.69-52.48 range. There was an overpowering demand for the USD as the Euro zone crisis turned traders towards risk free assets. The RBI has a challenge in getting inflation down from the current levels. Clearly the decline in the rupee will lead to a higher inflation in the short term. Therefore, any easing in monetary policy by the RBI is well delayed into possibly late first quarter of 2012, possibly early second quarter, but certainly not in the near term. There is a shortage of liquidity, and with year end, and advance tax payments, we expect the liquidity to remain tight. Systemic liquidity stands in the negative territory (LAF was Rs. 77,850cr. as on Nov 30, 2011). In a move which should be supportive of bonds, RBI announced INR 100 billion of bond buybacks through OMOs (Conducted on Nov 24th). This amount still is unlikely to inject liquidity in the banking system for it to be net surplus (Banks are borrowing INR 1 trillion from RBI under the Liquidity Adjustment Facility). Also RBI announced increase in debt FII limits (for foreign investors to buy INR denominated bonds) by USD 5bn equivalent for both government and corporate bonds (total USD 10bn).

DEBT OUTLOOK
Both these moves should be supportive of government bonds, and expect the bond yields to ease a bit. Yields on Indian government 10-year notes fell 14 basis points last month, the most since February, to 8.74 percent. We reiterate our view that we expect the yield curve to steepen bullishly (short end rates falling faster than long rates) over the next 3 6 months. We believe that Bond yields are unlikely to soften much from current levels in the immediate term. With dominant concern shifting to increasing primary supply, we expect yields to remain under pressure. Benchmark bond may continue to trade in the region of 8.75% 9%. Moreover, since RBI is at the end of tightening cycle in terms of policy rates the additional borrowing by the government in second half will suffice to check any downside in yields. We suggest short term funds with low average maturity and high carry in the portfolio. Investors with higher risk appetite can allocated a part of their portfolio in dynamic bond funds.

Rupesh Nagda Head Investments & Products Alchemy Capital Management Pvt. Ltd

PMS PRODUCT PERFORMANCE

Alchemy High Growth

Bright Prospects for a Bright Future
Investment Strategy: The strategy aims to generate long-term returns by investing in equities across
market capitalizations, but with a strong mid-cap bias.

Fund Manager: Mr. Chandraprakash Padiyar is a portfolio manager with over 10 years of research and

investing experience. He is an MBA and CFA by qualification. He started his career in equity research and analysis at UTI Mutual Fund and later graduated to portfolio manager, managing assets across various equity schemes totaling Rs. 2,500 crores. He has been a portfolio manager with Alchemy since April 2007.

Strategy at a Glance

Category: Equity Diversified Fund Style: Multi-cap Growth Type: Open Ended Launch Date: 08 May, 2002 Benchmark: BSE 500 Min. investment: Rs. 50 lacs Portfolio Action: November 2011 turned out to be a weak month for equity markets post a very strong October 2011. BSE 500 corrected by 9.6% during the month. FIIs sold net $960 mn worth of stocks whereas MFs bought net $150 mn. Concerns on stability of the Euro region continued to be the top topic for debate and had a large bearing on global asset markets.
Indian GDP growth for Q2FY12 has slowed down further to 6.9%. We have been highlighting our views on growth getting impacted on account of high interest rates and delays in decision making on the part of the government on various sectors like land acquisition, mining etc. We expect growth to continue to be lower at around 7% over the next 12-24 months. The silver lining in slower growth is that going ahead inflation is likely to be lower and hence RBI can, if required, reverse the interest rate cycle to protect growth not falling off a cliff. A good monsoon in the current year will also provide a strong impetus to agriculture growth and contribute in terms of lower food inflation. RBI has started with infusing liquidity in the system through open market operations and till date have announced OMOs worth 30,000 cr. Also, government has increased the FII limit for Government securities market and corporate bond market by $5bn each. A total of $10 bn of fresh inflow is likely to flow in the country through our debt markets on the back of this move over the next 2-3 months. We expect Indian Equity markets to continue to trade in a range in the near term, however, as and when interest rate cycle turns, markets are likely to start discounting better growth in earnings in future and are likely to trade higher from there on. We expect that with GDP growth slowing down significantly over the next 3-6 months, RBI is likely to evaluate rate cycle reversal some time in FY13 which augurs well for our markets. At current levels, markets (Nifty) are trading at reasonable valuations of 13-14 times FY12 earnings. The Mid Cap segment of the market is trading at attractive valuations with discount to Nifty widening to >250 bps. We have built a portfolio today which we believe can deliver an earnings growth of 20-25% over the next 2 years and where risk reward is favourable. We have built significant positions in select companies in the telecom sector (free cash flows from FY13 onwards, favourable government policy on M&A in the sector expected and attractive valuations), private sector banks & NBFCs (rate cycle reversal benefits, lower NPA expectations, growth momentum to be better), Pharmaceuticals, Consumer sector, Agricultural sector and IT. Overall, we are optimistic on the risk reward for equity investment on a long term basis.

PMS PRODUCT PERFORMANCE

Alchemy High Growth

Bright Prospects for a Bright Future

Alchemy High Growth 160.00

BSE 500 CAGR: 27.8%

120.00

80.00

CAGR: 18.5%

40.00

0.00 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11

* CAGR as on 30 Nov, 2011

Alchemy High Growth BSE 500

160.0%

134.9% 101.1%

120.0%

96.5% 77.9%

90.2% 63.0% 36.6% 40.8% 38.9% 17.3% 16.4% 58.7%

80.0%

40.0% 4.8% 0.0%

-2.4%

26.1%

17.5%

-16.3% -40.0% -56.1% -80.0% CY 2002* CY 2003 CY 2004 CY 2005 CY 2006 CY 2007 CY 2008 CY 2009 CY 2010 YTD 2011 -58.1%

-23.2%

* From inception of product (08 May, 2002)

Note: The above returns are for a model portfolio; the investors actual portfolio may differ.

PMS PRODUCT PERFORMANCE

Alchemy High Growth

Bright Prospects for a Bright Future
TOP-10 HOLDINGS TOP SECTORS (%)

SCRIP
BAJAJ AUTO FINANCE LTD TITAN INDS GODREJ CONS. PROD LTD ORACLE FINANCIAL SERVICES SOFTWARE IDEA CELLULAR LTD PRAJ INDUSTRIES LTD STRIDES ARCOLAB ICICI BANK LTD BATA INDIA LTD FEDERAL BANK LTD RATIO ANALYSIS

Holding (%)
6.6 5.3 5.0 4.5 4.0 4.0 3.9 3.8 3.6 3.4 MARKET CAP ALLOCATION
> 5000 cr 500 cr - 5000 cr < 500 cr Cash & Equivalents

Materials

4.5%

Information Technology Telecom Healthcare Consumer Staples Industrial

Financials Consumer Discretionary

4.7% 7.1%
7.3% 9.9% 12.3% 17.7%

20.5%

Parameter

Alchemy High Growth (since inception)

Benchmark (since inception)

2.5%

15.7%

35.8%

Std. Dev.

24.0%

26.0%

Sharpe

0.79

0.37
46.0%

Beta As on 30 Nov, 2011

0.77

PMS PRODUCT PERFORMANCE

Alchemy Leaders
Quest for the Best
Investment Strategy: The strategy aims to generate long-term returns by investing in large-cap
equities.

Fund Manager: Mr. Chandraprakash Padiyar is a portfolio manager with over 10 years of research and

investing experience. He is an MBA and CFA by qualification. He started his career in equity research and analysis at UTI Mutual Fund and later graduated to portfolio manager, managing assets across various equity schemes totaling Rs2,500 crores. He has been a portfolio manager with Alchemy since April 2007.

Strategy at a Glance

Category: Equity Diversified Fund Style: Large-cap Growth Type: Open Ended Launch Date: 21 Dec, 2006 Benchmark: S&P CNX Nifty Min. investment: Rs50 lacs Portfolio Action: November 2011 turned out to be a weak month for equity markets post a very strong October 2011. Nifty corrected by 9.3% during the month. FIIs sold net $960 mn worth of stocks whereas MFs bought net $150 mn. Concerns on stability of the Euro region continued to be the top topic for debate and had a large bearing on global asset markets.
Indian GDP growth for Q2FY12 has slowed down further to 6.9%. We have been highlighting our views on growth getting impacted on account of high interest rates and delays in decision making on the part of the government on various sectors like land acquisition, mining etc. We expect growth to continue to be lower at around 7% over the next 12-24 months. The silver lining in slower growth is that going ahead inflation is likely to be lower and hence RBI can, if required, reverse the interest rate cycle to protect growth not falling off a cliff. A good monsoon in the current year will also provide a strong impetus to agriculture growth and contribute in terms of lower food inflation. RBI has started with infusing liquidity in the system through open market operations and till date have announced OMOs worth 30,000 cr. Also, government has increased the FII limit for Government securities market and corporate bond market by $5bn each. A total of $10 bn of fresh inflow is likely to flow in the country through our debt markets on the back of this move over the next 2-3 months. We expect Indian Equity markets to continue to trade in a range in the near term, however, as and when interest rate cycle turns, markets are likely to start discounting better growth in earnings in future and are likely to trade higher from there on. We expect that with GDP growth slowing down significantly over the next 3-6 months, RBI is likely to evaluate rate cycle reversal some time in FY13 which augurs well for our markets. At current levels, markets are trading at reasonable valuations of 13-14 times FY12 earnings. We have built a portfolio today which we believe can deliver an earnings growth of 15-20% over the next 2 years and where risk reward is favourable. We have built significant positions in select companies in the telecom sector (free cash flows from FY13 onwards, favourable government policy on M&A in the sector expected and attractive valuations), private sector banks (rate cycle reversal benefits, lower NPA expectations, growth momentum to be better), Pharmaceuticals, Consumer sector, Agricultural sector and IT. Overall, we are optimistic on the risk reward for equity investment on a long term basis.

PMS PRODUCT PERFORMANCE

Alchemy Leaders
Quest for the Best

Alchemy Leaders 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09

Nifty

CAGR: 6.2%

CAGR: 4.8%

Dec-09

Jun-10

Dec-10

Jun-11

* CAGR as on 30 Nov, 2011

Alchemy Leaders 76.9%

Nifty 75.8%

80.0%
60.0% 40.0% 20.0% 0.0% -20.0% 2.9% 3.5%

63.6% 54.8%

15.6% 17.9%

-19.6% -21.2% -51.3% -51.8% CY 2006* CY 2007 CY 2008 CY 2009 CY 2010 YTD 2011

-40.0%
-60.0%

* From inception of product (21 December, 2006)

Note: The above returns are for a model portfolio; the investors actual portfolio may differ.

PMS PRODUCT PERFORMANCE

Alchemy Leaders
Quest for the Best
TOP-10 HOLDINGS
SCRIP Holding (%)

TOP SECTORS (%)

IDEA CELLULAR LTD GODREJ CONS. PROD LTD ORACLE FINANCIAL SERVICES SOFTWARE BHARTI AIRTEL LIMITED DIVIS LABORATORIES LTD ICICI BANK LTD DISH TV INDIA LIMITED HDFC BANK LTD FEDERAL BANK LTD TITAN INDS RATIO ANALYSIS

6.7 5.8 5.7 5.3 5.2 5.1 5.0 4.8 4.7 4.7

Materials Healthcare Energy

2.6% 5.2% 7.2% 8.5% 11.2% 12.0% 17.5%

Information Technology Consumer Staples

Telecom Consumer Discretionary Financials

19.4%

MARKET CAP ALLOCATION

> 5000 cr 500 cr - 5000 cr Cash & Equivalents

Parameter

Alchemy Leaders (since inception)

Benchmark (since inception)

14.5%

Std. Dev.

21.4%

29.8%

14.7%

Sharpe

-0.12

-0.14
70.8%

Beta As on 30 Nov, 2011

0.63

WEALTH MANAGEMENT
Wealth Insight The rallying equity markets halted in early November much to the news flow from the Euro zone, which witnessed the change in leadership of two countries i.e. Greece & Italy, to drive the austerity measures and rescue the zone from witnessing sovereign defaults. The developments worldwide are expected to continually have an impact on the Indian markets. India once again led the global downfall with the benchmark BSE Sensex shedding close to 1350 points with a loss of about -7.76% in the month of November amidst the worries and news flow from the global economies as well as some disappointing domestic numbers. This was in sharp contrast to the market performance in previous month. The market still continues to track global events and remains volatile. Domestic macro situation continues to reel under sticky inflation and slowing growth momentum with much more visible impact. Corporate profitability came under pressure due to previous increase in interest rates, raw material costs and wages evident from the Q2 results. There have been concerns about the political situation where policy impasse and a series of scams and scandals have taken their toll on business confidence, infrastructure spending and capital flows. The domestic data hasnt been to cheer the investors either. The government has run a fiscal deficit of 74.4% of the full-year estimates in the first seven months of the current year, almost confirming it will miss the target of 4.6%. The April- October fiscal deficit was well ahead of the five-year moving average of 64.1%. Indias economy slowed down further and grew 6.9% in July-September, the slowest in over two years mainly to a contraction in mining and a steep decline in manufacturing growth. Eight infrastructure sectors coal, crude oil, steel, petroleum products, natural gas, fertilizers, electricity and cement virtually came to a halt in October 2011, a situation seen only six years ago. These industries grew a mere 0.1% in the month as compared to 7.2% in the same month last year. Indias headline inflation as measured by WPI for October came slightly higher at 9.73% compared with 9.72% for the previous month, marginally above market expectations of 9.65%. Primary articles inflation declined to 11.40% (Y-o-Y) from 11.84% in the previous month due to sharp fall in non food prices, fuel & power inflation though climbed to 14.79% (Y-o-Y) from 14.09% in September. Manufacturing continues to remain a concern with at it stood at 7.66% (Y-o-Y) against 7.69% in September. Core Inflation (non-food manufacturing) that RBI closely monitors remained unchanged at 7.63% from 7.62% in September and continues to remain well above RBIS comfort level. Even with the visible moderation in growth, inflation has persisted, reassuringly, there is some comfort coming from de-seasonalised sequential quarterly WPI data which suggest that inflation momentum has turned down. The domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario would play a major role in shaping the inflation path ahead. As per RBIs guidance for the inflation it should certainly decline from the present level of around 10% by the end of March 2012 to around 7%. We believe that with the sharp correction seen in the markets, a lot of the India has already got priced in. The risk-reward is definitely becoming favorable for being long on Indian equities. We are beginning to see the sell-side finally downgrade growth estimates for the Sensex for FY12 (from +20% to 10%-15%) and FY13 (after the poor June quarter reporting season where we saw EBITDA margins contract across sectors) to more reasonable levels. Even with the visible moderation in growth, inflation has persisted, reassuringly, there is some comfort coming from de-seasonalised sequential quarterly WPI data which suggest that inflation momentum has turned down.

WEALTH MANAGEMENT
The domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario would play a major role in shaping the inflation path ahead. As per RBIs guidance for the inflation it should certainly decline from the present level of around 10% by the end of March 2012 to around 7%. We also think that the RBI as stated is near to the end of its rate hike cycle. We are also beginning to see the government move ahead on the policy front with couple of bill lined up for approval during winter session of parliament. The cabinet decided allows 51% FDI in the multi-brand retail sector and decided to raise the cap on FDI in single-brand retailing to 100% from 51%. Government believes opening up of FDI in multi-brand retail trade and further liberalization of single-brand retail trade will facilitate greater FDI inflows besides additional and quality employment. From Valuation prospective we are trading at fair valuation. Looking at macro headwinds we feels markets would trade in narrow range in coming times. We see limited downside from here for the narrow market given the macro headwinds and downside risk to earnings. In the debt market, in an unexpected move saw China slashing its reserve requirement for the banks first time in last three years. US Federal Reserve, European central bank, Bank of Canada, Bank of England, Bank of Japan and Swiss national bank coordinated with each other to offer cheaper swap lines, where local currencies are exchanged for dollar with the US Fed to ease the dollar crunch on global front. In India owing to shortage of liquidity, and with year end, and advance tax payments, we expect the liquidity to remain tight. Systemic liquidity stands in the negative territory (LAF was Rs. 77,850cr. as on Nov 31, 2011). In a move which should be supportive of bonds, RBI announced INR 100 billion of bond buybacks through OMOs (Conducted on Nov 24th). This amount still is unlikely to inject liquidity in the banking system for it to be net surplus (Banks are borrowing INR 1 trillion from RBI under the Liquidity Adjustment Facility). Also RBI announced increase in debt FII limits (for foreign investors to buy INR denominated bonds) by USD 5bn equivalent for both government and corporate bonds (total USD 10bn). Both these moves should be supportive of government bonds, and expect the bond yields to ease a bit. Yields on Indian government 10-year notes fell 14 basis points last month, the most since February, to 8.74 percent.

The INR continues its weak run in November as it moved in the 48.69-52.48 range. There was an overpowering demand for the USD as the Euro zone crisis turned traders towards risk free assets. The RBI has a challenge in getting inflation down from the current levels. Clearly the decline in the rupee will lead to a higher inflation in the short term. Therefore, any easing in monetary policy by the RBI is well delayed into possibly late first quarter of 2012, possibly early second quarter, but certainly not in the near term.
We reiterate our view that we expect the yield curve to steepen bullishly (short end rates falling faster than long rates) over the next 3 6 months. We believe that Bond yields are unlikely to soften much from current levels in the immediate term. With dominant concern shifting to increasing primary supply, we expect yields to remain under pressure. Benchmark bond may continue to trade in the region of 8.75% 9%. Moreover, since RBI is at the end of tightening cycle in terms of policy rates the additional borrowing by the government in second half will suffice to check any downside in yields. The MCX Gold price closed at Rs 28841 as on 30th November 2011 posting 6.1% absolute returns. On YTD basis gold continue to remain strong and had surged up by around 39.67% and during the same period the Indias equity market large cap index S & P Nifty has posted a negative return of -21.2%. Major reason for such a huge appreciation is down grade of US credit rating from AAA to AA+.

WEALTH MANAGEMENT
Gold prices continued to surge mainly due to the strong buying in the festive season with the wedding season ahead in 2011 apart from the depreciating rupee in the month of November. We believe that owing to the challenging global macroeconomic environment, looming sovereign debt crisis in Europe, high inflation led by crude prices and weakening of major global currencies; the long term outlook for gold looks attractive. Earlier Mexico bought 93.3 tonnes of gold in February and March, according to the central bank, in a haul valued at $4.5bn at current prices and equivalent to 3.5 per cent of annual mined output. China, Russia and India have acquired large amounts of gold in recent years, while Thailand, Sri Lanka and Bolivia have made smaller purchases. We believe that gold is going to be firm and post new highs in coming times. We continue to focus and monitor four things at our end to judge the interest rate scenario in coming times. First set of numbers being the GDP growth numbers, secondly the general demand in the economy, third Crude prices and fiscal deficit number and lastly inflation. If growth tempers with the result of fall in demand, inflation would automatically come down, as hinted by RBI it should ease to 7% by March 2012. Henceforth we expect interest rates to start easing out from to remain elevated for next couple of months before showing signs of decline. Key risks that we foresee for Indian markets going forward are continued High inflation, rise in crude prices, high interest rates, tight liquidity condition and delay in implementing reform process due to wide scale corruption and political instability. High inflation continues to keep the interest rates at elevated level. Thus has already started impacting the growth momentum in the economy and hence affect the corporate profitability. In short we believe that asset allocation should consider cautious call on equities. Debt seems favourable as the carry yields are very high. Gold outlook is positive to maintain some allocation into it. Moving forward from previous month where we altered the asset allocation, we continue to promulgate the same distribution. For conservative and moderate allocation towards debt had been increased by 10% and reduced the allocation in equity by 10%. We continue believe 2011 will be the year full of surprises. Markets, be it equity, fixed income or commodities tends to be volatile and keep throwing opportunities with equal risks. Prudent investment strategy is to follow asset allocation process. We are of firm belief that one can ride any market crisis if he religiously follows the asset allocation while planning his or her investments. Based on our understanding of different asset classes we suggest following asset allocation for different profiles:
Asset Class Debt Equity Gold Total Conservative Moderate Aggressive 80 50 20 10 40 70 10 10 10 100 100 100

Asset Class Conservative Moderate Aggressive FMPs 30 20 0 Short term bond strategy 30 20 10 Bond funds with accrual strategy 10 10 10 Gilts 0 0 0 Hybrid Debt 10 0 0 Gold 10 10 10 Large cap equity fund 5 20 20 Diversified fund 5 20 30 Mid cap & small cap funds 0 0 20 Themetic/Sectorial fund 0 0 0 Total 100 100 100

WEALTH MANAGEMENT
Asset Allocation strategy for Conservative profile: The objective is to conserve the capital along with growth at optimal returns i.e. better then bank deposit. We recommend an asset mix of 10% in Equities, 10% in Gold and 80% in Debt. Equity allocation should be strictly in large cap funds and diversified funds with better risk management approach. The equity allocation should be staggered over six months to ride the volatility. Debt allocation should be in high carry portfolios and Fixed maturity portfolios. We expect yields to be range bound between 8% to 8.50% and short term yield would be at elevated levels due to tight liquidity. We expect short term yields to fall from these levels over next three to six months as RBI is near the end of tightening cycle in terms of policy rates. High inflation could be a risk to interest rates. We have not allocated to long bonds as we believe that additional borrowings by government would keep putting pressure on long dated securities. So we have allocated major portion of Debt in FMPs and short term debt funds. We have allocated 10% in Gold as gold is the best hedge against inflation and considered as safe haven in turbulent times. Asset allocation strategy for Moderate profile: The objective of Moderate portfolio is to generate optimal rate of return with medium risk. We recommend an asset mix of 40% in Equity, 10% in Gold and 50% in Debt. Equity allocation should be diversified in products carrying less risk and it is prudent to stagger over next six months. We have allocated 20% to large cap equity funds and 20% in diversify equity funds. Debt allocation should be in high carry portfolios and Fixed maturity portfolios. We expect yields to be range bound between 8% to 8.50% and short term yield would be at elevated levels due to tight liquidity. We expect short term yields to fall from these levels over next three to six months as RBI is near the end of tightening cycle in terms of policy rates. High inflation could be a risk to interest rates. We have not allocated to long bonds as we believe that additional borrowings by government would keep putting pressure on long dated securities. So we have allocated major portion of Debt in FMPs and short term debt funds. We have allocated 10% in Gold as gold is the best hedge against inflation and considered as safe haven in turbulent times. Asset Allocation strategy for Aggressive profile: Our research suggests that equities are poised for better growth in medium to long term. Markets are fairly valued at this point of time. We recommend asset split of 70% in Equities, 10% in Gold and 20% in Debt. Under equities, allocation is properly diversified between different styles of investments and themes to bring in more consistency in the portfolio return. We expect mid and small caps would post better returns going forward as the valuation Gap between CNX Midcap index and Nifty has widen to 450bps, so we have allocated 20% in pure mid and small cap portfolios, 30% in diversified & value strategy and 20% in large cap portfolio. We recommend investments in equities to be staggered over next six months to ride the market volatility. Debt allocation should be through FMPs and short term debt. We have allocated 10% in Gold as gold is the best hedge against inflation and considered as safe haven in turbulent times.
Reference Model Portfolio for 100% Equity Profile:
Scheme Returns (%) Aggressive 100% equity portfolio DSP BlackRock Small and Midcap Fund - Growth HDFC Equity Fund - Growth HDFC Top 200 - Growth ICICI Prudential Discovery Fund - Growth Mirae Asset India Opportunities Fund - Reg - Growth Tata Equity P/E Fund - Growth Templeton India Growth Fund - Growth UTI Master Value Fund - Growth Total S&P Nifty CNX Midcap 10% 15% 15% 10% 15% 15% 10% 10% 100% 1 month 3 months 6 Months 1 Year -9.87 -9.01 -8.88 -6.13 -7.05 -7.08 -7.69 -9.29 -9.28 -8.62 -8.50 -6.44 -4.74 -4.37 -3.11 -4.17 -5.95 -7.14 -3.38 -8.96 -12.35 -16.12 -13.45 -14.57 -10.92 -12.38 -16.46 -12.35 -12.41 -16.91 -18.58 -23.01 -20.46 -17.52 -15.29 -18.03 -23.69 -18.54 -19.37 -26.30 3 Years 32.78 28.42 25.38 35.93 30.33 25.69 22.70 31.90 17.47 22.34 Portfolio Returns (%) 5 Years 1 month 3 months 6 Months 1 Year 7.96 10.05 10.56 9.54 -10.56 8.61 8.95 4.16 5.52 -0.99 -1.35 -1.33 -0.61 -1.06 -1.06 -0.77 -0.93 -8.10 -9.28 -8.62 -0.85 -0.97 -0.71 -0.44 -0.47 -0.63 -0.60 -0.71 -5.37 -3.38 -8.96 -1.24 -2.42 -2.02 -1.46 -1.64 -1.86 -1.65 -1.24 -13.50 -12.41 -16.91 -1.86 -3.45 -3.07 -1.75 -2.29 -2.70 -2.37 -1.85 -19.35 -19.37 -26.30 3 Years 3.28 4.26 3.81 3.59 4.55 3.85 2.27 3.19 28.80 17.47 22.34 5 Years 7.96 1.51 1.58 0.95 -1.58 0.86 0.90 -4.16 5.52

As on 30 Nov, 2011 Source: MFI ICRA

RECOMMENDED FUNDS
Recommended Funds Equity Large cap Birla Sun Life Frontline Equity Fund - Plan A - Growth DSP BlackRock Top 100 Equity Fund - Growth Fidelity India Growth Fund - Growth HDFC Top 200 - Growth ICICI Prudential Focused Bluechip Equity Fund - Ret - Growth Principal Large Cap Fund - Growth UTI Opportunities Fund - Growth S&P Nifty Equity Diversified DSP BlackRock Equity Fund - Growth Fidelity Equity Fund - Growth HDFC Equity Fund - Growth ICICI Prudential Dynamic Plan - Growth Mirae Asset India Opportunities Fund - Reg - Growth Reliance Equity Opportunities Fund - Growth S&P Nifty Equity Absolute Return Strategy Edelweiss Absolute Return Fund - Growth Equity Mid cap & Small cap DSP BlackRock Small and Midcap Fund - Growth HDFC Mid-Cap Opportunities Fund - Growth UTI Master Value Fund - Growth CNX Midcap Equity Value funds ICICI Prudential Discovery Fund - Growth Tata Equity P/E Fund - Growth Templeton India Growth Fund - Growth S&P Nifty Equity Thematic funds DSP BlackRock India Tiger Fund - Growth S&P Nifty Equity Sector funds Reliance Banking Fund - Growth Reliance Pharma Fund - Growth Equity Index fund Franklin India Index Fund - NSE Nifty Plan - Growth UTI Nifty Fund - Growth S&P Nifty Balance funds HDFC Prudence Fund - Growth Tata Balanced Fund - Growth Crisil Balanced Fund Index Returns (%) Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 5 3 -5 years -7.81 -3.61 -11.54 Level 5 3 -5 years -7.46 -3.92 -10.29 Level 5 3 -5 years -8.08 -3.52 -9.39 Level 5 3 -5 years -8.88 -4.74 -13.45 Level 5 3 -5 years -7.08 -1.06 -7.65 Level 5 3 -5 years -7.40 -4.99 -13.87 Level 5 3 -5 years -5.35 -1.79 -4.68 -9.28 -3.38 -12.41 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 5 3 -5 years -8.14 -6.42 -12.26 Level 5 3 -5 years -7.65 -3.47 -9.48 Level 5 3 -5 years -9.01 -6.44 -16.12 Level 5 3 -5 years -7.50 -2.95 -12.49 Level 5 3 -5 years -7.05 -3.11 -10.92 Level 5 3-5 years -8.60 -5.09 -10.55 -9.28 -3.38 -12.41 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 3 1-2 years -1.66 -1.49 -1.14 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 6 3 -5 years -9.87 -8.50 -12.35 Level 6 3 -5 years -6.44 -6.69 -9.29 Level 6 3 -5 years -9.29 -7.14 -12.35 -8.62 -8.96 -16.91 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 6 3 -5 years -6.13 -4.37 -14.57 Level 5 3 -5 years -7.08 -4.17 -12.38 Level 5 3 -5 years -7.69 -5.95 -16.46 -9.28 -3.38 -12.41 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 6 5 years -9.20 -8.30 -16.47 -9.28 -3.38 -12.41 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 8 5 years -11.23 -8.07 -18.81 Level 8 5 years -4.87 -2.46 -7.42 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 5 3 -5 years -9.23 -3.52 -12.06 Level 5 3 -5 years -9.36 -3.64 -12.38 -9.28 -3.38 -12.41 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 5 3 -5 years -6.82 -5.39 -9.12 Level 4 3 -5 years -5.06 -2.07 -5.71 -5.63 -1.33 -6.58 1 Year -18.39 -15.00 -16.56 -20.46 -12.61 -20.86 -9.40 -19.37 1 Year -17.16 -16.46 -23.01 -14.72 -15.29 -15.39 -19.37 1 Year -2.77 1 Year -18.58 -13.07 -18.54 -26.30 1 Year -17.52 -18.03 -23.69 -19.37 1 Year -28.30 -19.37 1 Year -30.13 -6.80 1 Year -19.07 -19.56 -19.37 1 Year -12.39 -9.56 -10.60 3 Years 22.26 20.97 26.63 25.38 27.99 26.55 28.39 17.47 3 Years 24.23 25.48 28.42 23.75 30.33 32.71 17.47 3 Years -3 Years 32.78 32.92 31.90 22.34 3 Years 35.93 25.69 22.70 17.47 3 Years 13.27 17.47 3 Years 27.56 40.53 3 Years 17.60 16.94 17.47 3 Years 28.08 22.88 14.21 5 Years 9.13 9.52 -10.56 -7.38 13.22 4.16 5 Years -9.14 10.05 7.76 -8.43 4.16 5 Years -5 Years 7.96 -8.95 5.52 5 Years 9.54 10.56 8.61 4.16 5 Years 2.38 4.16 5 Years 16.90 21.66 5 Years 4.02 3.66 4.16 5 Years 11.51 9.74 5.96

As on 30 Nov, 2011 Source: MFI ICRA

RECOMMENDED FUNDS
Recommended Funds MIP-Conservative Birla Sun Life MIP - Savings 5 - Growth UTI - MIS - Advantage Fund - Growth Crisil MIP Blended Index MIP-Aggressive HDFC MIP - LTP - Growth ICICI Prudential MIP 25 - Growth Reliance MIP - Growth Crisil MIP Blended Index Short term debt DWS Cash Opportunities Fund - Reg - Growth Pramerica Short Term Income Fund - Growth Religare Credit Opportunities Fund - Reg - Growth Templeton India Low Duration Fund - Growth Axis Short Term Fund - Ret - Growth DWS Short Maturity Fund - Growth HDFC Short Term Plan - Growth IDFC SSIF - MTP - Plan A - Growth Reliance Short Term Fund - Growth SBI Dynamic Bond Fund - Growth Templeton India STIP - Growth CRISIL Short-Term Bond Fund Index Income funds Birla Sun Life Dynamic Bond Fund - Ret - Growth Reliance RSF - Debt - Growth Crisil Composite Bond Fund Index Ultra Short Term Funds HDFC Cash Mgmt Fund - Treasury Advantage - Ret - Growth Pramerica Ultra Short Term Bond Fund - Growth Reliance Money Manager Fund - Retail - Growth Tata Floater Fund - Growth Crisil Liquid Fund Index Liquid Funds Birla Sun Life Cash Manager - Growth BNP Paribas Overnight Fund - Growth HDFC Cash Mgmt Fund - Savings Plan - Growth Crisil Liquid Fund Index Floating rate funds Birla Sun Life Floating Rate Fund - STP - Growth Reliance FRF - ST - Growth Crisil Liquid Fund Index Gilt funds Birla Sun Life G Sec Fund - LT - Growth ICICI Prudential GFTP - Growth UTI Gilt Advantage Fund - L T P - Growth Returns (%) Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 2 1 year+ 0.19 1.48 4.00 Level 3 1 year+ -1.77 -0.87 -0.63 -0.79 0.80 1.36 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 3 2 year+ -1.55 -0.76 -0.56 Level 3 2 year+ -1.42 0.46 0.68 Level 3 2 year+ -1.35 -0.87 -0.59 -0.79 0.80 1.36 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 1 3 - 6 months 9.49 8.96 9.15 Level 1 3 - 6 months 9.63 9.42 9.93 Level 1 3 - 6 months 9.54 8.96 9.06 Level 1 3 - 6 months 9.77 9.23 9.60 Level 2 6 - 12 months 8.19 7.44 8.97 Level 2 6 - 12 months 8.68 8.20 9.47 Level 2 6 - 12 months 9.84 7.77 9.23 Level 2 6 - 12 months 13.00 7.92 10.71 Level 2 6 - 12 months 11.12 7.43 8.67 Level 2 6 - 12 months 19.00 9.74 11.45 Level 2 6 - 12 months 9.06 8.67 9.58 7.55 7.10 8.74 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 2 1 year+ 9.68 7.05 10.05 Level 2 1 year+ 9.19 7.84 9.35 8.03 5.66 7.71 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 1 In days 8.69 8.28 8.46 Level 1 In days 9.32 9.34 9.40 Level 1 In days 9.11 8.61 8.73 Level 1 In days 9.59 9.10 9.18 7.71 7.96 7.96 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 0 In days 8.89 8.64 8.75 Level 0 In days 8.35 8.41 8.53 Level 0 In days 8.77 8.78 8.85 7.71 7.96 7.96 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 0 In days 8.73 8.74 8.90 Level 0 In days 8.74 8.57 9.15 7.71 7.96 7.96 Risk Level Suggested Horizon 1 Months 3 Months 6 Months Level 2 18 months 17.23 3.70 6.44 Level 2 18 months 8.79 6.49 6.93 Level 2 18 months 13.02 -0.33 5.84 1 Year 6.74 0.45 2.15 1 Year 0.08 1.28 0.14 2.15 1 Year 8.65 -8.43 9.82 8.80 8.38 7.87 8.34 7.56 10.47 8.54 7.37 1 Year 8.52 7.77 6.07 1 Year 8.47 9.32 8.68 9.11 8.03 1 Year 8.52 8.47 8.70 8.03 1 Year 8.78 8.95 8.03 1 Year 5.75 6.07 6.78 3 Years 6.73 9.86 7.70 3 Years 13.90 11.14 11.08 7.70 3 Years 6.72 ----9.09 9.05 9.70 8.73 6.09 9.64 7.23 3 Years 8.68 6.80 6.76 3 Years 6.49 -6.66 6.92 6.08 3 Years 6.31 6.61 6.56 6.08 3 Years 6.59 6.83 6.08 3 Years 12.36 7.29 3.56 5 Years 9.85 7.65 6.32 5 Years 9.51 6.63 9.47 6.32 5 Years -----8.45 8.78 8.63 8.65 3.51 9.07 7.18 5 Years 9.01 6.03 5.98 5 Years 7.25 --7.61 6.75 5 Years 7.06 6.74 7.34 6.75 5 Years 7.30 7.59 6.75 5 Years 8.37 8.14 6.63

For MIP (Conservative, Aggressive), returns for < 1 year: absolute, for >1 year: annualised. For Debt and Liquid schemes, returns for all periods are annualised.
As on 30 Nov, 2011 Source: MFI ICRA

DISCLAIMER
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Edited by: Rupesh Nagda (Ph: +91-22-66171785), Ambrish Jamodkar (Ph: +91-22-66171772) Alchemy Capital Management Pvt. Ltd., B-4, Amerchand Mansion, 16 Madame Cama Road, Mumbai 400 001. Ph: +91-22-66171700