Some thoughts on financial markets: …
Stocks, forex flows, dollar index and all that …
Rama Krishna Vadlamudi
MUMBAI
May 26th, 2009
HOPE FLOATS!
Optimism has been wafting through the financial markets in India after the perception of
a stable government at the centre has established itself firmly in the minds of general
public as well as market experts. Everybody is waxing eloquent about the youthful
leadership in the Congress. Though, there are usual Cassandras, like me, who are
shaking their heads in disbelief.
Now, it seems that the all-pervading feel-good factor is creating a good base for another
rally in the stock market even though they have rallied spectacularly in the last two
months and a half. Now there is a talk of indices going up another 30 to 40 per cent from
the current level of Sensex at around 13,900 (25.5.09). If the current optimism is
buttressed by policy action, one can not rule out the possibility of Sensex reaching a
level of 18,000 in the medium term.
Unless something dramatic happens in the world markets, the optimism may linger much
longer than anticipated. One needs to close follow the policy pronouncements from Delhi
to take stock of the situation now and then. As of now, the consensus view is that the
UPA government will give a big boost to the reform process. The next biggest event risk
could be the presentment of Union Budget before July 31st.
This dramatic turnaround in sentiment is fuelling a re-rating of all mid-caps, especially
which were beaten down in the recent bear market. Stocks in capital goods, construction
and real estate are going through the roof. Even banking stocks are doing well.
The consensus view is veering a little bit towards optimism as of now and equity
investments are likely to generate good returns in the short to medium term if not in the
long-term.
RUPEE APPRECIATION and FOREX FLOWS:
Rupee is appreciating against the US dollar after UPA’s victory. Marketmen are
expecting huge inflows in the form of FDI and FII into India. FII money has been lifting
sentiment in the stock markets already. Indian stock markets have received Rs 21,600
crore (or USD 4.4 billion) of FII money between March 1st and May 22nd of this year. This
is in sharp contrast to the total FII outflows of around USD 11.5 billion in 2008. Suddenly,
sentiment has turned extremely positive as far as inflows from FIIs and FDI are
concerned. It seems RBI is intervening in the forex markets in the last few days to stem
the rupee appreciation. Despite RBI’s intervention, rupee may continue its appreciation
in the short time, depending on the FII and FDI funds that are waiting to be invested in
India.
If the expected inflows turn out to be true, the rupee may touch 45-mark against the
dollar in the next three months subject to the degree of RBI’s intervention in the forex
markets.
US DOLLAR WEAKENS:
Moreover, US dollar itself is depreciating against other major currencies in the last nine
weeks after the US Fed in March 2009 had decided to undertake large-scale buying of
government debt as part of an extra USD 1,000-billion injection into the ailing US
economy. This was the first operation on such a scale since the 1960s. This move had
stunned the markets at that time. Since then, the dollar has declined by 8% and 14%
against the Euro and Pound respectively. The two-month old stock market rally in the
emerging markets has also caused some outflows from the US dollar to these emerging
markets causing the dollar to weaken further.
Last week, the Euro and Pound were quoting at 1.34 and 1.51 respectively against the
US dollar. As of now, they are quoting at around 1.40 and 1.59 showing an unusual rise
of 4% and 5% against the dollar in just one week.
US DOLLAR INDEX:
The US Dollar Index indicates the average value of the United States dollar against the
value of six major currencies, namely, Pound Sterling, Euro, Japanese yean, Canadian
dollar, Swedish krona and Swiss franc. If the index is higher it signifies the relative
strength of the dollar against these currencies and vice versa.
The US dollar index is hovering around 80 as of now (May 26th, 2009). Its recent peak
was 89.29 as on March 9th, 2009. This means, the US dollar index has fallen by more
than 10 per cent in the last two months and a half. The feeble dollar is said to have
positively impacted the prices of commodities, like, gold, crude oil and metals.
IMPACT OF RUPEE APPRECIATION:
The rising rupee against the dollar is not good news for export-oriented sectors, like, IT,
Textiles, leather and other sectors. Tourism and hotel sectors also may be impacted
adversely unless they go for rupee-denominated room rates. However, it would augur
well for companies in the import-heavy industries, like, capital goods, oil marketing and
refineries and metal sectors.
CRUDE OIL:
Crude oil is quoting at around USD 61 a barrel on the Nymex as of now. It has gone up
by more than 20 per cent in the last one month in line with the expectation of a global
economic recovery much earlier than anticipated previously.
BOND MARKET:
The signals from the Indian bond market are just opposite to the optimism that has
pervaded the stock and forex markets after UPA’s victory. The government bond prices
have fallen and the yields are creeping up. The yield on the 10-year benchmark paper
6.05% 2019 has moved up from 6.40% to 6.55% in the last one week indicating bond
market’s concern about large-scale government borrowing programme in the next four
months to bridge the shortfall in tax collections following the economic slowdown in the
last two quarters. What has exacerbated the fiscal situation is the increased government
expenditure in the last one year owing to some populist measures. But, several
economists, like, Bimal Jalan, former RBI Governor, have opined that the ballooning
fiscal deficit this year is not a big concern for the economy under the current global
financial crisis that has enveloped the entire world and caused a dip in world GDP and
sharp decline in world trade. But, such confident overtones have not persuaded the
traders in the Government bond market.
DELEVERAGING:
Real Estate stocks: Recently, DLF, Unitech and Indiabulls Real Estate have raised huge
money from the QIP placement/stake-sale in order to bring down their debt burden and
clean up their balance sheets. The promoters are exuding confidence that they would
cut the debt levels to manageable levels. Network 18 is also bringing out a rights issue
with a view to making the debt levels to almost zero. This confidence has now spread to
other real estate players and HDIL, Purvankara Projects and Parsvnath Developers are
expressing their intention to come out with QIP placements in order to cash in on the
current optimism.
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