Market Outlook-VRK100-11072011

Market Outlook

Rama Krishna Vadlamudi, HYDERABAD July 11, 2011

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When you thought the markets were poised for a breakdown, just the opposite happened. During the middle of June 2011, the sentiment on Indian equities was very weak and most of the market people expected the stock indices to go lower. But, in a matter of one week, the sentiment turned positive suddenly, following a couple of events. When I wrote the ‘Market Outlook’ almost a month ago, I suggested that market would climb down from 18,000 Sensex level to 17,000 levels. Against my expectation, the Sensex rebounded and closed at 18,858 last week.

During the first week of this month, equities staged a rebound led by inflows from Foreign Institutional Investors (FIIs) following the Government’s decision to hike prices of heavily-subsidized diesel, kerosene and LPG. Added to the positive sentiment were: the sharp decline in international crude oil prices; and the decision by the International Monetary Fund (IMF) and the European Central Bank (ECB) to give an aid of USD 170 billion (120 billion euro) to Greece to help it out of the sovereign debt crisis.

What investors ignored

Investors, rather traders, seemed to have ignored a variety of factors. The south-west monsoon seems to be weak with the India Meteorological Department (IMD) suggesting that rainfall so far is deficient in several met sub-divisions of the country. The IMD estimates that rainfall, during this kharif season, may be five per cent below the long-term average. Inflation is at elevated levels though food inflation seems to be on the bend. Food inflation is down to 7.6 per cent due to a high base effect of last year. The policy drift in India continues with the government not being able to go ahead with policy reforms.

Commodities

Commodities prices have come off their peaks in the last one month. After touching a low of $ 90 per barrel, the Nymex crude oil rebounded to 98-level before ending the week at $ 96 per barrel. The upheaval in Libya, Syria and other Middle East countries and the supply-demand gap are likely to drive crude oil prices to higher levels in the following months. Gold prices rose to $ 1,530 per ounce while silver ended the week at $ 36 per ounce. In Mumbai, gold was quoting at around Rs 22,000 per 10 gm and silver at Rs 54,200 per kg. World cotton and wheat prices have fallen 20 per cent off their recent peaks.

Global cues

The US unemployment rate rose unexpectedly in June 2011 from 9.1 per cent to 9.2 per cent. The US jobs data softened the commodities prices. The European Central Bank raised its benchmark interest rate from 1.25 per cent to 1.5 per cent for the second time this year. China raised its benchmark interest rates for the third time this year from 6.31 per cent to 6.56 per cent. Europe continues to be troubled with its sovereign debt crisis prompting Moody’s to cut Portugal’s credit rating by four notches to ‘junk’ status.

Amidst all the gloomy news, the Nikkei – Japanese benchmark stock index, crossed 10,000 last week. Interestingly, the Nikkei was at 10,000-level when tsunami hit Japan on March 11, 2011. It is expected that Japanese companies are recovering well from post-tsunami supply chain disruptions.

Foreign Flows

Foreign Institutional Investors (FIIs) have brought in USD 1.3 billion or Rs 5,700 crore in this month alone to the Indian stock markets. The total inflows from FIIs are at USD 2.7 billion or Rs 11,700 crore for this calendar year, as per SEBI data. The Indian stock prices are heavily influenced by FII flows.

As per Reserve Bank of India (RBI) data, foreign direct investment (FDI) in India has fallen by 62 per cent to $ 7.1 billion in 2010-11 from $ 18.8 billion in 2009-10. The steep fall is attributed to a variety of reasons, like, weak investment climate in India following the issues surrounding corruption which has dented country’s image among foreign investors, slow government decision making in business deals such as Vedanta Resources acquisition of Cairn India, and policy issues in government’s new exploration licensing policy (NELP).

India’s Exports and Imports

India’s exports have been growing rapidly in the last six months. Data from the commerce ministry shows that merchandise exports in June 2011 grew strongly at 46 per cent to $ 29 billion led by engineering, oil, gems & jewellery, and cotton yarn; while imports rose to $ 42 billion led by crude oil, precious metals, gems and machinery.

Current account deficit (CAD) for 2010-11 stood at $ 44.3 billion representing 2.6 per cent of India’s gross domestic product (GDP). This is much higher than the $ 38.4 billion deficit, 2.8 per cent of GDP, recorded in 2009-10.

Hauling over the coals

The draft mining bill proposed by the government spooked the stock price of Coal India. The bill proposed that Coal India should share 26 per cent of its net profit with the people affected by the project. The proposal will adversely affect the profits of Coal India in future. As a result, the stock price of Coal India nosedived by eight per cent on July 9th and closed at Rs 362 per share. The draft bill is likely to negatively impact others firms, like, NMDC and Sesa Goa, though the impact on these iron ore miners may be lesser compared to Coal India. A peculiar feature of Indian stock market, of late, has been that whenever the Government eyes a particular sector, the stocks in that particular sector are falling heavily. Markets, in general, do not like government intervention or control/regulation. Previously, the telecom sector was beaten down in a similar fashion.

Banking results

Banks were the first to announce their first quarter (April to June 2011) results heralding the start of results season, which opened on a positive note. HDFC, the country’s biggest housing company, clocked a 22 per cent rise (quarter on quarter) in net profit to Rs 1,176 crore boosted by a healthy loan growth of 22 per cent. HDFC says the demand for housing loans is strong despite rise in interest rates. Mid-sized private sector bank, IndusInd Bank has shown a good 52 per cent rise in net profit spurred by healthy growth in non-interest income and reduced interest costs.

In other developments, State Bank of India, India’s biggest lender, has raised its base rate and benchmark prime lending rate (BPLR) by 25 basis points (0.25 per cent) each to 9.5 per cent and 14.25 per cent respectively. SBI raised deposit rates also. Several banks, including ICICI Bank, IOB and Corporation Bank, have increased their lending rates in the last one month following a series of rate hikes by Reserve Bank of India.

Banking sector seems to be bogged down with large spike in bad loans prompting the finance minister, Pranab Mukherjee to direct the public sector banks to exercise due diligence in sanctioning of new loans and taking necessary steps for recovery in bad loans. It is no wonder that the stock market finds the stocks of public sector banks unattractive compared to private sector banks. Media reports suggest that SBI is planning to raise overseas debt of $ 5 billion as its biggest stakeholder, Government of India, seems to have no interest in investing in SBI through rights issue. The government is facing funds crunch as fiscal deficit’s target for the current financial year appears to be a difficult achievement.

Reserve Bank of India has imposed a penalty of Rs 25 lakh on Citibank for violating Know Your Customer (KYC) norms. Earlier this year, the foreign bank’s relationship manager reportedly duped several corporate customers. Due to the fraud, the bank’s customers had lost hundreds of crores of rupees.

Insurance

The regulator of insurance sector, Insurance Regulatory and Development Authority (IRDA) has imposed a penalty of Rs 70 lakh on SBI Life Insurance Company for violation of guidelines on group insurance policies.

Direct Cash Transfer

The Central Government is proposing to transfer subsidies, like, fertilizers, kerosene, cooking gas, and food grains worth thousands of crores, to the needy consumers directly. As per a task force, headed by Nandan Nilekani, the government will directly transfer cash to the consumers with the help of Aadhar-linked bank account. Aadhar is a unique identification number being given by the Unique Identification Authority of India (UIDAI), a government body. The UIDAI has already issued one crore Aadhar numbers in the last nine months.

What lies ahead?

The continuing uncertainties in Europe over sovereign debt will keep the prices of commodities under check. Other factors that are negative for commodities are the unexpected rise in unemployment rate in the US and rising interest rates in China and India, two of the top importers of raw materials. Even the ECB is going to raise its interest rates further in future. However, due to fundamental factors and the political unrest in the Middle East, crude oil is likely to go up.

The important stock indices around the world have rallied in the last one or two weeks. Last week, the Sensex closed at 18,858 and the Nifty at 5,661. Last week’s closing levels for world indices are: Dow Jones – 12,657; S&P 500 – 1,344; Nasdaq – 2,860; FTSE 100 – 5,991; Dax – 7,403; Hang Seng – 22,726; and Nikkei – 10,138.

In the short term, Indian stocks are looking to be in an uptrend led by strong FII inflows. The quarterly results also may give some positive surprises, especially from private sector banks, pharma, metals and consumption-oriented sectors. However, the long term trend for Indian stocks is hazy due to concerns on problems being faced by the central government, weak south-west monsoon, inflationary concerns and the possible decline in GDP going forward. Overall, these are interesting times for Indian stock markets.

Disclaimer: The author’s views are personal. The author has a vested interest in the stock markets. Before taking investment/trading decisions, consult your personal certified financial planner/adviser.

Market Outlook-VRK100-14062011

Market Outlook

In a state of flux

Rama Krishna Vadlamudi, HYDERABAD June 14, 2011


With Sensex hovering around 18,250 and Nifty well below 5,500 at the end of June 13, 2011, the Indian stock market looks to be in a lackluster phase. Investors seem to be worried about inflationary concerns, GDP growth deceleration, lack of governance, policy paralysis and political controversies surrounding anti-corruption stirs. However, investors are looking to a good monsoon, some solution to the anti-corruption agitations and some policy reforms. It remains to be seen whether investors’ expectations will be met. More rate hikes are expected from Reserve Bank of India in this fiscal year.

Inflation

Food inflation proves to be a nemesis for the Government with the latest figures showing a jump in food inflation to 9.01 per cent for the week ended May 28, 2011 compared to previous week’s 8.55 per cent. There is a big mismatch between supply of and demand for food items. Adding to the supply constraints is the rise in demand for food fuelled by rising income levels for the middle income groups in the urban as well as rural areas. Government seems to be having no right solution to control the food inflation in the immediate future. The Government seems to have passed on the buck to the RBI.

RBI rate hikes

Reserve Bank of India has been increasing policy interest rates for the past one year in order to contain inflationary expectations in the economy. It is expected to increase the benchmark repo rate by another 25 basis points or 0.25 per cent when it announces the mid-quarter review of its monetary policy on June 16th. The rate hikes are expected to continue for another two to three quarters. The markets have been bracing themselves for a further rate hike of 50-75 basis points in policy rates in this fiscal year. The banks may absorb some of the rate hikes themselves by compromising on their net interest margins and may pass on only a portion of the rate hikes to borrowers. The banks’ margins at present are at elevated levels giving them some cushion to absorb the rate hikes.

India’s GDP Growth

In the last four quarters, India’s GDP growth has come down substantially. After touching a high growth of 9.40 per cent (year-on-year) in the January-March 2010 quarter, the growth rate has come down progressively to 7.80 per cent in the January-March 2011 quarter. But the consumption theme seems to be in good shape despite the visible signs of a slowdown in the economy.

FII inflows

After pumping in $ 17.5 billion in 2009 and $ 29.4 billion in Indian equity markets, foreign institutional investors (FIIs) have slowed down their investments in Indian stock market during this calendar year. At $ 85 million of net inflows in this calendar year, their investments have been almost negligible. However, in the first two weeks of this month, they have put in $ 467 million or Rs 2,103 crore in the Indian equity market. The FII appetite for Indian stocks will depend on several global factors, including inflationary concerns in India. The US Federal Reserve (Fed) has been buying bonds worth $ 600 billion. The buying programme, known as Quantitative Easing 2 or QE 2, is coming to an end on June 30th. It is not yet clear whether the Fed will continue or stop its easy money policy after June 30th. If the Fed continues with another round of bond buying or QE 3, this easy money from the US will chase commodities and may push up commodities’ prices which may be negative for India in general.

Commodities

In the last one month, most of the commodities have come off their inflated levels. Silver has lost 30 per cent from record levels of close to $ 50 (per ounce) levels to $ 35.5 now. Crude oil on Nymex has come down to $ 97 (per barrel) levels with Brent crude hovering around $ 119. But gold prices remain steady at around $ 1,530 per ounce. Gold may continue its dream run for some more time as Europe is going deeper and deeper into a bigger mess following the sovereign crisis affecting Greece, Portugal, Ireland and Spain adversely. The latest news from Europe is that Standard and Poor’s has cut Greece’s rating making it the least creditworthy nation. The ratings agency cut Greece’s rating three notches from B to CCC and said the country was likely to default on its debts at least once by 2013. With such anxieties, most of the commodities may come down going forward but gold may remain at elevated levels because of its status as a ‘safe haven’ asset in times of economic woes.

India imports 80 per cent of its crude oil demand making it vulnerable to oil prices. High oil prices increase inflationary expectations in India which in turn adversely impacts India’s growth rate. High oil bill is likely to increase fiscal deficit as the Government is unable to pass on fully the rise in international oil prices to consumers. Diesel, LPG and Kerosene are heavily subsidized in India.

With problems persisting in the Middle East, low inventories and lack of spare capacity, crude oil prices may not come down significantly in the near future unless something dramatic happens in OPEC (the body of oil exporters).

The US dollar index (against a basket of six major currencies, like, Euro, Yen and Pound Sterling) is around 74.5. The US dollar has been weakening against these major currencies in the last six months. However, in the last one week, it has shown some resilience and the index has moved up from lows of 72.5 to the present 74.5. The dollar’s overall weakness is pushing up commodities’ prices to some extent.

Global factors

The Dow Jones is at around 11,950 well below 12,000 after reaching a high of 12,800 recently. The S & P 500 is hovering around 1,270 after reaching a high of 1,360. The US indices have been in a bullish range in the last six to eight months. However, the Asian indices have been mostly in bearish territory. The Shanghai Composite (China) is at a low level of 2,700. The Hang Seng (Hong Kong) index is at 22,500 and Nikkei 225 is at a weak level of 9,400. The FTSE 100 and DAX indices are much stronger at 5,770 and 7,080 respectively.

China is going through its own problems. The non performing assets of Chinese banks are expected to go up significantly in the next one year. The central bank there has been increasing interest rates to tackle inflation. China wants its growth rates to slow down a bit to avoid any hard landing. There are concerns of overinvestment and overcapacity in China’s manufacturing sector. Following the global financial crisis of 2007/2008, China had pumped in huge amounts into its infrastructure and manufacturing sector.

Summary

The Indian Government and the RBI have to tackle inflation both from the fiscal and monetary angles. Some economists have suggested that allowing Indian rupee to appreciate against the US dollar may help in containing inflation in India. The data from RBI indicates that it has not been intervening in the foreign exchange market. The Government and RBI have to take both immediate and long-term measures to tackle inflation head on. However, the Government seems to be in some sort of a gridlock embroiling itself in controversies about how to tackle corruption monster. The general impression is that the Government may not be able to push the economic reforms forward in such a situation. The disinvestment programme seems to be in a limbo. The markets have noticed this policy drift and have been expecting further slide in stock indices. Investors need to be cautious at this point of time. As such, it is not a bad idea to hold some cash and wait for a correction and start buying Indian stocks at Sensex levels of between 16,500 and 17,500.