Market Outlook
Rama Krishna Vadlamudi, HYDERABAD 12 August 2011
Stock markets are inherently volatile. But, they have been subjected to some extreme volatility since the beginning of August 2011. Various factors have contributed to these wild fluctuations. First, it was the controversy between the US president and the Congress about solving the debt deal. Afterwards, the global markets have fallen heavily following concerns about sovereign debt crisis spreading to other eurozone countries, like Italy and Spain. Even commodities have fallen sharply while gold prices are surging relentlessly. The final blow came when the Standard and Poor’s has downgraded the US long term debt rating by one notch from AAA to AA+ after the markets in the US closed on August 5th. Here is an analysis of the global markets with an emphasis on Indian markets between August 1st and August 12th.
To know all about the S&P’s US Debt Downgrade and Its Impact, just click:
http://ramakrishnavadlamudi.blogspot.com/2011/08/us-debt-downgrade-and-its-impact-vrk100.html
or,
http://www.scribd.com/doc/62314269
The news flow was too much for the financial markets to absorb. Investors are at a loss to understand what’s going on. They are reacting very wildly due to panic. There are some concerns in the currency markets also. Stock prices across the world, right from Dow Jones to Dax, Cac, Hang Seng and Nikkei, are all over the place. Countries, other than the US and in eurozone, are worried about the appreciation of their domestic currencies against the US dollar. Investors are selling their dollar assets and moving to other currencies, like, the Japanese Yen and the Swiss Franc on concerns about the bloating US government debt. Japan intervened in the foreign exchange markets on August 4th to prevent the appreciation of Yen against the US dollar. The Swiss National Bank, the country’s central bank, cut interest rates with a view to preventing the Swiss Franc from appreciating against the US dollar. The Bank lowered its target for the three-month Libor to as close to zero as possible from 0.25 per cent. Against the US dollar, the Swiss Franc rose up to 0.76 on August 2nd. Investors are having real concerns about the global slowdown in GDP.
Investors have been losing confidence in the stock markets in the last four years since the global financial crisis broke out in 2007. So far, Greece, Portugal and Ireland received bailouts for their debt woes. The only silver lining in Europe is Germany, whose economy remains strong till date. Commodities too have been sold off, except gold and silver. Gold prices are rising amidst the gloom. The price of gold has crossed the important level of $1,800 per ounce. On August 9, Nymex crude oil fell to $76 a barrel while Brent crude sunk to $100 a barrel in reacting to the US credit rating downgrade by S&P. However, by weekend oil prices recovered. US unemployment rate is down to 9.1 per cent in July 2011 from 9.2 per cent in June.
Various measures have been taken in the last few weeks to cool down the highly volatile markets. The US Fed has issued a statement stating that it would keep the interest rates near zero for the next two years. The European Central Bank (ECB) has promised to take more action to douse the fears about sovereign debt crisis spreading to other countries. France, Spain, Belgium and Italy have temporarily banned short selling in stock markets for 15 days. But these measures may not be sufficient to bring some sense to the financial markets. The extreme volatility will continue for some more time. The global markets have entered a new phase of uncertainty and investors have to brace themselves for such extreme situations.
In India, the benchmark Sensex had fallen 700 points intra-day and closed down 2.2 per cent or 387 points at 17,306 on August 5th. The selling continued next week with the Sensex hitting an intra-day low of 16,432 on August 9th after the markets absorbed the news of S&P downgrade of US credit rating. The Sensex closed at 16,840 on August 12th. The government authorities have tried to calm the markets during the last two weeks. Global factors like the sovereign debt crisis in the US and eurozone are compounding the domestic problems for Indian stock markets. India at present is plagued with high and stubborn inflation, slow policy reforms, milder corporate profits and problems associated with project implementation.
Important Data:
Indices Closing Commodities Closing
12-Aug-11 12-Aug-11
Dow Jones 11 269 Nymex Crude ($/barrel) 85
Nasdaq 2 508 Brent Crude ($/barrel) 108
S&P 500 1 179 Gold ($/ounce) 1 746
FTSE 100 5 320 Silver ($/ounce) 39
Dax 5 997
Nikkie 225 8 963 Currencies
Hang Seng 19 620 GBP-USD 1.63
Shanghai composite 2 594 EUR-USD 1.43
Sensex 30 16 840 USD-JPY 76.86
Nifty 50 5 073 USD-RMB 6.39
US dollar index 74.6 USD-INR 45.19
The US Debt Deal
The US lawmakers have reached an agreement to reduce the budget deficit and avert a debt default. According to the much-awaited deal between the US president and Congress, the ceiling for US borrowing will be raised by up to $2.4 trillion. Immediately the debt ceiling is raised by $400 billion and next by another $500 billion. The debt ceiling is the legal limit on the total amount of debt the US government can run up in order to pay its bills. (Before this deal the ceiling was $14.3 trillion.) In the meantime, the deal puts in place measures to cut the US deficit by at least $2.1 trillion over 10 years. From October 210, $917 billion worth of spending cuts kicks in.
Guidelines for investment by foreigners in Indian mutual funds
The Government of India has issued guidelines for investment by foreigners in Indian mutual funds. This was as part of the Union Budget announcement in February 2011. The salient features are:
--- Qualified Foreign Investors (QFIs) can now directly invest in Indian mutual funds, either debt or equity
--- QFIs are foreign pension funds, trusts and individuals – not registered with SEBI as foreign institutional investors (FIIs) or sub-accounts thereof
--- These guidelines for QFIs are separate from guidelines that are already in place for Foreign Institutional Investors (FIIs)
--- QFIs can invest up to $10 billion in equity schemes, while for debt mutual funds there will be an additional limit of $3 billion
--- There will be no limit for one investor or one scheme
--- QFIs will have to fulfil the know-your-customer norms
SEBI’s concept paper on Alternative Investment Funds (AIFs)
The Securities and Exchange Board of India has released a concept paper on proposed alternative investment fund regulation for public comments. The proposals are:
--- Registration is a must for AIFs
--- The entity must be a trust, a limited liability partnership or a company
--- The sponsor and fund manager shall have relevant experience
--- The AIFs are not to accept any funds from the public or retail through issue of prospectus or offer document
--- AIFs are private equity funds, private investment in public equity funds (PIPE), real estate investment trusts (REIT), venture capital funds and others
--- AIFs are privately pooled funds of institutional investors and high net worth individuals
News Notes
Royal Bank of Scotland reported loss of GBP 897 million in the second quarter (April-June 2011) due to Greek debt write-down. RBS made a provision of GBP 733 million for Greek government bonds.
The Economist says that Indian Rupee is undervalued by 53 per cent against the US dollar, as per the Big Mac Index-July 2011. Chinese currency Yuan is undervalued by 44 per cent, while Mexican and Russian currencies are undervalued by 33 and 34 per cent respectively. Brazil and Argentina are overvalued by 52 and 19 per cent respectively. The Big Mac index is developed by The Economist 25 years back and uses the price of McDonald’s burger in different countries to build the index.
The Prime Minister’s Economic Advisory Council (PMEAC) has asked the Indian Government to take active measures to improve investment climate and go ahead with unfinished economic reform agenda.
HSBC Holdings is cutting 30,000 jobs globally by 2013
HSBC Purchasing Managers Index (PMI) for India fell to 53.6 in July from 55.3 in June
Indian Government sought parliament’s approval for an additional Rs 34,724 crore expenditure for 2011-12, but the net outgo will be only Rs 9,000 crore
Cognizant has overtaken Wipro in June 2011 quarter, in terms of revenues, and become number three software exporter from India after TCS and Infosys
The stock price of BL Kashyap had fallen by 20 per cent on August 4th, after allegations surfaced that it resorted to evasion of provident fund dues to Employee Provident Fund Organsiation (EPFO). However, the company denied the allegation.
Reserve Bank of India has asked banks to obtain board resolutions from companies on their risk management policy before offering derivative products to companies
BEST bus service in Mumbai has completely replaced the old bus ticket boxes with electronic devices
The Government of India has announced a package of Rs 1,200 crore for the ailing Air India. However, Moody’s has cautioned that defaults by Air India may dent ratings of banks which have lent money to Air India. SBI, PNB, BOB, BOI, IDBI Bank, CBI and OBC are its large lenders.
State Bank of India raised its base rate by 50 bp to 10 per cent and its BPLR by 50 bp to 14.75 per cent while ICICI Bank raised its base rate and BPLR by 50 bp to 10 per cent and 18.75 per cent respectively
Mahindra Satyam Limited has announced the ‘winding down’ of its ADS (American Depository Shares) as it faces cancellation of its registration from SEC. The company’s shares were delisted from NYSE after a fraud by the promoter.
India’s indirect tax collections (customs duty, excise duty and service tax) have surged by 27 per cent to Rs 125,900 crore in Arpil-July 2011 against the same period last year
India’s direct tax collections fell by 8.1 per cent during April-July 2011 due to sharp jump in income tax refunds
The Government has given D Subbarao two-year extension till 2012 as the Governor of RBI
India’s exports grew by 82 per cent year-on-year to $29.3 billion in July 2011 driven by engineering, readymade garments, gems and jewellery and electronics
Index of Industrial Production (IIP) has grown up by 8.8 per cent in June 2011 year-on-year
National Stock Exchange (NSE) has decided to impose transaction charges on trades it is currency derivatives (futures and options) segment
BPLR-Benchmark Prime Lending Rate, NYSE-New York Stock Exchange, RBI-Reserve Bank of India, and SEBI-Securities and Exchange Board of India.
Disclaimer: The author’s views are personal. Investors need to consult their certified financial adviser before making any investment decisions.
Showing posts with label market outlook. Show all posts
Showing posts with label market outlook. Show all posts
Friday, 19 August 2011
Monday, 1 August 2011
Market Outlook-VRK100-01Aug2011
Market Outlook
Rama Krishna Vadlamudi, HYDERABAD 01 August 2011
In its latest review of the monetary policy, Reserve Bank of India has raised interest rates by 50 basis points against the consensus market estimate of 25 basis points. The reverse repo rate is increased to 7.0 per cent and the Marginal Standing Facility rate is hiked to 9.0 per cent. The unexpected 50-basis point hike has caught the stock and bond markets unawares and both the bond prices and stock prices have reacted negatively to the news. The corporate quarterly results continue to be mixed with several large- and mid-cap companies declaring their results. However, stock market has been punishing companies not only with poor performance but also with average performance. Public Sector Banks have been reporting a substantial jump in loan provisions due to rising non-performing assets.
RBI’s Monetary Policy-from baby steps to dinosaur steps
Following an aggressive move by Reserve Bank of India to increase its Repo rate by 50 basis points (under its liquidity adjustment facility or LAF) from 7.5 per cent to 8.0 per cent with effect from 26 July 2010, many banks like, Punjab National Bank, IDBI Bank, Oriental Bank of Commerce, Bank of India, DCB, Yes Bank, Corporation Bank, and Bank of Baroda, have raised their base rates by 40 basis points (100 basis points = one per cent) to 75 basis points. This is likely to push up interest rates of corporate loans, housing loans and auto loans.
RBI started raising interest rates since February 2010 gradually with 25 basis points raise each time which was described as ‘baby steps’ by RBI itself. But in a matter of just under three months, RBI has raised the Repo rate by 125 basis points signifying a change to a hawkish monetary policy stance. Clearly, RBI is worried about inflation and wants to control the stubborn inflation with stern measures.
First Quarter results
BHEL has recorded a 22 per cent rise in net profit for the first quarter aided by surge in other income. Its order book decreased to Rs 1,59,600 crore as on 30 June 2011.
RIL has posted an increase of 17 per cent in net profit aided by higher refining margins and other income. Sales growth for the quarter was 39 per cent.
Maruti Suzuki’s net profit has gone up by 18 per cent mainly due to higher other income, while sales were up by a mere 3 per cent.
ICICI Bank’s first quarter net profit surged by 30 per cent due to lesser loan provisions following improved asset quality.
Andhra Bank has recorded an increase of 21 per cent in net profit while that of Corporation Bank was a mere five per cent.
Syndicate Bank has recorded a 29-per cent jump in net profit due to surge in other income.
Grasim Industries reported a surge in net profit by over 30 per cent due to improved realizations from VSF and cement businesses.
Hindustan Unilever has posted good results with a rise in net profit of 18 per cent in the first quarter helped by volume growth, cut in advertisement cost and better product mix.
Punjab National Bank has shown a mere 3 per cent increase in net profit due to aggressive loan provisioning, though it managed to keep the net interest margin at 3.84%.
Bank of Baroda has posted decent numbers with a rise of 20% in net profit aided by interest income and fee income. Compared to other public sector banks, BOB’s loan book is of superior quality.
Canara Bank’s net profit was down by 28 per cent due to sharp rise in loan provisions and steep decline in treasury profits.
UltraTech Cement has reported a rise of 22% in its quarterly net profit.
ITC’s net profit has grown by 25 per cent while sales growth was 20 per cent.
Land Acquisition Bill
Government of India has come out with a draft Land Acquisition Bill which aims to provide better market values to land owners and to safeguard the livelihoods of the project-affected people. The salient features of the Bill are:
Government will not acquire land for private companies
In urban areas, land owners will get a minimum compensation of twice the market value
In rural areas, land owners will get a minimum compensation of six times the market value
A comprehensive rehabilitation package for land owners and the landless people affected by the project
The Bill will enjoy primacy over specialized legislations
Karnataka Lokayukta Report
Karnataka state ombudsman Mr Santosh Hege has named several firms, like, JSW Steel, Adani Enterprises, NMDC and Sesa Goa to be involved in illegal mining of iron ore in Bellary district of Karnataka between 2006 and 2010. The share prices of these companies have crashed after the report made public. The report estimated a loss, in taxes and royalty, of Rs 16,085 crore to the Karnataka Government. Following the report, the Supreme Court has suspended iron ore mining in Bellary district.
SEBI takeover code
On 29 July 2011, the Securities and Exchange Board of India (SEBI) has raised the threshold limit for open offer to 25 per cent from the existing 15 per cent. The capital market regulator, SEBI, has also decided to increase the open offer size to 26 per cent from the present 20 per cent. What this means is, from now onwards, companies in India can acquire shares worth up to 25 per cent of the target company’s paid-up capital without triggering any open offer. Once this 25 per cent threshold limit is reached, the acquiring company has to come out with an open offer to acquire another 26 per cent stake in the target company. SEBI has done away with the provision of non-compete fee. Till now, an acquirer was allowed to pay non-compete fee on takeover.
Debt pangs continue for the United States
The deadlock about raising the $14.3-trillion US debt level continues between the US president and the Congress. If no consensus is reached between the warring parties, the US Treasury Department will run out of money to pay its bills on August 2nd. The Republican Party seems to be blackmailing the US president about debt reduction. Rating agencies have threatened to downgrade US’ AAA-rating if the US lawmakers fail to reach an accord. However, rating agencies may still downgrade the US rating due to the fact that fiscal deficit is a long-term problem. The new managing director of the International Monetary Fund, Christine Lagarde, has warned that the US debt default/shock will have huge repercussions not only for the US but also for the rest of the world.
The huge US fiscal deficit is a big problem for other countries which hold their foreign exchange reserves in US government debt. Some of the biggest holders of the US debt are: (in USD billion) China - 1,160; Japan – 907; the UK – 333; and Brazil – 190. Other investors in the US government debt are banks, pension funds, sovereign wealth funds and individual investors.
The outlook
Sensex ended down at 18,197 for the last week and Nifty was down at 5,482. As I am writing this, the flash news is that an agreement has been reached in the US to reduce government debt. This will be a big relief for the markets around the world. However, in the medium to long term, markets will be guided by what is happening in the US and their decisions on the deficit-cut will be closely tracked. For over 10 years, the US has been living beyond its means. Between 2001 and 2011, the government debt has almost trebled from $ 5.8 trillion in 2001 to $ 14.3 trillion in 2011 (one trillion is equal to one lakh crores).
With Indian Parliament opening its monsoon session today, the market will be watching the progress of several pending bills which will have huge consequences economically and socially. The market will be watching the quarterly results also.
Snippets
State Bank of India Commercial and International (SBICI) Limited was merged with State Bank of India effective 29 July 2011.
The US gross domestic product has increased by 1.3 per cent annual rate during the second quarter (April to June 2011). The growth rate of 1.3 per cent is much below the expected rate of 1.8 per cent due to weak consumer spending. The US economy contracted at an annual average rate of 0.3 per cent between 2007 and 2010 as per the latest estimates.
SEBI, the capital market regulator, has reintroduced entry load for mutual funds. Existing investors have to pay an entry load of Rs 100 per transaction. New investors have to pay Rs 150 per transaction. However, investments up to Rs 10,000 will not attract any entry load.
SEBI has proposed to allow setting up of KYC Registration Agencies, which will enable mutual fund investors to have a single and uniform KYC (know your customer) procedure across the securities market.
Mogul Resources Limited is coming out with an initial public offer of 7.5 million Australian dollars with a listing on the Australian Securities Exchange (ASX) in October. The company is exploring for copper, gold and other metals in Rajasthan, Karnataka and Andhra Pradesh.
Anshu Jain has been named as co-chief executive officer of Deutsche Bank Group along with Juergen Fitschen. They will take over from the current CEO, Josef Ackermann, next year.
Moody’s has cut Greece’s credit rating by three notches.
Quote of the week
“If you hold your currency perennially depreciated, it amounts to giving away goods for free. That is good news for everybody except the person giving it away thus. The right policy is to sell cheap for a while to get people used to your product and then raise the price and reap the benefit of the habit of buying your goods that you have inculcated in people.” – Kaushik Basu, chief economic advisor, on being asked whether it is a good idea for China to let its currency, Yuan, appreciate now.
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.
About the Author: Passionate about financial markets. Watches equity, bond and currency markets from a macro point of view. Loves writing articles on financial markets. So far, has written more than 120 articles running into about 720 pages of original content, which have attracted more than 165,000 readers on SCRIBD. www.scribd.com/vrk100
Rama Krishna Vadlamudi, HYDERABAD 01 August 2011
In its latest review of the monetary policy, Reserve Bank of India has raised interest rates by 50 basis points against the consensus market estimate of 25 basis points. The reverse repo rate is increased to 7.0 per cent and the Marginal Standing Facility rate is hiked to 9.0 per cent. The unexpected 50-basis point hike has caught the stock and bond markets unawares and both the bond prices and stock prices have reacted negatively to the news. The corporate quarterly results continue to be mixed with several large- and mid-cap companies declaring their results. However, stock market has been punishing companies not only with poor performance but also with average performance. Public Sector Banks have been reporting a substantial jump in loan provisions due to rising non-performing assets.
RBI’s Monetary Policy-from baby steps to dinosaur steps
Following an aggressive move by Reserve Bank of India to increase its Repo rate by 50 basis points (under its liquidity adjustment facility or LAF) from 7.5 per cent to 8.0 per cent with effect from 26 July 2010, many banks like, Punjab National Bank, IDBI Bank, Oriental Bank of Commerce, Bank of India, DCB, Yes Bank, Corporation Bank, and Bank of Baroda, have raised their base rates by 40 basis points (100 basis points = one per cent) to 75 basis points. This is likely to push up interest rates of corporate loans, housing loans and auto loans.
RBI started raising interest rates since February 2010 gradually with 25 basis points raise each time which was described as ‘baby steps’ by RBI itself. But in a matter of just under three months, RBI has raised the Repo rate by 125 basis points signifying a change to a hawkish monetary policy stance. Clearly, RBI is worried about inflation and wants to control the stubborn inflation with stern measures.
First Quarter results
BHEL has recorded a 22 per cent rise in net profit for the first quarter aided by surge in other income. Its order book decreased to Rs 1,59,600 crore as on 30 June 2011.
RIL has posted an increase of 17 per cent in net profit aided by higher refining margins and other income. Sales growth for the quarter was 39 per cent.
Maruti Suzuki’s net profit has gone up by 18 per cent mainly due to higher other income, while sales were up by a mere 3 per cent.
ICICI Bank’s first quarter net profit surged by 30 per cent due to lesser loan provisions following improved asset quality.
Andhra Bank has recorded an increase of 21 per cent in net profit while that of Corporation Bank was a mere five per cent.
Syndicate Bank has recorded a 29-per cent jump in net profit due to surge in other income.
Grasim Industries reported a surge in net profit by over 30 per cent due to improved realizations from VSF and cement businesses.
Hindustan Unilever has posted good results with a rise in net profit of 18 per cent in the first quarter helped by volume growth, cut in advertisement cost and better product mix.
Punjab National Bank has shown a mere 3 per cent increase in net profit due to aggressive loan provisioning, though it managed to keep the net interest margin at 3.84%.
Bank of Baroda has posted decent numbers with a rise of 20% in net profit aided by interest income and fee income. Compared to other public sector banks, BOB’s loan book is of superior quality.
Canara Bank’s net profit was down by 28 per cent due to sharp rise in loan provisions and steep decline in treasury profits.
UltraTech Cement has reported a rise of 22% in its quarterly net profit.
ITC’s net profit has grown by 25 per cent while sales growth was 20 per cent.
Land Acquisition Bill
Government of India has come out with a draft Land Acquisition Bill which aims to provide better market values to land owners and to safeguard the livelihoods of the project-affected people. The salient features of the Bill are:
Government will not acquire land for private companies
In urban areas, land owners will get a minimum compensation of twice the market value
In rural areas, land owners will get a minimum compensation of six times the market value
A comprehensive rehabilitation package for land owners and the landless people affected by the project
The Bill will enjoy primacy over specialized legislations
Karnataka Lokayukta Report
Karnataka state ombudsman Mr Santosh Hege has named several firms, like, JSW Steel, Adani Enterprises, NMDC and Sesa Goa to be involved in illegal mining of iron ore in Bellary district of Karnataka between 2006 and 2010. The share prices of these companies have crashed after the report made public. The report estimated a loss, in taxes and royalty, of Rs 16,085 crore to the Karnataka Government. Following the report, the Supreme Court has suspended iron ore mining in Bellary district.
SEBI takeover code
On 29 July 2011, the Securities and Exchange Board of India (SEBI) has raised the threshold limit for open offer to 25 per cent from the existing 15 per cent. The capital market regulator, SEBI, has also decided to increase the open offer size to 26 per cent from the present 20 per cent. What this means is, from now onwards, companies in India can acquire shares worth up to 25 per cent of the target company’s paid-up capital without triggering any open offer. Once this 25 per cent threshold limit is reached, the acquiring company has to come out with an open offer to acquire another 26 per cent stake in the target company. SEBI has done away with the provision of non-compete fee. Till now, an acquirer was allowed to pay non-compete fee on takeover.
Debt pangs continue for the United States
The deadlock about raising the $14.3-trillion US debt level continues between the US president and the Congress. If no consensus is reached between the warring parties, the US Treasury Department will run out of money to pay its bills on August 2nd. The Republican Party seems to be blackmailing the US president about debt reduction. Rating agencies have threatened to downgrade US’ AAA-rating if the US lawmakers fail to reach an accord. However, rating agencies may still downgrade the US rating due to the fact that fiscal deficit is a long-term problem. The new managing director of the International Monetary Fund, Christine Lagarde, has warned that the US debt default/shock will have huge repercussions not only for the US but also for the rest of the world.
The huge US fiscal deficit is a big problem for other countries which hold their foreign exchange reserves in US government debt. Some of the biggest holders of the US debt are: (in USD billion) China - 1,160; Japan – 907; the UK – 333; and Brazil – 190. Other investors in the US government debt are banks, pension funds, sovereign wealth funds and individual investors.
The outlook
Sensex ended down at 18,197 for the last week and Nifty was down at 5,482. As I am writing this, the flash news is that an agreement has been reached in the US to reduce government debt. This will be a big relief for the markets around the world. However, in the medium to long term, markets will be guided by what is happening in the US and their decisions on the deficit-cut will be closely tracked. For over 10 years, the US has been living beyond its means. Between 2001 and 2011, the government debt has almost trebled from $ 5.8 trillion in 2001 to $ 14.3 trillion in 2011 (one trillion is equal to one lakh crores).
With Indian Parliament opening its monsoon session today, the market will be watching the progress of several pending bills which will have huge consequences economically and socially. The market will be watching the quarterly results also.
Snippets
State Bank of India Commercial and International (SBICI) Limited was merged with State Bank of India effective 29 July 2011.
The US gross domestic product has increased by 1.3 per cent annual rate during the second quarter (April to June 2011). The growth rate of 1.3 per cent is much below the expected rate of 1.8 per cent due to weak consumer spending. The US economy contracted at an annual average rate of 0.3 per cent between 2007 and 2010 as per the latest estimates.
SEBI, the capital market regulator, has reintroduced entry load for mutual funds. Existing investors have to pay an entry load of Rs 100 per transaction. New investors have to pay Rs 150 per transaction. However, investments up to Rs 10,000 will not attract any entry load.
SEBI has proposed to allow setting up of KYC Registration Agencies, which will enable mutual fund investors to have a single and uniform KYC (know your customer) procedure across the securities market.
Mogul Resources Limited is coming out with an initial public offer of 7.5 million Australian dollars with a listing on the Australian Securities Exchange (ASX) in October. The company is exploring for copper, gold and other metals in Rajasthan, Karnataka and Andhra Pradesh.
Anshu Jain has been named as co-chief executive officer of Deutsche Bank Group along with Juergen Fitschen. They will take over from the current CEO, Josef Ackermann, next year.
Moody’s has cut Greece’s credit rating by three notches.
Quote of the week
“If you hold your currency perennially depreciated, it amounts to giving away goods for free. That is good news for everybody except the person giving it away thus. The right policy is to sell cheap for a while to get people used to your product and then raise the price and reap the benefit of the habit of buying your goods that you have inculcated in people.” – Kaushik Basu, chief economic advisor, on being asked whether it is a good idea for China to let its currency, Yuan, appreciate now.
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.
About the Author: Passionate about financial markets. Watches equity, bond and currency markets from a macro point of view. Loves writing articles on financial markets. So far, has written more than 120 articles running into about 720 pages of original content, which have attracted more than 165,000 readers on SCRIBD. www.scribd.com/vrk100
Monday, 25 July 2011
Market Outlook & Crompton Greaves-VRK100-25July2011
Follow @vrk100
There are a couple of announcements that may augur for the markets next week. The Government (cabinet committee on economic affairs) has decided to clear the $ 7.2 billion-deal between Reliance Industries (RIL) and BP. Under this deal, Reliance Industries has agreed to sell 30 per cent participating interest in 21 oil and gas blocks to BP. Another announcement relates to allowing foreign direct investment (FDI) in multi-brand retail. A government committee has given its consent; however, it is yet to be cleared by the union cabinet. It is quiet likely that markets will read these measures as a policy reform.
First Quarter results
Private sector banks have been recording good quarterly results. HDFC Bank, Axis Bank, ING Vysya Bank, Kotak Mahindra Bank and Yest Bank have posted good bottom line growth in a range of 25 to 35 per cent. HDFC Bank has maintained its net interest margin, while Axis Bank’s net interest margin has been declining for the third quarter in a row. Allahabad Bank posted good results while Union Bank’s net profit is down 23 per cent due to rise in loan provisions.
Among IT companies, TCS and MindTree have posted good results, while Wipro is lagging behind. It is clear from the results that TCS has stolen a march over Infosys and Wipro in recent quarters. Exide Industries net profit was down one per cent due to weak auto sales. DRL has reported a 25 per cent rise in net profit for first quarter. For DRL, the US market saved the day despite setbacks in Europe and domestic market. Biocon’s net profit was down about 10 per cent to Rs 70 crore. Hero Honda and Bajaj Auto have posted good results.
Crompton Greaves-all good things come to an end
Crompton Greaves (CG) has shocked the markets with a disappointing performance. On a consolidated basis, the company reported a drop of 59 per cent in net profit due to higher raw material costs, depreciation and wage cost. The stock was down 14 per cent the day the results were announced and it lost another 15 per cent the next day. For the week, the stock lost about 25 per cent. The market is nervous about the fact that the company bought an aircraft in 2010-11 for Rs 270 crore and its ex-CEO S.M.Trehan sold his entire stake of about 1.8 lakh shares in the company at the end of June 2011.
A look at CG’s annual report for 2010-11 indicates that the addition to fixed assets under the sub-head ‘aircrafts’ was Rs 272.55 crore. Surprisingly, the company did not mention about this purchase anywhere else in the 180-page report. The company could have been more transparent on this issue. Till the quarterly results, the company was considered as a good bet on transparency. The expectation about the company was very high. High expectations lead to bigger disappointments. No wonder the stock lost 25 per cent in just two days and closed the week at Rs 182 per share.
See the roller coaster ride of CG’s market cap in the last four years. In November 2007, its m-cap reached the then peak of Rs 15,500 crore. It fell to Rs 4,200 crore in November 2008 and later it reached its lifetime high of Rs 21,500 crore in November 2010. Due to weakness in capital goods stocks, the stock’s m-cap fell by 30 per cent in the last eight months before the June 2011 quarter results. On the morning of 19 July 2011, before results announcement, CG’s m-cap was Rs 15,400 crore; but in just two trading sessions it fell to a low of Rs 11,200 crore before closing at Rs 11,700 crore on 22 July 2011. In the last eight months, the stock lost 50% of its value. Oh, what a ride!
The company boasts of seven independent directors in the 10-member board. The independent directors are industry veterans and they include:
Meher Pudumjee - Chairperson, Thermax (a company known for good
corporate governance)
Omkar Goswami - Economist and columnist of good repute
Scott Bayman - Formerly with GE
SP Talwar - Highly reputed banker and independent director
Despite such luminaries on the board, the company has lost, without doubt, some of its sheen from the corporate governance angle. Interestingly, HDFC mutual fund has lapped up 65 lakh shares of the company during the mayhem. It may be noted that HDFC mutual fund has been holding CG shares for more than four years in a number of its schemes, though the number of shares fluctuates from time to time. The stock performance of CG last week is a very big lesson for investors. In life, all good things come to end. Recently, we have seen the US disbanding its ‘space shuttle’ programme. Likewise, investors’ romance with CG appears to have come to an end.
Data corruption
Nobody would disagree with the view that corruption has spread to every nook and corner of Indian society. But, data corruption is a new phenomenon for India. Reserve Bank of India complains about lack of quality data while making policy decisions. It is particularly uncomfortable with index of industrial production (IIP) date given out by government agencies. Now, rating agency CRISIL says the GDP from the Central Statistical Organisation (CSO) is questionable. CRISIL indicates that India’s GDP for 2010-11 may be revised to 8.9 per cent from the earlier estimate of 8.5 per cent. A few years ago back, KV Kamath said that official estimates of national income did not really capture the economic activity to fuller extent. Even Prime Minister Manmohan Singh is famous for telling that “India’s data are unreliable.” Who will save India’s data?
China is more worried than the US
Germany and France have moved closer to solving the Greece’s debt problem. This has given a boost to equities around the world. The US is still struggling to find a way out of the self-created mess. The top priority for present Obama is increasing the debt level of $14.3 trillion and avoiding a debt default. If the US defaults, its AAA rating will come down and it will create a havoc across the financial world. Everyone is hoping a solution will be found.
China is feeling the heat resulting from US problems because it (China) has invested $1.2 trillion of its foreign exchange reserves in the US Treasurys. If any drastic fall happens to the US dollar following the US debt problems, China will be the biggest loser as it has invested its export surpluses in the US government debt. The fortunes of the US and China are interlinked like the Siamese twins.
The outlook
As mentioned at the outset, stock market will react positively to the news of the clearance of RIL-BP deal and the decision on FDI retail. More quarterly results from frontline companies will be announced next week. While the quarterly results so far are a mix of positive and negative surprises, Reserve Bank of India’s interest rate decision on July 26th will be watched carefully. Reliance Industries will announce its first quarter results on July 25th after market hours. On the global front, the US decision on raising the $ 14.3 trillion debt level will set the tone for markets.
Snippets
Bharti Airtel has decided to increase its pre-paid rates by 20 per cent.
L&T Finance Holdings, an arm of L&T, is coming out with an IPO which will open on July 27th. The pricing of the issue seems to be attractive.
Gold prices touched a high of $1,611 an ounce during the week.
India’s finance minister thunders that the government would meet the disinvestment target of Rs 40,000 crore for 2011-12.
The United Nations has declared famine in some parts of Somalia.
Sushil Kumar Modi, deputy chief minister and finance minister, Bihar, has been appointed as head of the Empowered Committee of Finance Minister on Goods and Services Tax (GST).
Senior Supreme Court Lawyer Rohinton F Nariman is appointed as new Solicitor General of India following the resignation of Gopal Subramanium.
Quote of the week
“The oft quoted joke is that thank god, the government was sleeping when we were building the IT Industry!” laughs Rajendra Pawar, co-founder of NIIT. But he does not agree with this view and gives lot of credit to N Vittal, then secretary in the Department of Electronics. India continues to have such wise people in government who have been helping in building a strong nation. (Source: BL)
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
And View on Crompton Greaves
There are a couple of announcements that may augur for the markets next week. The Government (cabinet committee on economic affairs) has decided to clear the $ 7.2 billion-deal between Reliance Industries (RIL) and BP. Under this deal, Reliance Industries has agreed to sell 30 per cent participating interest in 21 oil and gas blocks to BP. Another announcement relates to allowing foreign direct investment (FDI) in multi-brand retail. A government committee has given its consent; however, it is yet to be cleared by the union cabinet. It is quiet likely that markets will read these measures as a policy reform.
First Quarter results
Private sector banks have been recording good quarterly results. HDFC Bank, Axis Bank, ING Vysya Bank, Kotak Mahindra Bank and Yest Bank have posted good bottom line growth in a range of 25 to 35 per cent. HDFC Bank has maintained its net interest margin, while Axis Bank’s net interest margin has been declining for the third quarter in a row. Allahabad Bank posted good results while Union Bank’s net profit is down 23 per cent due to rise in loan provisions.
Among IT companies, TCS and MindTree have posted good results, while Wipro is lagging behind. It is clear from the results that TCS has stolen a march over Infosys and Wipro in recent quarters. Exide Industries net profit was down one per cent due to weak auto sales. DRL has reported a 25 per cent rise in net profit for first quarter. For DRL, the US market saved the day despite setbacks in Europe and domestic market. Biocon’s net profit was down about 10 per cent to Rs 70 crore. Hero Honda and Bajaj Auto have posted good results.
Crompton Greaves-all good things come to an end
Crompton Greaves (CG) has shocked the markets with a disappointing performance. On a consolidated basis, the company reported a drop of 59 per cent in net profit due to higher raw material costs, depreciation and wage cost. The stock was down 14 per cent the day the results were announced and it lost another 15 per cent the next day. For the week, the stock lost about 25 per cent. The market is nervous about the fact that the company bought an aircraft in 2010-11 for Rs 270 crore and its ex-CEO S.M.Trehan sold his entire stake of about 1.8 lakh shares in the company at the end of June 2011.
A look at CG’s annual report for 2010-11 indicates that the addition to fixed assets under the sub-head ‘aircrafts’ was Rs 272.55 crore. Surprisingly, the company did not mention about this purchase anywhere else in the 180-page report. The company could have been more transparent on this issue. Till the quarterly results, the company was considered as a good bet on transparency. The expectation about the company was very high. High expectations lead to bigger disappointments. No wonder the stock lost 25 per cent in just two days and closed the week at Rs 182 per share.
See the roller coaster ride of CG’s market cap in the last four years. In November 2007, its m-cap reached the then peak of Rs 15,500 crore. It fell to Rs 4,200 crore in November 2008 and later it reached its lifetime high of Rs 21,500 crore in November 2010. Due to weakness in capital goods stocks, the stock’s m-cap fell by 30 per cent in the last eight months before the June 2011 quarter results. On the morning of 19 July 2011, before results announcement, CG’s m-cap was Rs 15,400 crore; but in just two trading sessions it fell to a low of Rs 11,200 crore before closing at Rs 11,700 crore on 22 July 2011. In the last eight months, the stock lost 50% of its value. Oh, what a ride!
The company boasts of seven independent directors in the 10-member board. The independent directors are industry veterans and they include:
Meher Pudumjee - Chairperson, Thermax (a company known for good
corporate governance)
Omkar Goswami - Economist and columnist of good repute
Scott Bayman - Formerly with GE
SP Talwar - Highly reputed banker and independent director
Despite such luminaries on the board, the company has lost, without doubt, some of its sheen from the corporate governance angle. Interestingly, HDFC mutual fund has lapped up 65 lakh shares of the company during the mayhem. It may be noted that HDFC mutual fund has been holding CG shares for more than four years in a number of its schemes, though the number of shares fluctuates from time to time. The stock performance of CG last week is a very big lesson for investors. In life, all good things come to end. Recently, we have seen the US disbanding its ‘space shuttle’ programme. Likewise, investors’ romance with CG appears to have come to an end.
Data corruption
Nobody would disagree with the view that corruption has spread to every nook and corner of Indian society. But, data corruption is a new phenomenon for India. Reserve Bank of India complains about lack of quality data while making policy decisions. It is particularly uncomfortable with index of industrial production (IIP) date given out by government agencies. Now, rating agency CRISIL says the GDP from the Central Statistical Organisation (CSO) is questionable. CRISIL indicates that India’s GDP for 2010-11 may be revised to 8.9 per cent from the earlier estimate of 8.5 per cent. A few years ago back, KV Kamath said that official estimates of national income did not really capture the economic activity to fuller extent. Even Prime Minister Manmohan Singh is famous for telling that “India’s data are unreliable.” Who will save India’s data?
China is more worried than the US
Germany and France have moved closer to solving the Greece’s debt problem. This has given a boost to equities around the world. The US is still struggling to find a way out of the self-created mess. The top priority for present Obama is increasing the debt level of $14.3 trillion and avoiding a debt default. If the US defaults, its AAA rating will come down and it will create a havoc across the financial world. Everyone is hoping a solution will be found.
China is feeling the heat resulting from US problems because it (China) has invested $1.2 trillion of its foreign exchange reserves in the US Treasurys. If any drastic fall happens to the US dollar following the US debt problems, China will be the biggest loser as it has invested its export surpluses in the US government debt. The fortunes of the US and China are interlinked like the Siamese twins.
The outlook
As mentioned at the outset, stock market will react positively to the news of the clearance of RIL-BP deal and the decision on FDI retail. More quarterly results from frontline companies will be announced next week. While the quarterly results so far are a mix of positive and negative surprises, Reserve Bank of India’s interest rate decision on July 26th will be watched carefully. Reliance Industries will announce its first quarter results on July 25th after market hours. On the global front, the US decision on raising the $ 14.3 trillion debt level will set the tone for markets.
Snippets
Bharti Airtel has decided to increase its pre-paid rates by 20 per cent.
L&T Finance Holdings, an arm of L&T, is coming out with an IPO which will open on July 27th. The pricing of the issue seems to be attractive.
Gold prices touched a high of $1,611 an ounce during the week.
India’s finance minister thunders that the government would meet the disinvestment target of Rs 40,000 crore for 2011-12.
The United Nations has declared famine in some parts of Somalia.
Sushil Kumar Modi, deputy chief minister and finance minister, Bihar, has been appointed as head of the Empowered Committee of Finance Minister on Goods and Services Tax (GST).
Senior Supreme Court Lawyer Rohinton F Nariman is appointed as new Solicitor General of India following the resignation of Gopal Subramanium.
Quote of the week
“The oft quoted joke is that thank god, the government was sleeping when we were building the IT Industry!” laughs Rajendra Pawar, co-founder of NIIT. But he does not agree with this view and gives lot of credit to N Vittal, then secretary in the Department of Electronics. India continues to have such wise people in government who have been helping in building a strong nation. (Source: BL)
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.
Monday, 18 July 2011
Market Outlook-VRK100-18072011
Market Outlook
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Driven by negative sentiment about Infosys’ first quarter results and weak industrial growth numbers, the stock markets were volatile last week with the Sensex shedding close to 1.5 per cent and ended at 18,562 for the week. The Nifty closed at 5,582. The industrial growth, represented by the Index of Industrial Production or IIP, has dipped to 5.6 per cent in May 2011 due to a sluggish growth in manufacturing and capital goods sectors. The 5.6 per cent growth is much lower compared to 8.5 per cent growth recorded in May last year. The investment cycle in India is experiencing a slowdown due to a variety of factors.
First Quarter results
For the April-June 2011 quarter, Infosys Limited has shown a revenue growth of 3.2 per cent and net profit growth of minus 5.3 per cent compared to January-March 2011 quarter. Even though the results matched the guidance given by the company, the market was clearly disappointed with the results and the stock was down 4 per cent the day the results were announced. The disappointment stemmed from the fact the company did not revise its estimates for the full year 2011-12. In contrast, TCS, India’s leading IT company, has posted good results with the net profit for the first quarter soaring by 27 per cent compared to the same quarter last year. The first quarter revenues shot up by 31 per cent. Unlike Infosys, TCS does not give any forecast of its revenues or profits. Among other companies, Bajaj Auto has posted good results for the first quarter with net profit rising by 21 per cent year-on-year. Sales turnover was up 23 per cent for the quarter.
Robust tax collections
Even as the industrial production is showing signs of weakness, the indirect tax collections have gone up by 30 per cent during first quarter of this fiscal. Between April-June 2011, the indirect tax (customs duty, central excise, and service tax) collections were at Rs 95,800 crore compare to Rs 73,600 crore last year. With such strong collections, the Government is confident of meeting this year’s tax targets which augurs well for the fiscal situation. However, the tax collections will be adversely impacted by the Government’s latest decision to reduce taxes on crude oil and petroleum products. Another negative could be the large increase in tax refunds this year.
Gold’s dream run continues
The rally in international gold prices continues unabated. Gold rose to $ 1,595 per ounce on Thursday before closing at $ 1,583 at the weekend. Silver rose to $ 39.4 per ounce before closing at $ 38.2. Gold prices are mostly driven by investment demand rather than jewellery. The sovereign debt crisis in Greece, Portugal and other countries is contributing to the gold’s investment demand. The London Metal Exchange (LME) has doubled delivery size for top warehouses with a view to easing backlogs in Detroit and moving aluminium faster. It is interesting to note that many LME-approved warehouses in Detroit are owned by Metro International, a Goldman Sachs group company.
Money managers for EPFO
The Employee Provident Fund Organisation (EPFO) has appointed State Bank of India, ICICI Securities Primary Dealership, Reliance Capital and HSBC Asset Management Company as fund managers to manage its Rs 3 lakh crore corpus for the next three years. SBI will manage 35 per cent of the corpus, ICICI Securities PD 25 per cent, and the other two will manage 20 per cent each.
India is at 62nd place…
According to the 2011 edition of the Global Innovation Index, India is ranked 62nd in innovation. For the year 2010, India’s rank was 56th and for 2009, it was 41st indicating that India has been losing on innovation to other competitors.
For 2011, Switzerland is at the top followed by Sweden, Singapore, Hong Kong and Finland. The important parameters for computing the innovation index are: institutions; human capital & research; infrastructure; market sophistication; and business sophistication.
Global cues
In the next few weeks, the US congress will decide on raising the US debt level. The present debt limit is $ 14.3 trillion. There are some differences over raising the debt level between the Republicans and the President. If they fail to sink their differences, the country may plunge into an economic crisis. Meanwhile, Moody’s Investor Services has warned that it would review the US rating, currently at Aaa since 1917, if the lawmakers do not raise the debt limit. Standard & Poor also gave a similar warning by putting the US on the negative watch list.
The outlook
During the fourth week of this month, the Reserve Bank of India will be reviewing its interest rate policy. It is expected that RBI will raise the policy rates by another 25 basis points. With rising interest rates, auto sales have slowed down. The real estate sector is also listless. More quarterly results are expected next week. As such, the volatility in stock markets will continue for the time being.
Top Central Bankers
Managing Director, International Monetary Fund Christine Lagarde
President, World Bank Robert B Zoellick
Governor, Bank of England Sir Mervyn King
Chairman, US Federal Reserve Ben Shalom Bernanke
President, European Central Bank Jean-Claude Trichet
Governor, Bank of Japan Masaaki Shirakawa
Governor, Reserve Bank of India Duvvuri Subbarao
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.
Monday, 11 July 2011
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.
Tuesday, 14 June 2011
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.
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