Money on the markets

from India Insight:

Wary of stocks, Indians cling to safe havens

Sometimes people suspect that the grass is greener in the next field ... but they're not always right.

Consider this. India's gross domestic product has grown about 7 percent on an average per year for the past nine years. Its industrial growth has been steadily rising since then. Buoyed by economic growth, the country’s capital markets also offered itself as an attractive and inflation beating investment option.

That means that someone who invested at the end of 2002 in the BSE’s benchmark index, Sensex, would have made a 418 percent return on his portfolio by July 11 (just a random date). It sounds like the Madoff plan, but it’s not. The Sensex’s value on Dec 31, 2002 was 3377.28 which rose manifold to 17489.14 on July 11, 2012. Our market had its fair share of ups and downs, but it remained focused and depicted the country’s growth story.

However, that "someone" who made the 418 percent return most likely was not one of us. The average Indian investor has been satisfied with, and probably still wants, investments with a fixed return that comes from safer havens. According to the National Council of Applied Economic Research, Indians were called "wise savers but poor investors". The statement found its base in the statistics that its Indian household Investor Survey revealed.

According to the survey, only 10.74 percent of households were investors (up from 7.4 percent in 2001-2002) while 89 percent were either saving in fixed income or are still clinging to their savings accounts. About 46 percent of urban households preferred to save, compared to 21 percent who chose investing.

In 2002, this was not a bad idea. India's GDP grew at 3.7 percent that year compared with 2001. But in 2003, it jumped to 8.37 percent because of services (mostly financial, real estate and business services) and manufacturing sector which together drove this transition to a higher growth trajectory.

In the same year, the amount of foreign money entering India's capital markets rose sevenfold. Most of this came from foreign institutional investors, who poured in 304.6 billion rupees ($5.5 billion), compared to 36 billion rupees ($665 million) a year earlier. They bought the Indian growth story; why didn't we?

from Expert Zone:

Hopes fade as investors await concrete action

(The views expressed in this column are the author's own and do not represent those of Reuters)

It was an action-packed week for the markets but not for the reasons we had anticipated. Manmohan Singh’s government, which was expected to announce a string of policy action steps starting with a diesel price hike, failed to make any announcements which would have cheered markets.

Instead, it got busy firefighting to pacify the NCP, a sulking ally which was threatening to move out. As feared, policy paralysis along with other international worries on the euro zone and the monsoon deficit resulted in a breakdown from support levels. After touching a low of 5034, Nifty closed the week at 5100 -- a loss of about 2 pct.

Buying peace with the NCP seems to be at the price of policy reforms. The UPA has decided to set up a co-ordination committee to screen the proposed policy actions before presenting it to the cabinet. A number of proposed reforms could be a casualty as a result of this committee and those which go through could get delayed beyond expectation. Hence, we would be slipping back into hibernation. But then, when did we ever move out of it? It was just hope.

Monsoon rains continued to bother the markets and have failed to pick up. We still have about 20 pct deficit to the long-term average for the week ending July 25. Deficient rains in areas of west and north India would result in lower production of oil seeds, coarse pulses and sugarcane. It may not have a spiralling effect on food inflation, thanks to the bumper crop last year, but still the situation is worrisome. A government panel is expected to meet this week to take stock of the drought-like situation in various states.

World markets reacted positively to ECB President Mario Draghi’s assurance that he would take appropriate steps to protect the euro zone from falling apart. One should hope that this is not a mere statement but would be followed by action. This also helped the rupee to bounce back from lower levels to close at 55.24 versus the dollar, almost flat for the week. It is also expected that the ECB chief will discuss with German Bundesbank President Jens Weidmann the lowering of interest rates and increased bond buying, among other initiatives. This should act as a cushion for a while.

Market regulator SEBI hiked liquidity levels for F&O eligibility which resulted in about 51 scrips being removed from the list. Subsequent unwinding resulted in a number of them losing heavily thus exerting further pressure on markets. The lone exception was MTNL where there was short covering which saw the stock at a 3-month high of 30 rupees. The SEBI move also seemed to have resulted in margin calls for highly leveraged mid-cap stocks, some of them showing sharp cuts such as Pipavav Defence, Tulip Telecom, Parsvnath Developers, Everonn Education and Glodyne Technologies. High promoter pledges are like the Damocles sword but being active stocks they are speculators’ favourites.

from Expert Zone:

Get set for an action-packed week

(The views expressed in this column are the author's own and do not represent those of Reuters)

Markets continued to display weakness during the week except for a spirited, though limited, rally on July 18 after the UPA convinced belligerent ally Mamata Banerjee to fall in line for the presidential elections. The Nifty lost 0.4 pct to close the week at 5205 on political worries after the NCP, another government ally, expressed dissatisfaction with its functioning.

International markets were volatile due to encouraging earnings from U.S. companies on one hand and the deepening Euro crisis on the other. Though a bailout has been approved for Spanish banks, yields on bonds continue to rise and is a cause for worry. The rupee was range-bound and closed at 55.32 rupees.

The week was low on data points, with only inflation and a few corporate results being declared. Inflation at 7.25 pct was a tad lower than expectations but these figures may get revised upwards in the next few weeks. Axis Bank surprised on the bottom line but analysts are worried about rising NPAs, thus it closed flat for the week. Bajaj Auto had a huge short build-up prior to the results as market men were expecting a pathetic set of numbers. A surprise from the two-wheeler major forced short-sellers to cover their positions leading to a 11 pct rally from the week’s low point. Reliance Industries reported its results after market hours on Friday, which were slightly higher than market expectations on the back of robust refining margins. The profits would have been higher but for lower-than-expected petrochemical margins which limited gains. The stock may hold ground at current levels due to buyback support from the company.

Monsoons failed to pick up last week resulting in about 22 pct deficiency. The hard-hit states of Maharashtra and Karnataka may look at the centre for drought relief measures in the next few weeks. Despite a poor monsoon, India may not be in a distraught state due to the bumper crop we had the previous year. The troubled pockets would be oilseeds and coarse cereals which could have a marginal impact on food inflation.

The government announced the imposition of 21 pct anti-dumping duty on power equipment but this failed to enthuse the capital goods sector as the Chinese equipment manufacturers still seem to enjoy a 10 pct price advantage despite this duty. The banking sector saw a further correction when a RBI committee recommended the tightening of regulations for loan restructuring, resulting in higher provisioning going ahead. This has come at a time when a number of large corporates are lining up for debt restructuring. The Empowered Group of Ministers (EGoM) on telecom has agreed to cut the minimum price for 2G spectrum by 15 pct to 140 - 160 billion rupees and accepted TRAI’s recommendation of staggered payment. This along with the mortgage of airwaves meets the demands of most telecom companies.

The shocking incident of the week was the brutal murder of a Maruti official during the unrest at their Manesar Plant. In October 2011, it was expected that they have arrived at a long-term solution with the labour union but this incident has proved otherwise and is bound to keep the pressure on Maruti for a while. The plant has since been shut. Though the management has put up a brave face in denying proposals to shift the facility out of Manesar, I doubt they would be able to get back on track soon, looking at the history of volatile industrial relations at that location. Maruti shares plunged more than 10 pct before recovering to close about 6 pct lower. If the imbroglio continues for the next few weeks, we could see the stock at a 52-week low soon.

from Expert Zone:

India Market Weekahead – Policy action, rupee to decide market direction

(The views expressed in this column are the author's own and do not represent those of Reuters)

The week gone by displayed indecisiveness by participants as the markets garnered small gains after moving in a tight range. The Nifty managed to hold on to the 4900 level mark as investors cheered the government’s announcement to raise petrol prices in an attempt to revive the policy inaction tag.

State-run oil marketing firms took the long overdue step of raising petrol prices by 7.50 rupees per litre -- the steepest ever increase in retail prices. The revision comes as the rupee hit an all-time low against the dollar leading to a jump in the oil import bill. As expected, the government faces strong protests by the opposition and a partial rollback could be on the cards in the next few days. This could also delay the decision on the increase in retail prices of diesel and LPG which form a lion’s share of the subsidy bill and is one of the important signals about the seriousness of the government to pull through bold and tough measures.

The rupee slid further during the week and crossed 56 a dollar. Token measures by the Reserve Bank of India (RBI) in the form of 50 percent conversion of exporters’ dollar holdings into rupee provided some respite. Given the short-term risk conditions, the rupee will remain generally on the defensive and a rally beyond 52-53 does not seem likely in the near-term.

The coming week may see heightened volatility as the derivatives contracts are set to expire on Thursday. The announcement of January- March 2012 quarter gross domestic product (GDP) data on Friday will provide an important indicator of the health of the economy but again the expectation is tempered. The Indian economy expanded 6.1 percent in the October-December 2011 quarter from a year earlier, the weakest pace of expansion in more than two years, hurt by slower growth in manufacturing output and a contraction in mining production. With current account and fiscal deficit along with weak investment climate playing a spoilsport, the GDP scare has intensified further.

HSBC's monthly purchasing managers' index (PMI), which indicates the health of the manufacturing sector, is likely to be released some time this week. The HSBC India PMI rose to 54.9 in April from 54.7 in March.

Automobile and cement shares will be in focus as companies from these two sectors will start unveiling monthly sales volume data for May 2012 from Friday. After a fall in April 2012 sales, demand continues to remain weak in May. Pessimism is expected to increase after the recent hike in fuel prices. May is a seasonally muted month for car makers and inventory levels are also expected to be high.

from India Insight:

It’s time India bites the diesel bullet

"81 rupees?" asked an astonished TV anchor when an irate Bengaluru-based consumer called in after the recent 7.5-rupee hike in petrol prices. Perhaps cars that run on milk are now needed, the anchor suggested -- when the caller said the dairy product costs around 30 rupees a litre.

While milk-powered automobiles might be a distant dream, the reality remains that those relying on petrol vehicles will now need to do their budgeting again. If a falling rupee and high inflation were not enough, this steepest-ever rise in petrol prices will surely pinch.

The fact remains that petrol prices were decontrolled way back in June 2010. That move gave oil marketing companies (OMCs) freedom to revise prices and also gave the government some saving grace as ministers can now easily say that petrol prices are market driven.

Though the government cannot be blamed for this hike on paper, they do manage to influence OMC decisions. That is indicated by the fact that this hike comes after state elections and a day after the parliament’s budget session got over.

However, it is tough to understand why the government would allow OMCs to raise petrol prices, given the move will not help improve the fiscal situation as the government doesn’t subsidise petrol. It is the subsidy burden of other fuels that strains the government’s finances.

As Hitendra Dave, global markets head at HSBC in Mumbai explained -- This (the petrol price hike) has zero fiscal impact. This will only help oil marketing companies.

What was perhaps more needed at this stage was a revision or decontrol of other fuel prices, which could help boost the already weak economic sentiment.

from India Insight:

The rupee’s fall from grace

Indian milk and dairy products producer Amul’s campaign has a new subject -- the rupee.

The newspaper advertisement features the iconic Amul girl, in her polka dotted red dress, in a boat made of the rupee, about to sink in turbulent waters. She says ‘mujhe mere rupee se bachaao!’ in Hindi. Loosely translated into English, it would mean 'save me from my rupee.'

The tagline, tongue in cheek, says ‘valued highly’.

The Amul mascot’s angst today reflects that of investors who have so far been bullish on the India growth story.

That the rupee has caught the Amul girl’s attention is no surprise. For over thirty years, she has commented on social, political and economic issues of the day making her as favourite a household name as R.K. Laxman’s common man.

Be it the 'Hurry Amul, Hurry Hurry' campaign when Mumbai saw the beginning of the Hare Rama Hare Krishna movement. Or, the Indian Airlines strike which led Amul to say ‘Indian Airlines Won’t Fly Without Amul’ (seems a bit of déjà vu’, doesn’t it?)

from India Insight:

As the economy and markets struggle, India needs tough actions

Slowing growth, a falling rupee, sliding stock markets, a rising current account deficit, drying foreign inflows and policy paralysis at the centre. Things certainly don’t look rosy for India.

With the rupee down 22 percent in the last 10 months and a 6 percent drop in stock markets so far in May (as of Friday’s close), is it time for the government to seriously rethink its strategy ahead of the 2014 general elections?

From Mark Mobius, who said the Indian government has been making many big policy mistakes, to Lakshmi Mittal, who told The Times of India on Friday that decision-making is too slow and India needs to move the way the rest of the world does -- there is no dearth of criticism.

As the global economic environment continues to be weak, what is the government doing to address these issues? Right now, India badly needs reforms, foreign inflows, and most importantly, clarity and stability.

It took Finance Minister Pranab Mukherjee nearly two months to clarify his controversial set of General Anti-Avoidance Rule (GAAR) proposals, and also defer it by a year, after an investor backlash.

One wonders what took the government so long to issue clarifications, which could have helped revive much-needed inflows and improve sentiment. And even when it did, it failed to pacify investors.

As a Scotiabank executive summed it up -- India changes rules too quickly. They don't realise it hurts them in debt capital markets and hurts flows on a long-term basis.

from Expert Zone:

India Market Weekahead – Volatile market within a narrow range

(The views expressed in this column are the author’s own and do not represent those of Reuters)

A sharper-than-expected cut of 50 basis points in the repo rate boosted the benchmark indices early during the week. However, as expected, the Nifty could not gain higher than 5350 as apprehensions about the limited scope of further rate cuts suppressed sentiment.

The Reserve Bank of India (RBI) sounded cautious as recent growth trends indicate the economy is operating below its post-crisis levels. We anticipate a very limited scope for further reduction in policy rates going ahead as persistent liquidity deficit would make rate cuts difficult. Also the upside risk to inflation remains and further slippage on the fiscal front can aggravate inflationary pressure.

Globally, the euro zone markets also witnessed positive action following a successful bond auction by Spain and France. Appetite for these bonds during such distress times renewed some hope of revival in that region.

Reliance Industries came out with its Q4FY12 numbers after market hours on Friday. Its net profit of 42.4 billion rupees just fell short of the street estimate of 43 billion rupees, down 21 pct year-on-year. Lower production from its KGD6 offshore fields and weak refining margins dented profits. Sales, however, grew 16 pct to 878 billion rupees. Due to falling KGD6 production and weak cyclical margins, its near-term earnings are expected to remain subdued. The stock should remain sideways for some more time due to a lack of positive triggers, with the downside protected due to the ongoing buyback plan. Among cement heavyweights, Ambuja and ACC results also disappointed markets.

For the coming week, the markets are expected to remain volatile on account of derivative expiry. Some of the major corporate results -- beginning with TCS on Monday -- will remain crucial. Others include Sesa Goa, Wipro, Sterlite Industries, ICICI Bank, Axis Bank, Jindal Steel & Power, Siemens and Maruti Suzuki.

The rupee continued to be weak quoting above 52 rupees against the dollar. Though the RBI intervention in the currency market was expected to stem the fall, there doesn’t seem to be any such move. The rupee would continue to remain weak within a range. Oil prices gave some respite by correcting to $118.Closer home, with no action on increasing the retail prices of petro products, the subsidy burden continues to balloon.

from Expert Zone:

Brace for volatility, but utilise opportunity

(The views expressed in this column are the author's own and do not represent those of Reuters)

After a 21 percent run so far this year due to unabated liquidity flow, markets paused for two weeks in a row with a cut of close to 5 percent. Data showing a slowdown in GDP growth in Q3 December spooked investors while macroeconomic worries arising from high oil prices also weighed on sentiments.

Foreign institutional investors’ (FII) flow continued unabated with $5 bln in February and $7 bln so far this year. Domestic institutional investors continue their selling spree with a net sell figure of $2.4 bln in February and $3.8 bln YTD.

The European Central Bank (ECB) announced 530 bln euros in the second Long-Term Refinancing Operation (LTRO) operation that was marginally higher than expected and compared with a 489 bln euro figure last time. However, there are still fears looming the Greek crisis has still not been resolved and there will eventually be a Euro exit as we have been indicating in the past.

Back home, the 5 percent government stake sale through the ONGC auction route scraped through with Life Insurance Corporation of India (LIC) moving in at the last minute to save the day for the government. There were debates the floor price was on the higher side. As a result, a large number of FIIs and mutual funds did not participate in the bidding. The decision makers needed to look at the market reality than pure mathematics. Any issuer should always pay heed to the reference price (which is the market quote) and give a suitable discount irrespective of the fundamentals. The ground rule of the market -- “the market price captures the current value of the stock” -- seems to have been forgotten by the decision makers. No investor (other than strategic), whether an institutional one or retail, would pay a premium especially when it’s not a scarce commodity. The government has to take this into account while strategising future divestments with regards to the pricing.

Markets this week are expected to remain volatile with three big events lined up over the next fortnight -- Uttar Pradesh election results on March 6, RBI credit policy on March 15 and the Union Budget on March 16.

If one were to believe the various exit polls, the Samajwadi Party (SP) may be set to regain power and is likely to win around 185 seats in the 403-seat Uttar Pradesh assembly. However, it remains short of majority and may need a partner. The stock markets have to some extent build on a SP-Congress alliance; but in case they stick to their pre-poll stand of not forging a partnership, there also remains a possibility of a hung house with SP as the largest party. Hence, we could have a scenario of President's rule.

from Expert Zone:

India Market Weekahead: RBI policy holds the key

(The views expressed in this column are the author's own and do not represent those of Reuters)

Markets extended a rally for the third consecutive week led by strong FII inflows. FIIs have pumped in $1.2 billion so far this year as risk sentiment stabilised after several European debt auctions saw lower borrowing rates and overwhelming demand. Improvement in U.S. economic data, rupee appreciation and December quarter earnings exceeding lower expectations helped the market rally nearly 8 pct in three weeks.

The initial set of corporate results surprised the street as HDFC Bank, Axis Bank, Wipro, TCS, HCL Technologies and Hero MotoCorp posted better-than-expected numbers.

However, Reliance Industries (RIL) disappointed with a net profit de-growth of 13.6 pct year-on-year on the back of lower refining and petrochem margins. Its gross refining margins declined sharply to $6.8 per barrel from $9 per barrel. The buyback of $2 billion at a maximum price up to 870 rupees/share for up to 120 million shares or 3.6 pct equity via open market is seen as a cover-up for the subdued results. RIL stock has already gained 8 pct during the week after the announcement of the buy-back program. We may see a knee-jerk reaction to the results when trading opens on Monday but the buy-back may provide a cushion at the lower end.

As expected, shares of power generation companies gained after Prime Minister Manmohan Singh pledged help on chronic power shortages in the country in its meeting with business leaders. Our top pick Tata Power jumped 9 pct while NTPC gained 5 pct. Any action at the ground level will lend a helping hand to other sectors such as banking where there is a fear of NPAs from the power sector as well as capital goods which has seen a slowdown in order flows.

The rupee maintained a stronger tone during the week and strengthened to near 50 levels against the dollar. Sustained net inflows so far in 2012 along with short covering helped strengthen the rupee. It may be difficult for the rupee to extend the recovery further in the near term and we expected consolidation at current levels.

The coming week is truncated on account of Republic Day on January 26. We have the all important quarter review of monetary policy on January 24. The Reserve Bank of India (RBI) is widely expected to keep its key lending rate -- the repo rate -- steady. However, a few sections of the market are expecting a CRR cut.