Expert Zone
Straight from the Specialists
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.
India Market Weekahead – Time to start buying
(The views expressed in this column are the author’s own and do not represent those of Reuters)
May is typically a bear month for the stock markets as players often look to take advantage of the adage, ‘sell in May and go away’. Before going on vacation, I was expecting the markets to correct to levels of 5000/5050 but was pleasantly surprised to see the crack leading to around 4800 levels. All the negative factors compounded over the past few weeks gave momentum to the ‘sell’ sentiment which remained jittery over the fate of Greece after an inconclusive election.
Weighing on sentiment is a growing sense among investors that the euro zone debt crisis is aggravating, further fuelled by fears of a Greek euro exit and the deteriorating health of the Spanish banking system. There will be fears surrounding any contagion effect if Greece did exit the European Union. Investors continued to reduce positions in riskier assets, leading to a fall in oil prices and a drop to a 4-month low for spot gold, while lifting the dollar which tends to be seen as a safe haven in times of heightened uncertainty.
Facebook Inc priced its initial public offering at $38 per share, giving the world’s No. 1 online social network a $104 billion valuation in the third largest offering in U.S. history. However, it disappointed investors with a tepid market debut on Friday. Shares rose a scant 0.6 percent — nowhere near expectations for double-digit gains on the first trading day.
Back home, the rupee remained under sustained selling pressure during the week and it reached record lows beyond 54.50 against the dollar. Weak risk appetite undermined capital inflows and internally the twin deficit concerns — fiscal and current account deficit — moderating growth prospects, soaring inflation numbers led to the rupee weakness. A falling rupee would increase the threat to inflation, limiting the RBI’s freedom to cut rates. The central bank did intervene which helped drag the currency off its worst levels. The rupee would continue to remain vulnerable in the short-term.
The State Bank of India (SBI) surprised the street with a higher than expected net profit growth in the fourth quarter of 40.5 bln rupees. Slippages came in lower than the previous quarters leading to a decline in NPA provisions made by the bank. Its net non-performing asset (NPA) ratio declined to 1.82 pct, while the gross NPA ratio fell from 4.61 pct to 4.44 pct during the same period. We are positive on the SBI and expect a gradual alleviation of the asset-quality concerns and a turn in the rate cycle to drive the stock performance going ahead. The recent correction is a great opportunity to acquire this stock.
Coming to the cues for the coming week, internationally, U.S economic data including April’s existing home sales is due on Tuesday with new homes sales figures on Wednesday. Initial jobless claims and durable goods orders will be published on Thursday while the consumer sentiment data is due on Friday.
India Market Weekahead – Time to “sell in May and go away”?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Markets were jolted this week by news that Standard & Poor’s cut India’s long-term rating outlook to negative from stable, citing slowing growth and a ballooning current account deficit. The negative outlook signals at least a one-in-three likelihood of the downgrade of India’s sovereign rating within the next 24 months.
The results season, as expected, didn’t have much impact on the market except for specific stocks. The IT sector results so far have been a mixed bag with Infosys which reported weaker-than-expected results while TCS, Mindtree and HCL Tech surprised the street.
TCS reported a healthy growth in both top line and bottom line in an environment where the prospects of the Indian IT sector were in question due to muted performance and guidance given by Infosys. Unlike Infosys, the TCS management indicated a revival in the industry demand scenario over the last one month. Moreover, the company is expecting FY13 to be a normal year of growth and also sounded positive on its hiring plans.
Wipro reported results which were in line with street estimates but it disappointed on the Q1 FY13 guidance front. Among the IT pack, we remain positive on TCS, Mindtree and HCL Tech. Infosys was the odd man in the pack. It seems it has lost the plot and may not continue to enjoy premium valuation going ahead.
Two key banks declared their results last week. ICICI Bank surprised with its net interest income (NII) and net profit growth ahead of estimates. Net interest margins (NIM) at 3.01 pct, up 30 bps, were its highest in the recent times. Axis Bank’s NII growth was inline with consensus expectations. However, driven by lower provisions, net profit at 12.8 bln rupees was ahead of consensus expectations. The revised ratio for the Enam merger is also in its favour. We are positive on Axis Bank.
Meanwhile, the rupee remained under pressure during the week and retreated to a three-month low closer to 53 rupees against the dollar. There was strong demand from importers and oil refiners which contributed to the negative rupee tone. Standard & Poor’s downgrading India’s credit rating also added to the woes. With further uncertainties surrounding the domestic and regional economic outlook, the rupee is likely to remain weak.
Markets are in a limbo due to non participation by the FIIs. Parliament is in session to pass the budget. It will be range bound market with a negative bias in May.
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.
Yes it was, it taken all the stoploss till 5000 level in Nifty Future only. And the market range should be between 5100-5330.
Global cues likely to dominate market
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The Indian market ended with minor gains in a truncated week as data showing slowdown in growth in the services sector in March and weak global stocks hurt sentiment.
Growth in the Indian services sector slipped to a five-month low in March as optimism about the business outlook in the coming year faded to its weakest level since 2009. According to HSBC’s India PMI, service sector activity fell sharply to 52.3 in March from 56.5 the previous month, though it remained above the 50 level that divides growth from contraction for the fifth month. Momentum in the services sector eased on account of lack of economic policy progress and continued high inflation which is expected to remain elevated due to factors such as high crude oil prices. Thus, we feel that the Reserve Bank of India is likely to approach policy easing cautiously as the upside risks to inflation remain.
Coal India was the story of the week as the government issued a rare presidential decree to force Coal India to sign fuel supply agreements, binding it to provide at least 80 percent of the coal required by power plants. This is part of the government’s efforts to revive the ailing Indian power sector. This further confirms the fears of foreign institutional investors about corporate governance issues and one of them has already filed a complaint regarding the Coal India issue. India may be having one of the largest coal reserves in the world, but it still has to import its coal requirements as Coal India is unable to fully exploit the reserves which results in demand outstripping supply. Opening up of coal mining to the private sector in the last few years has resulted in the Comptroller & Auditor General of India (CAG) suggesting another scam. Hence the demand/supply gap is expected to continue in the foreseeable future.
On the political front, the fragile coalition government is a cause of concern. With successive state elections, we are moving towards a scenario of strong states and a weak centre which has resulted in too many cross-currents leading to policy fatigue. As mentioned in my previous column, policy paralysis is preferable to retrograde policies. GAAR is perceived to be one in spite of assurances from the government. Curtailing subsidies has been one of the cornerstones of the recent budget but the indecision on raising petrol prices especially ‘deregulated’ petrol goes to show no tough decisions affecting the electorate can be taken easily.
Globally, the focus is on the U.S. markets after the Fed minutes last week indicated it is less likely to take further stimulus measures. Also, a disappointing March employment report was released when the market closed on Friday. The U.S. unemployment rate fell to 8.2 percent, the lowest since January 2009, from 8.3 percent. The global equity markets are thus poised to fall early this week.
The focus is likely to be on several key economic releases from China and the beginning of U.S. earnings season. China is set to release first quarter gross domestic product, inflation figures and trade balance data. Signs of a sharper-than-expected slowdown could further undermine sentiment.
India Market Weekahead: Brace for volatility within a range
(The views expressed in this column are the author’s own and do not represent those of Reuters)
It was a topsy-turvy week for markets as the benchmark indices hovered between positive and negative territory to finally end with a loss of 0.7 percent. A lacklustre budget initially triggered the weakness followed by a spate of negative events resulting in a fifth consecutive week of decline for the markets. The newly appointed railway minister’s move to roll back fares also unnerved investors.
A leaked draft report of the Comptroller and Auditor General (CAG) revealed that between 2004 and 2009, the government gave away 155 coal acreages to private and public companies without a proper auctioning process. It is estimated that due to this, the government exchequer lost about $210 bln. The CAG later quashed reports of losses from the government’s coal block allocations policy. However, the already dwindling faith of investors in the current government got another jolt in the wake of numerous other scams that rocked the nation in the past.
The rupee weakened against the dollar beyond 51.30 as confidence in the global economy deteriorated again following weaker-than-expected Chinese and euro zone data. Weakness in equity markets and a strong dollar demand from oil importers kept the currency weak. With risk appetite on the weaker side due to doubts over capital inflows, the rupee is likely to remain under pressure, undermined by high oil prices. The global economic outlook will remain an important market focus. Any further evidence of deterioration in the Chinese and the euro zone outlook would result in a defensive stance on risk appetite with a shift into instruments such as the yen and dollar.
Ben Bernanke’s statement that the U.S. economy lacks the strength to sustain gains is another negative news item for the markets. The rupee may continue to remain weak over the next few weeks.
After dilly-dallying with the prospects of deregulation in petrol prices, the prime minister again hinted at a possible increase in petrol prices. Oil marketing companies (OMC) will be in the spotlight this week but without definite action from the government, their fate remains uncertain. ONGC, on the other hand, may hold its ground due to increased weightage in the MSCI EM Index.
The drama on the political front continued with the Samajwadi Party categorically stating its intention not to join the Congress-led UPA at the centre, emboldened by their thumping victory in Uttar Pradesh. There was a growing fear of a mid-term poll but issue-based support by both the Samajwadi Party and the Bahujan Samaj Party has allayed these fears to an extent. As long as there are no bigger scams unfolding and India Inc is allowed to function without any retrograde measures by the government, the markets may continue to attract global liquidity due to the relative growth differential.
India Market Weekahead: Global markets, FII action to be primary drivers
(The views expressed in this column are the author’s own and do not represent those of Reuters)
It was a flattish close for the markets in what was supposed to be an eventful week. But the biggest event — the budget – turned out to be a non-event.
The markets, which initially began on an upbeat note, felt let down after disappointment on the policy review and the budget front. As expected, the Nifty kissed 5500 early during the week but gave away its gains to finally close at 5300 levels.
The finance minister played it safe and refrained from announcing any radical reforms in the budget. The government failed terribly on the fiscal deficit front –5.9 pct of Gross Domestic Product (GDP) for FY12 against a projected deficit of 4.6 pct of GDP. The deficit target for the next fiscal has been pegged at 5.1 pct of GDP which may be difficult to achieve yet again. We hope the slippages may not be as bad and expect it to reach 5.5 – 5.6 pct of GDP in FY13.
Gross market borrowings for FY13, pegged at 4.8 trillion rupees, may increase further on fiscal slippages. A high target for market borrowings is likely to keep bond yields under pressure. What is even more disheartening is the budget did not give any clear roadmap for bringing down expenditure in the form of subsidies. Even the disinvestment target of 300 billion rupees was quite disappointing as how the government will achieve this remains obscure. If one were to take a leaf out of the ONGC experience, even doing 50 billion rupees would be difficult. The key would be pricing of the issues.
As expected, the implementation of key measures such as the Goods and Services Tax (GST) and Direct Taxes Code (DTC) has been left to a later stage with only a token mention of 49 pct FDI in the aviation sector. The final rollback of the stimulus doled out to the economy in 2008-09 was announced in this budget by hiking excise duty and service tax by 2 pct each.
Market specific announcements like the reduction of Securities Transaction Tax (STT) by 20 pct on delivery trades were below market expectations as delivery trades form a miniscule portion of the overall volumes.
It’s Budget week but be ready to book profits
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The markets ended in negative territory for the third straight week after the ruling Congress party suffered a setback in the recently held assembly elections, clouding the government’s ability to push major economic reforms. However, a sharp pullback of 2 percent seen on Friday saved the indexes from suffering major losses.
Contrary to popular belief of a Samajwadi Party-Congress alliance, the SP’s landslide victory resulted in the Congress being relegated. The less-than-impressive performance of the Congress would lead to the government pushing through more populist measures in a desperate bid to woo voters before the next general elections. If that happens, the Indian economy could further sink into a downward spiral, further wrecking the country’s finances.
Coming back to the stock markets, the primary markets got a booster with the stellar performance of the Multi Commodity Exchange (MCX) offering. The issue that had got subscribed 54 times got listed with a hefty premium of 38 percent over the issue price of 1,032 rupees. This goes to show that if priced correctly with sufficient money left on the table for investors, a public offering can sail through quite well. At current prices, MCX is available at 19x its FY13E EPS of 70 rupees. The key risk on the regulatory front is the probable introduction of commodity transaction tax in the upcoming budget, which could hamper trading volumes. Given the recent sharp gains, investors could book out partial profits at current levels.
Now that the assembly elections are over, the focus will shift to the two important events this week — the credit policy review and the Union Budget. The coming week might be the busiest week for 2012. Ahead of its policy review meet, the central bank surprised with a 75 basis points cut in the Cash Reserve Ratio (CRR). This larger-than-expected cut will ease systemic liquidity and signal a shift in monetary stance from an anti-inflationary one to a pro-growth mode. The coming RBI monetary policy meeting on March 15 may be a non-event and a cut in the repo rates is not expected until April. Similarly, before the Railway Budget on March 14, the railway ministry has increased freight rates across product categories by 20 pct – 32 pct. Thus, the upcoming railway budget may also turn out to be a non-event.
The finance ministry is considering a proposal to increase excise duty to 12 pct from 10 pct in the Union Budget due to widening fiscal deficit. Investors will also look for a possible road map for implementation of the Goods and Services tax (GST). Although, the introduction of the Direct Taxes Code is highly unlikely from April 1, some of the provisions of the proposed law may be incorporated in this Budget.
A cut in Securities Transaction Tax (STT) also seems to be on the cards which will lift investor sentiment and boost equity volumes. The finance minister had earlier circulated a note on a proposal to lower STT and widen the tax net to other assets such as commodities. An increase in the exemption slabs for personal income tax is also in the offing. One needs to see how the finance minister does the fine balancing act looking at the huge fiscal deficit. The recently released trade deficit data wasn’t too encouraging and rising oil prices will force the minister to revise subsidy estimates.
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.
Volatility Research has come up with a pretty good way to predict VIX “fear index” volatility as measured by NYSE VXX:
https://sites.google.com/site/Volatility Research/hot-tip
And it’s free, no gimmicks, strings or ads!
India Market Weekahead: Need for caution as correction may be steep
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The Nifty extended its rally for the seventh consecutive week to touch 5600, returning 3 pct for the week and making it one of the best market rallies in recent times. The bourse continued to show strength on signs that euro zone officials would approve a long-awaited bailout for Greece next week to avoid any disorderly default.
Hopes of a further cut in CRR also boosted sentiment. FIIs have pumped in $4.4 billion so far this year, which is a remarkable comeback after being net sellers for long.
The power sector continued to remain in the spotlight after the prime minister’s office asked Coal India to make the fuel available to private power producers which will reduce shortage of coal for generation plants. Our pick — Tata Power has gained around 30 pct so far this year; investors can continue to hold on to it.
The Air India debt restructuring plan involves conversion of its working capital loans from 26 banks to long-term loans of 10 to 15 years. As a result, the SBI gained significantly during the week. At levels of 2400 rupees, SBI trades at around 2.2x its P/ABV based on FY12E estimates that has suddenly crept above its five-year average P/ABV. Though this seems to be slightly on the higher side, markets are still giving it a thumbs up considering it is one of the biggest beneficiaries of a fall in interest rate scenario and improvement in asset quality. It would be wise for investors to book out at least partially as the asset quality is still an area of concern.
Amidst all positive news flows, Brent crude oil prices have inched up to $120/barrel over supply concerns which could threaten economic recovery. As India imports more than 80 pct of its requirements, the import bill is likely to rise, putting further strain on the current account deficit situation. This is probably one of the areas where the upcoming budget will surprise on the negative side.
High oil price has other problems like exerting pressure on inflation, rupee and corporate earnings. Stock markets seem to be ignoring this fact as of now due to the liquidity thrust from FIIs and sudden exuberance in the markets. But sooner or later, it will have to face the reality, which is when markets will probably have a hard landing.
Dear Baliga,
Your weely article in reuters about indian stock markets is always have a great value like eg. investing in stokc markets in the begining of the new year.
Your predictions are always correct.
