Money on the markets

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.

from Expert Zone:

Stock market under stress

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

The first big jolt to the market after the 2008 crisis had come last August when FIIs disinvested 95 billion rupees worth of equity and moved into liquid assets. That brought the Sensex down by 1500 points and pulled the dollar up by 4 rupees.

The FIIs wanted to reduce their risk which had been heightened by the EU crisis. It was not Greece alone but even Italy, the third largest European economy, which was in danger of sovereign debt default. These governments could borrow only at interest rates over 7 pct, about 2 pct more than the average rate for EU countries.

Undoubtedly, the prospects for the Economic and Monetary Union (EMU) were grim and there could have been sheer chaos had a weak state like Greece or a strong state like Germany left the Union. France and Germany did finally persuade other members to accept fiscal consolidation and establish a permanent bailout fund. An early agreement failed mainly because of the veto exercised by Britain. Hence, a new treaty will have to be signed which is not likely before March.

The promise of a new treaty was not enough to create confidence among investors in the solidarity of the EU or the European banking system. For that reason the recovery of world markets did not come through. The BSE Sensex hardly changed its mood and, with the added fear created by the 5 pct fall in industrial production, declined further.

There were triggers that could have kicked up stock prices. A good opportunity for market recovery was lost when the government almost withdrew the earlier amendment to facilitate FDI in retail. With a fractured parliament and undependable allies, it is unlikely that any major reform will come through before the elections in Uttar Pradesh.

The next budget can be a trigger but is unlikely to be one. For, the kind of pressure under which it is at present requires the finance minister to seek approval to borrow another 550 billion rupees, mainly to fund subsidies. As such, it may be difficult to even maintain the fiscal deficit at 4.6 pct as provided in the last budget.

from Expert Zone:

2012 – Boom or Doom?

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

What a year 2011 has been. Except certain commodities such as gold and oil, every other asset class has been hit. With Sensex down more than 20 pct YTD, 10 year g-sec yields up by almost 1 pct and rupee down by almost 14 pct against the dollar, it has been a poor year for investors. This was caused by a bout of strong global risk aversion led by the European sovereign debt crisis, high inflation in emerging markets and consequent monetary tightening, and lack of proper policy action in India. The only salvation came from commodities such as oil (up almost 26 pct in rupee terms) and gold (up almost 38 pct in rupee terms).

Are any of these likely to continue haunting us in 2012? Or will there be a new set of problems? Is the worst already behind us? That's the million dollar question on everybody's mind. The irony is few of us, if at all, have the right answers. Still based on evidence available today, one can hazard a guess.

What does 2012 have in store for the investor? There is no doubt that growth has slowed down. The poor industrial growth numbers over the last quarter and the latest second quarter real GDP growth of 6.9 pct (manufacturing growth was a mere 2.7 pct whereas mining output contracted) drive the point home.

Is it going to change in a hurry? Seems improbable. After all, more than a year of continuous rate hikes should have taken its toll on growth. And to top it up, inflation is yet to subside at least on a year on year basis, even though that is not the best way to look at it. The fall in the rupee hasn't helped either, exacerbating the already high trade deficit and inflation by making imports costlier.

But aren't we pricing it all in? Aren't equity valuations cheap and yields already near 2008 highs? True. But stocks can get cheaper still? Markets can remain irrational longer than you can remain solvent. Remember, we are still looking at Sensex valuations with respect to FY13 earnings which price in a 16-17 pct growth over FY12. Whereas FY12 earnings growth is already being revised down to 10 pct, expected FY13 growth can be downgraded further if macro indicators worsen. Also, the Sensex earnings yield (basis forward PE of 13-13.5 as per FY13 earnings estimate) at approx 7.5 pct is still short (approx 0.8 pct) of the one year bond yield. Historically, equity markets have come out of a bear phase once Sensex earnings yields have been higher than bond yields by more than approx 50 pct i.e. the ratio between Sensex forward earnings yield and bond yields has been around 1.5. On this basis, valuations seem to be in a fair zone rather than being screaming cheap. For Sensex yields to become 1.5 times of bond yields today either the Sensex will have to be de-rated further or the bond yields will have to come down significantly. It is unlikely that either of these events happen in isolation. Rather a combination of both, i.e. a price or time correction in stocks coupled with the bond yields coming off significantly seems to be a more plausible scenario going ahead.

The initial part of the year 2012 (probably the first half) thus might continue to see high volatility as a result of the above. But as we move to the latter half of 2012, things should start improving. Bond yields are most likely to have come down quite some distance by that time (assuming that inflation moderates -- month on month growth momentum in core WPI inflation is already showing signs of slowing down -- and RBI starts cutting rates) and equities should be available at a real bargain by then. The second half of 2012 should thus be much better than the first.

from Expert Zone:

Sensex: Key takeaways from 2011

(Nipun Mehta is an award-winning private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

About a year back in November, we were at the highest ever level of the Sensex with hopes of moving higher. A year hence, as we inch closer to the end of 2011, the Sensex has fallen more than 26 pct from its peak, and then recovered a bit.

In the interim, there have been bouts of volatility, long periods of dull range-bound movements, and a lot of events and learnings from the domestic and international markets.

The biggest learning in the last year has been for the present generation of investors who would not have seen such a long period of stock market underperformance and for whom the definition of long-term has changed. For those who started investing after 2003, the last three years have been an excruciating period yielding seriously negative returns. Most of these portfolios are still a few years away from returning to green. The key lesson is, short-term is out and long-term is in, with long-term to be defined as more than three years.

The other key learning during 2011 has been for the Indian corporate sector, where some hardly ever hedged their forex exposure. It was largely perceived by these companies that the rupee would remain stable and the Reserve Bank of India (RBI) would intervene whenever there were sudden bouts of currency inflows or outflows.

This prevented several mid-sized companies from taking a forex cover with the objective of saving costs. After losing significant sums during 2011 on account of foreign currency fluctuations, risk management for forex has all of a sudden become the buzzword for companies that have foreign currency exposure. The corporate sector is unlikely to take the currency fluctuations for granted any longer.

It is gradually becoming apparent that after a few years of excellent domestic economic growth, even when the global economy was struggling, the growth momentum for an 8 pct (or thereabouts) GDP growth for the country cannot be taken for granted any more. Estimates for closer to 7 pct GDP growth for 2011-12 have already been announced by rating agencies. The decision paralysis and governance deficit within the government is at an unanticipated new low and threatens to pull down GDP for 2011-12 to 6.5 pct levels. The greater threat, however, is for the Indian corporate sector -- starting to look overseas for expansion rather than investing in India, a far cry from the 'India shining' story that used to pull large investments from other countries into India.