Not a very happy 2011 for the Sensex

Feb 12, 2011

In this issue:
» After 18 tumultuous days, Hosni Mubarak steps down
» India railways - seeing a new landscape
» IIP at a 20 month low!
» Fannie Mae and Freddie Mac to wind down?
» ...and more!

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 Chart of the day
Indian markets have had a roller coaster ride over the past year. The benchmark Sensex has moved from steep heights, to jaw-dropping falls. And since the start of 2011, everything has just gone downhill. The index has lost close to 14% of its value since the start of January. When we compare India with some of its regional peers' year to date (YTD) performance, the dismal show is very evident. India is the 2nd worst performer among major global markets. It is next only to Egypt, which was rocked by violent protests against its autocratic leader. So, is there something wrong with India? Or are we as usual subject to the erratic moods of the FIIs.

Data Source: Yahoo Finance, Countries represent their benchmark stock indices
*Egypt's benchmark index has not traded since Jan 27, 2011

Inflation has been one major sore point. Prices of crude and metals have been soaring. Cotton prices have also hit an all time high. The RBI's hawkish did not help matters either. These two factors will push up input and borrowing costs for most companies. Shrinking margins and profits are now evident.

But, India is not alone in the soup. Rising commodity prices and inflation are affecting most emerging economies. This is causing an exodus of funds, back to the developed world in an effort to chase higher returns. As of mid February, foreign funds have sold US$ 1.3 bn worth of Indian shares in 2011. This comes as a huge contrast to the record inflows of US$ 29.4 bn seen in 2010.

FIIs were the major drivers of last year's rally. Retail investors largely stayed out of the game. But we believe that India's long term story remains as firm as ever. Post the unearthing of corruption scandals, even the regulatory watchdogs are getting more vigilant to catch the wrong doers. Hence this sharp correction may offer you the most opportune moment to pick up stocks at reasonable valuations.

The question is, do you believe in India's growth story or will inflation/corruption be king? Post your comments or share your views on our Facebook page.

After 18 tumultuous days, the drama in Egypt, the most populous of the Middle East countries has finally come to an end. The news came out yesterday that Mr Hosni Mubarak, the current President is stepping down. He has handed over the power to the military, which will now have to ensure that Egyptians get to live under a democratic government. In other words, there is still a fair amount of distance between the cup and the lip. Mr Mubarak has stepped down alright but he was an important cog in the wheels of Middle Eastern political affairs. And it is this uncertainty that will have countries like US and Saudi Arabia worried. The financial markets though are currently focusing on the first fact rather than stay worried about the second outcome. Risk assets like stocks and oil had a good day yesterday whereas safe havens like gold and US Treasuries partly erased early gains. There will most likely be a long period of lull in Egypt from here on. The financial markets will thus have to focus on something else to make its assets move in the near term we believe. What could that be? Well, our guess is as good as yours.

There are quite a few thumb rules in equity research. One of the most popular we believe is the debt to equity ratio of a company. It is believed that for a company to be considered safe for investment, the debt to equity ratio should not exceed 1. If these levels are exceeded, the company could have problems repaying its debt in the future. Have you ever wondered whether a similar ratio existed for the optimal debt levels in an economy? It certainly does as per Harvard University economist Kenneth Rogoff.

In a recent interview, Rogoff has argued that many countries in Southern and Eastern Europe have external debt levels that far exceed 60% of GDP. And he believes that historically, that is a high number. In other words, many countries start resisting debt repayment at significantly lower levels. Rogoff has further added that even the US is on an unsustainable path of its own. Thus, in view of this, Rogoff has put forth a view that a global sovereign debt crisis is indeed coming. We cannot help but agree. The mountain of debt that US, Europe and Japan have accumulated does indeed look too big to be repaid anytime in the near future.

The series of interest rates hikes seem to be taking a toll on the economy. This is suggested by the slowest pace of growth in Industrial output (IIP) in 20 months. It is convenient for the government to blame a dismal 1% growth in December industrial output on a high base effect. However, it comes along with a 13% fall in the capital goods sector which is hard to ignore. The same implies reduction in capital investment which can hamper industrial growth in the times to come.

The IIP monthly data is considered to be too volatile to convey the whole truth. The Finance Minister suggests that one must wait and watch to see how it reflects on an annual numbers. However, with expectations for further rate hikes from the RBI; this may turn out to be just a start of a weakening growth trend.

Homeownership in the US will eventually become expensive. Let us explain how. As per the Treasury Secretary's latest statements, the US government intends to slowly wind down the role of housing giants Fannie Mae and Freddie Mac. This will mean an end of federal support for most US housing loans. Under the plan, the government will gradually reduce the US$ 1.5 trillion support system by 10% each year.

Well, these two companies do not lend directly to homeowners. They fund the primary lenders by issuing debt securities in domestic and international capital markets. The two companies were nationalized in the 2008 crisis. For your information, these two ailing giants still guarantee 97% of US mortgage bonds. And to stay afloat, have so far absorbed US$ 150 bn in taxpayer money.

So what happens if they seize to exist? And how will that make homeownership expensive in the US? The consequence of withdrawal of federal support will make mortgage bond investors wary. They wouldn't want to touch bundled home-loan bonds lacking government protection. As a result, they would ask for higher bonds yields. This in turn would raise the cost of home loans. However, all in all, this may be a sensible move. It will also reduce the poor taxpayer's burden.

Several government owned businesses in India have been in limelight in recent months. Some due their debut on the bourses and others due to better profitability. But one of the largest conglomerates in the government's kitty is yet at a nascent stage of evincing private sector interest. This is despite being one of the largest employers in the country. And at the same time touching the lives of more than 18 m Indians every day. Yes, we are certainly referring to the Indian railways.

Leave aside any comparison with the furious paced growth in China's rail infrastructure. But India's rail network has been deprived of very basic investments. Ones that could have helped the network keep up its capacity with the needs of a growing nation. Only recently has the government embarked on ambitious projects to facilitate inter-state passenger and cargo travel. The US$ 90 bn Mumbai-Delhi freight corridor in particular is expected to take care of transport of food items. This project along with the intra city metro rail projects are the ones that have been funded by global and private corporations recently. And they are expected to change the landscape of India's infrastructure. We only hope that with private participation, the railways' growth plans get better cemented.

While it was a positive week for the global markets, it was not so for the Asian markets. The BSE Sensex lost as much as 1.6% during the week. Hong Kong (down 4.5%) was the biggest loser of the week followed closely by Singapore (down 4.2%) as profit booking continues in the wake of the Chinese interest rate hike. Indian stock markets also closed the week in the red, down 1.6%. China and Japan were the only Asian countries to close the week higher, up 1% and 0.6% respectively.The biggest gainer of the week was Germany up 2.1%. In the Americas, US was up by 1.5% while Brazil closed the week up 0.7%.

Source: Yahoo Finance

 Weekend investing mantra
"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." - George Soros

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15 Responses to "Not a very happy 2011 for the Sensex"


Feb 16, 2011

India story is all hogwash. When all key and top persons are nose deep in scams and corruption and the ceo of the country is completely inactive and passively encouraging all wrongs, there is only one india story possible and that is going the way of Tunisia and Egypt and now Baharin. It will happen sooner and end the pain for all.



Feb 15, 2011

We believe in our Business Leaders and very sure that they will ensure India Growth Story.As far as Inflation is concerned our babus will not do much except few personalities and Weather God we cant predict.
But we can predict or rather more confident about our politicians/ babus that they will continue their usual business of corruption which is their roji/roti.


D. Sampat Kumar

Feb 14, 2011

India is at the cross roads...

Come March and inflation is going to be benign.. Well RBI and FM have their KRAs well defined and isn't it a coincidence that inflation posts a smart u turn as we head towards the year end? Do we need to believe the numbers or the monetary tightening is really showing results.. As far as I can stretch my memory,it is always a case of inflation numbers dramatically cooling down as we near the financial year-end!!



Feb 14, 2011

Increasing the interest rates by RBI to control inflation will not serve the purpose. Most of the companies will pass on the increase in interest either directly or indirectly & hence will ultimately result in increased prices.


Vinod Saini

Feb 14, 2011

I agree with your views. The valuations were indeed on the higher side & the present decline offers a gr8 opportunity to build a long term portfolio.


Kunal Kundu

Feb 14, 2011

Here's what I had to say on the IIP number:

The IIP number released today merely confirms what I have been saying for a long time. India's Index of Industrial Production or IIP plunged to a low of 1.6% in December 2010 as compared to 18% recorded during the same period in the previous year. In November, 2010, the Index of Industrial Production had expanded by a meager 2.7%.

Clearly the process of the slowdown that started as early as March'10, continues. A look at the three month moving average data (3-MMA) confirmed the slowdown from March and now, with Monetary tightening starting to take effect, slowdown is but a natural consequence. Add to that negative signals emanating from the capital goods sector and things indeed look less than sound, atleast in the short to medium term.

With inflation likely to remain at elevated levels as is the interest rate, 2011 will be quite a difficult year for India. This also exposes the basic frailty of the Indian economy. A supply constrained economy like ours is expected to face inflationary pressures if the economy starts to grow fast over a period of time.

All actually boils down to the basic problems that continues to haunt the economy:

1) Inadequate physical infrastructure
2) Continuous under-investment in agriculture
3) Clear lack of accountability in governance
4) Policy decisions with political overtones that result in wrong policy choices etc

An economy that flatters to deceive, I expect the FY 2012 GDP growth to hover between 8 to 8.2%, with a downside risk. Its a shame really, given the potential that is there.

I will conclude with my favouraite phrase - India is growing despite the politicians and not because of them


DC Sekhar

Feb 13, 2011

The India Growth story will be intact in medium to long term but there will be contraction of earnings in short term. The inflation is a major concern & the corruption will haunt the government until there is a reversal. It is not the sole reason for the fortune of stock market. The smart FIIs will not buy stocks, when the valuations sore high. Hence they are forcing a bear Indian market. There is absolutely no justification for correction but let us remember that FIIs did the same in China, in the last quarter of 2010. Now it's the turn of India. Let's be patient enough for at least 6-8 months, we will here reverse analysis to justify investment after hammering.



Feb 13, 2011

Not a very happy year for the SENSEX so far. A 3000+ points decline is not that easy to recover, amidst a whole lot of national issues... inflation, IIP Data, corruption, kickbacks, scams, and now reading of the wrong speech at the United Nations. It has been a roller coaster ride both for the SENSEX AND NIFTY for the past 2 months.

FIIs have gradually withdrawn their money from Indian markets, but they might find it difficult at current levels of share valuations. So it is time for Indian investers to wake up and take a call. Friday (11/02/11) was, perhaps, the beginning of a new episode of trend reversal in markets, and hope that it will continue in the coming months and reach the peak once again.

So take a call on the markets, and let the bulls come charging and take over. Equity valuations are fair after all....


Manoj Kumar

Feb 13, 2011

Nothing is fixed and everything is relative. India Story is also relative and dependent on many a factors. Stable polity, corruption free administration, further opening up of economy and quality education are some of the factors on which this story is dependent.



Feb 13, 2011

Having heard and read a thousand times that " "India's Longterm story is intact"
Retail Investors i.e. "AAM Janata" starts believing this story.
However Corruption, Incompetent Government
Eco-terrorists and the beaurocracy along with the
Super Rich unscruplous Corporate Honchos , create umpteen hurdles for keeping the said story intact. Time alone will tell the final outcome of this.

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