Should Indian markets be worried about more shocks?

Jul 13, 2010

In this issue:
» India's IIP growth is 11.5% in May
» Loan growth yet to take off in FY11
» The future of India's infra projects lies with...
» Outlook for the Indian IT sector
» ...and more!!

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Asian economies learnt some very hard lessons from the 1997 Asian crisis. So much so that the various reforms that were put in place helped the region become resilient to external shocks. This has been amply demonstrated in the recent global financial crisis. Although many of the Asian economies did slow down, their growth was still much stronger than what their Western counterparts were recording.

But this has also brought its own share of problems. The environment in the developed world is not very encouraging. Europe and Japan are saddled with huge debt and are still coming to grips with it. The US is also hobbling along. As a result, there is very little investment appetite in these economies. And so, all that money is still flowing into faster growing Asian economies including India. Little wonder then that the IMF has asked Asian economies to be prepared for further shocks. This is keeping in mind that surging capital inflows and asset bubbles pose significant challenges for the government in its policymaking.

The RBI in the last one year has also been grappling with the problem of excess liquidity fueled by FIIs bringing in truckloads of money. Stock prices also moved up considerably in the past one year. This has pushed up valuations of many stocks. The RBI since then has clearly signaled tightening of its monetary policy. Although no significant announcements have been made with respect to imposing capital controls.

The good news is that there are no bubbles forming yet in the Indian markets. In that sense, any further negative developments in Europe may actually be a boon in disguise. Because given the interconnectedness with the global markets, stock prices in India will then come down. And provide investors that perfect opportunity to pick up some quality stocks at a bargain.

 Chart of the day
May was not a good month for India when it came to industrial production. As today's chart of the day shows, India's industrial production grew by 11.5% in May 2010. This is much lower than what was recorded in April and also lower than what was expected. Obviously, it would not be prudent to come to conclusions based on one month's data. A few months more will give a clearer picture of whether a slowdown is taking place in the manufacturing sector. That said, all indications point out that the RBI is not likely to ease its monetary policy anytime soon.

Data Source: The Economist

Bankers are having their hands full these days. Incremental loan growth has touched nearly 20% YoY for the first quarter of FY11. This brings it close to the RBI's full year target. The 3G (telecom) loans have emptied their coffers to quite an extent. And the shift to base rate pricing is also taking a lot of their time and effort. But bankers believe that their job is far from done. The loan growth seen so far in FY11 is not broad-based. In fact steel and power are the only sectors that have been borrowing. Also, the 3G loans may attract high risk weights unless classified as secured. Further, the customers who borrowed under the PLR loan pricing system have been allowed to continue with the same. The bankers, however, are uncomfortable with two loan pricing systems. Bankers therefore have appealed to the RBI to classify the telecom 3G loans as secured and cease the PLR system with effect from 1QFY12. All said and done, banks are readying themselves for more challenges in terms of loan growth and quality in the months ahead.

India's capital city of New Delhi recently got a new, spanking airport terminal. State of the art, it is clearly a testimony to India's growing economic clout. An article in The Economist though has doubts whether this new landmark project is indeed a symbol of India's future. Or is it just an exception? And the doubt is not without reason. It is quite well known that infrastructure, or the lack of it, easily shaves off a couple of percentage points from the country's GDP growth rate. And it isn't that the Government is not doing anything about it. In 2007, it set an ambitious target of pumping in as much as US$ 500 bn into infrastructure over the next five years. Today, we are more than three years into the plan period and already a shortfall of US$ 150 bn is staring us in the face.

The shortfall has been attributed to poor private sector participation. And why not? When projects in India have a track record of facing monumental delays, investors are bound to look the other way. But now a solution has been found to this problem. It is in the form of infrastructure debt funds. These debt funds will buy loans from banks for projects that have completed construction and entered into commercial operation. This would then free up some of the banking system's capital so that the same could be channeled into projects at an earlier stage of completion. Such a move indeed makes sense. This could enable a lot of private investors to play ball as their risk now stands reduced considerably. Thus, the future of India's infrastructure projects now hinges upon the capital that such infrastructure debt funds are able to attract.

The result season began on a weak note for the IT sector. IT major Infosys reported a 7% QoQ decline in their net income for 1QFY11. The results were impacted by the higher wage expenses, higher tax rates as well as lower other income as compared to the previous quarter. The management has said that while the global scenario remains uncertain, they are witnessing an increase in demand from clients. Infosys added 38 new clients during the quarter and saw repeat business increase to 99%.

The IT sector has been witnessing pressures on their billing rates due to the global financial crisis. This combined with wage hikes and an appreciating rupee has added to the woes of the IT companies in the recent past. However, with a recovery in IT spending by companies, demand is expected to go up in the coming months. This is expected to offset the negative news and improve margins.

The yuan is expected to appreciate. And China's key export market, Europe, is in shambles. In light of all this exports offer bleak prospects to drive China's GDP growth. No surprise then that China is looking at consumption from its own citizens like never before. And there are many things working in its favour as far as this transition is concerned. For one, wages in China have shown a steady rise and quite a fast one at that. This means more money in the hands of the average Chinese consumer. Growing number of jobs and the hiring plans of Chinese employers too paint quite an optimistic picture. Thus while the exports led growth may cool off, domestic consumption might just be enough to pick up the slack.

The importance of policy making in an industry cannot be emphasized enough. In fact, in certain industries they could perhaps be terms as the sole determinant of which way the profits move. Thus, in today's fiercely competitive world, it helps to have someone in your company who has walked the corridors of power on quite a frequent basis. And who better than the mighty civil servants to suit this profile.

Thus, it doesn't come as a surprise when a leading daily proclaims that the trend of civil servants hanging their boots of public service and donning the new garb of a corporate executive is increasing by the day. There are some who term these sorts of guys as lobbyists. However, for people who have already made the switch, the term comes across as rather derogatory.

We believe that the success of such trends should be viewed from the point of view of reforms. Since a civil servant is well versed with the limitations that the Government works with and is also aware of its checks and balances, he can help speed up reforms by helping companies understand the Government's point of view and also the other way round. But sadly, such reforms have been few and far between.

Meanwhile, Indian markets languished in the red for the larger part of the day, although strong buying activity in the later hours pushed the indices above the dotted line. At the time of writing, the BSE-Sensex was trading higher by around 20 points. Gains were largely seen in oil & gas stocks.

 Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch

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5 Responses to "Should Indian markets be worried about more shocks?"


Jul 15, 2010

yes" indian market must prepare for more shocks.way in which market is behaving irratinaly it looks sure possibilities.from 06-03--09 sensex from 8047 to 15600 on 12-06-09 just 100 days. 7600 points and as against this now from 13-07-09 sensex 13220
to 18150 on 14-07-10 whole one year just 5000 point in one year. now IIP suddenly collapsed???? something hidden????? investor must get away from market.
quality of shares except few jumping-bumping shows doubts.
except few companies market sensex can crash to
may 09 levels??? reason can follow.



Jul 13, 2010

"Thus, it doesn't come as a surprise when a leading daily proclaims that the trend of civil servants hanging their boots of public service and donning the new garb of a corporate executive is increasing by the day. There are some who term these sorts of guys as lobbyists. However, for people who have already made the switch, the term comes across as rather derogatory."

My comments: Most of the civil servants who take up avocations in PSUs are not doing it for the benefit of those PSUs, but to just keep themselves more engaged and thus they tend to show enough initiatives in boosting up the PSUs. The main reason for the PSUs and private corporates recruiting them is mainly as lobbyists and it true though may sound derogatory!



Jul 13, 2010

To say there are no bublles is not exactly correct. The real estate is a big bublle. The builders borrow from banks and also collect money from customers who in turn borrow from the banks without being aware that the builder has borrowed mortgaging the property. Thus the double the value of the property is coming as lliquidty in the market. It is not possible to prect when exactly the bubble will burst



Jul 13, 2010

Excess Liquidity

The reason for excess liquidity is foreign funds and creating havoc with pricing going up. RBI is showing blind eye to this and putting the citizens in to trouble by increasing the lending rate.

Citizens are sandwiched by flow of foreign money and higher interest rates. Well done RBI...


Sanjay Negi

Jul 13, 2010

A faster way to reforms would be to open up the bureaucracy to lateral entry at all present the Government follows a caste system(Class 1,2,3 &4)where employees are recruited based on some silly exams by UPSC (a little different than the caste system based on birth)and then these employees remain in these classes(castes) till retirement. No question of allowing outsiders in when even the insiders are fixed into their castes/classes...

UPSC can be safely abolished and people can be hired on short duration contracts with clear goals and is important to get the maximum numbers of people of all backgrounds to have briefly worked for the government during their careers...the whole opaque system will start becoming somewhat translucent....

Of course there needs to be a core of civil servants who would be permanent and hold the system together...but that number can be one twentieth of the total planned employee base for the government...

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