Apr 8, 2003|
Bourses: Domestic economy holds key
FY03 has not been particularly good for the stocks markets. The BSE Sensex has fallen by over 12% while the NSE Nifty has fallen by over 13%. A relative slowdown in the economic growth compared to FY02 as well as war concerns have taken a heavy toll on the stocks markets. But even amidst the gloom, India is witnessing welcome structural changes that will go a long way shaping the economic prospects of the country in the long term.
FY03 was not bad for all the sectors. Banking, engineering and steel sectors have done very well despite the general gloom. This is due to structural as well as well as operational changes in these sectors. For the banking sector, it was the passing of the securitisation law as well as falling interest rates that cheered investors. The parliament passed the ’Securitisation and Reconstruction of financial assets and Enforcement of Security Interest Act 2002’. This new law gives sweeping powers to lenders to recover their dues. The law allows banks to take over the assets of the defaulting borrowers and to either dispose them off or hand it over to an asset reconstruction company in order to recover their dues.
The steel sector on the other hand, was buoyed due to improving steel demand in the international markets. The improvement in demand also helped improve realisations of steel companies considerably. The debt-restructuring package also added to the positivism towards the sector.
Engineering stocks on the other hand, have been in the limelight essentially due to the initiatives taken by the government to improve the infrastructure facilities in the country. Apart from the highway projects under implementation, the government has announced more projects to improve the infrastructure facilities in the country. Most engineering companies saw their order books overflowing.
The likely passing of the Electricity Bill 2001 is likely to provide further stimulus to the sector. The new bill will go a long way in reforming the power sector by concentrating on the distribution side of the equation. For one, the bill seeks to do away with the compulsory licensing required to set up generation and distribution plans. The bill seeks to set up a central power grid, which may act as a market for buyers and sellers of electricity. But perhaps the most significant aspect of the bill is the fact that it requires the various state governments to sign up for corporatising their SEBs and therefore seek private participation in the distribution of electricity. This will bring about the necessary improvement in the distribution and transmission infrastructure of states and thereby nurse the SEBs back to financial health. Subsidised tariffs will also become a thing of the past.
Let’s take a look at how Indian stock markets performed vis-à-vis international markets. The table shows that the Indian indices have done relatively well compared to its peers in the developed markets. US, Japanese and most European markets have fallen drastically in FY03. A key reason for this weakness was the slowdown in the growth engine of the world - the US. US economic growth has been slowing down since the September 11, 2001 attacks. The main economic driver of Europe i.e. Germany is on the other hand, is facing economic stagnancy. In 2002, German economic growth was restricted to 0.2%.
In the first three months of 2003 however, concerns of war played on the minds of investors. First it was the uncertainty whether the war on Iraq would actually take place. Once it started, investors are now worried about the duration of the war. The longer the war stretches, the more difficult it becomes for a global economic recovery to take place. As the war stretches in Iraq, global markets have taken a toll.
Compared to other emerging markets, Indian stock markets have not done too well. In a condition where most of the global markets have fallen, Russian and Egyptian markets have actually risen in FY03. But compared to other Southeast Asian economies, India has done relatively well. This is due to the fact that Indian economy still is in the development phase, and therefore sees a bulk of demand coming from within.
The Russian economy has been growing at a consistently good rate in the last few years and this has increased the investor attention to this country. Moreover, the importance of the country in investor radars has gone up due to the fact that the Russian economy is emerging as a major crude oil exporter. China on the other hand, has managed to limit the fall of its stock market due to the robust growth of its economy. Domestic demand itself is so strong that it can very well compensate for a fall in exports.
One of the encouraging aspects for the Indian indices has been a marginal re-rating by Morgan Stanley Capital International (MSCI). It raised India's weightage in its MSCI Asia-Pacific (excluding Japan) index to 3.14% from 3.12%. India's weightage in the MSCI emerging markets index was also increased to 4.25% from 4.21%. The MSCI index is a kind of reference for FIIs investing in India. One can see from the graph above that FIIs started to show increasing investments post the month of October when India’s MSCI weightages were increased. Before that inflows had been largely volatile.
Another important factor to notice is that unlike FY02 where FII inflows were largely volatile, FY03 has shown an upward trend in FII investments at least in the second half. There seems to be a changed perception towards the Indian stock markets due to the fact that it is one of the fastest growing economies among emerging markets and even otherwise. The government’s initiative to bring about economic reforms should also stand India Inc. in good stead. Though the MSCI rating changes were marginal, if the western markets continue to exhibit volatility and sluggishness, more money could find its way towards emerging economies.
Going forward as investors enter into the new financial year i.e. FY04, the state of the Indian economy will be the biggest factor investors will have to contend with in order to make their investment in equities. This is likely to dictate the performance of the stock markets more than global economic pressures.
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