Stockmarkets: The macro view... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Stockmarkets: The macro view...

May 15, 2006

The Indian stock market express continues to chug along, crossing various milestones along the way. The optimism has been fuelled by a robust Indian economy, strong demand and no dearth of liquidity in the markets. That said, despite the buoyancy on the bourses, developments in the global market (including the Fed rate hike) does prompt us to examine certain issues at the macro level, which we believe should be kept in mind by investors. The Fed does it again: The US Fed has increased its benchmark interest rate by 25 basis points (0.25%) to 5%, which effectively means that the rates have been raised for 16 times in the past 22 months beginning June 2004. Investors should note that with rising US interest rates, equity money flows into emerging markets like India could be impacted in the medium term. The US 10-year yield has already crossed the 5.2% mark and further a rise cannot be ruled out. In such a scenario, a foreign investor has an option to invest in a security, which assures him more than 5% return (almost risk-free) versus taking a emerging market bet (including India).

Trade deficit widens: India's burgeoning trade deficit continues to remain a cause for concern. During April 2005 to February 2006, India's trade deficit stood at US$ 37.4 bn and was higher by 51.7% than the previous year (US$ 24.7 bn) (Source: Reserve Bank of India (RBI)). What is pertinent to note is that while exports posted a strong growth of 26.6% YoY during the said period, they still lagged imports, which grew by 33.1% YoY. It must be noted that GDP growth at around 8% and strong capital goods imports have kept imports buoyant and consequently, a rise in the trade deficit burden.

Paradoxical rupee:A current account deficit generally exerts downward pressure on the rupee, which in turn makes imports expensive, thus enabling in curbing the same. What has happened in the past couple of years is the opposite. The rupee has been on an appreciating trend since breaching the Rs 46 levels against the greenback in May 2004 (barring December 2005, wherein it once again depreciated to Rs 46.30 levels against the dollar). One of the main reasons why the rupee has appreciated despite the trade deficit is the surge of Foreign Institutional Investors (FIIs) inflows in to the country. In 2004 and 2005, net cumulative FII inflows amounted to US$ 8.5 bn and US$ 10.7 bn respectively. In the Jan-May 2006 period itself, FIIs have pumped in money to the tune of US$ 5 bn in Indian equities (Source: Securities and Exchange Board of India (SEBI)). The other major reason for the appreciation is the fact that the greenback is weak (not that the rupee is strong).

Oil spurts: The surge in crude oil prices over the years is not a surprise to anyone (currently over US$ 70 a barrel mark). This is certainly not good news for India since it imports around 70% of the oil that it consumes. During April 2005 to February 2006, while non-oil imports posted a growth of 26.8%, oil imports increased by 49% due to the steep rise in international crude oil prices (Source: RBI). A US$ 10 per barrel rise in crude prices is enough to shave off nearly 1% from the GDP growth rate of emerging economies like India. This is in sharp contrast to advanced economies, which would witness a 0.25% decline in their GDP growth rate!

To sum up...
The Indian stock markets have been awash with liquidity (domestic and FIIs). That said, with current valuations looking stretched and with the US Fed not exhibiting signs of halting the rate hiking process, whether the current rally will sustain remains to be seen. While we do not want to be the harbingers of doom, we nevertheless advise investors to exercise caution while investing in stocks at current levels.

Equitymaster requests your view! Post a comment on "Stockmarkets: The macro view...". Click here!

  

More Views on News

The Top 6 Artificial Intelligence Plays in India (Views On News)

Dec 6, 2021

Investors looking to tap into AI theme need to keep an eye on tech firm leveraging the power of AI are making things possible.

6 Penny Stocks that Rallied 1,000%+ in One Year (Views On News)

Dec 6, 2021

These penny stocks shed their penny status by surging 1,000% or more in the last one year.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Prepare for a Stockmarket Pandemic in 2022 podcast (Views On News)

Dec 6, 2021

The transition from a small correction to a market crash to a bear market may be without any warning.

SEBI Issues Operating Norms For Silver ETFs. Here is All You Should Know (Outside View)

Dec 6, 2021

SEBI has issued operating norms for Silver ETFs to ensure uniformity of the schemes.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Dec 6, 2021 03:36 PM

MARKET STATS