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Will Dr. Doom get it right again? - Views on News from Equitymaster
 
 
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  • Jun 20, 2009

    Will Dr. Doom get it right again?

    Nouriel Roubini aka Dr. Doom sounded his first bearish overtone on India earlier this week. And the way stocks moved was not far from what he said. After fourteen straight weeks of rally led by realty and infrastructure stocks, the Indian markets had a rather dull trading week. The benchmark BSE-Sensex declined week-on-week by almost 700 points (4.7%), though it still trades 78% higher than its lows touched on March 9th. With the exception of China (index up 3%), weakness was all pervading in other Asian markets. The key benchmark indices of Japan and Hong Kong ended 4-5% down. As for other global markets, key indices in the US, Brazil and UK all closed with losses in arrange of 2-4%.

    Source: Yahoo Finance Source: Yahoo Finance

    Commodity stocks were amongst the biggest losers during the week across the world. In India as well, the BSE-Metal and BSE-Oil and Gas indices were at the receiving end given that these posted losses of 10% and 11% respectively. The pressure on stocks from the sector was seemingly on the back of fears that commodity prices have entered a bubble phase following China massive purchases, not for satisfying the current demand but for stock piling. Indirectly, this would suggest that once the country stops this buying binge, it would be difficult for commodities (like oil and metals) to sustain the recent advance. It may be noted that crude oil prices have already doubled in price since mid-February.

    Source: BSE Source: BSE

    Coming back to the Indian markets, to say the least, trading was extremely volatile throughout the week. Apart from metal and oil & gas stocks, those from the realty space were among the biggest losers following the euphoria with which they had risen for the previous three months. This is also considering the fact that these stocks (as also from the infrastructure space) that have seen the maximum rise since this rally began in March still have weak fundamentals - overextended balance sheets, depleting profitability, and weak demand. The buying in them was overdone and thus selling followed.

    On the economic front, this week saw the first of its sorts when it comes to India's inflation, which dropped into negative the negative territory (deflation) for the first time since the government started releasing weekly data in 1977. The figure stood at -1.6% (meaning prices fell by 1.6% as compared to the same time previous year) during the first week of June. This may be attributed to the high base effect of last year's prices wherein commodity prices were at their peak.

    However, it may be noted that retail inflation as measured by consumer price index (CPI) is still high at around 8%. In fact, inflation in the prices of food items like cereals and pulses continue to be high - 13.6% and 16.8% respectively. Hence, 'deflation' still brings no respite to the common man. Overall, economy watchers believe that the current deflation is a temporary phenomenon and the number will be back in the positive territory in the next few months, especially on the back of rise in oil prices.

    The week also saw the Centre for Monitoring Indian Economy (CMIE) state that it expects the Indian economy to grow by 6% to 7% in the current fiscal (FY10), though it would still take a couple of years for it to come back to the phenomenal growth rate of 9%.

    Coming to some specific actions within India Inc., the week saw the gas supply dispute between Anil Ambani controlled RNRL and Mukesh Ambani's RIL reach another level as the Bombay High court ruled the decision in favour of the former. As per the ruling, RIL will have to supply 28 mmscmd (million cubic metres a day) of gas to RNRL for US$ 2.34 per mmBtu (million metric British thermal unit) for the term of 17 years. This move will largely benefit RNRL as it would receive an assured supply of gas at a price which is much lower than current prevailing market price of the gas. On the other hand, the gas supply at a lower price accounts for around 70% of the initial output of RIL's KG-D6 block, which will lead to lower realisations for the company. While RIL is now said to be preparing itself to challenge the order before the Supreme Court, whatever be the decision, while one brother is going to benefit tremendously, the other is going to lose out significantly. At this time though, it's 'Advantage Anil'!

    Movers and shakers during the week
    Company 12-Jun-09 19-Jun-09 Change 52-wk High/Low
    Top gainers during the week (BSE-A Group)
    Castrol 339 376 10.9% 380 / 234
    Mphasis Ltd. 354 392 10.6% 375 / 119
    Central Bank 78 85 9.2% 82 / 30
    Piramal Healthcare 273 295 8.1% 363 / 164
    IDBI Bank 100 108 8.0% 113 / 40
    Top losers during the week (BSE-A Group)
    Jet Airways 288 232 -19.4% 567 / 115
    Bhushan Steel 798 657 -17.6% 956 / 260
    GMDC 93 78 -15.6% 150 / 25
    Sterlite Industries 718 607 -15.5% 790 / 165
    Hind. Copper 283 239 -15.4% 328 / 70
    Source: Equitymaster

    In another news, that has come in just today, and that might not go down well with India's telecom service providers, the government has doubled the price (to Rs 40.4 bn) at which it will allocate 3G spectrum to bidding companies. 3G, which stands for third generation is a service which enables video calling and high-speed internet access on mobile phones. This price of Rs 40.4 bn will have to be shelled out by the winning bidder for a pan-India 3G license. And given that the government is planning to allocate six such licences for each circle (India has 23 telecom circles), the revenue for the government is estimated at a minimum of Rs 240 bn.

    Back to the action in the stockmarkets, the week saw Nouriel Roubini aka Dr. Doom sounding his first bearish overtone on India. And as you would have believed, his words do not make for a very good reading. Speaking to leading business daily, Roubini was of the opinion that the Indian stock markets may have run up too soon too fast and there is a potential asset bubble building here. Although he agrees that part of the reason the stocks have rallied is because of better fundamentals in these markets, but he also remains concerned about the easy-money situation which is pushing up asset prices sharply. Going by the man's track record, we better take his comments seriously.

     

     

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