Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
On fire! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 19, 2005

    On fire!

    What is it that we are talking about? Indian economy, the stock markets or crude oil prices? Both - the Indian stock markets and crude oil prices have now got accustomed to touching new highs everyday. So much so, that we have stopped rejoicing at BSE-Sensex touching 7,900 levels and worrying about oil touching US$ 67 per barrel! Also, natural calamities and geo-political threats have failed to ruffle the feathers of the Indian investor. While we support the former (Sensex rally) on the back of adequate rainfall and revised GDP target (the latest is 6.8% for FY06), the latter (crude prices) has historically been the government's headache.

    Although it is common knowledge that Foreign Institutional Investors (FIIs) have been the major drivers of the rally (having pumped in US$ 7.4 bn in 2005 to date), what is incomprehensible is the fact that domestic mutual funds (MFs) are also showing interest at the current high valuation levels. The debatable factor, therefore, is whether India is still 'shining'. Is the economy progressing at a comforting pace or beneath that seemingly tranquil surface, the imbalances and tensions are only getting worse?

    Arguments in favour

    Sufficient rainfall...:  ...or should we say more than necessary? While the better part of the country has been blessed with adequate rainfall this monsoon, the rain Gods have been more than generous on certain regions (like Maharashtra, Gujarat and Karnataka). In a primarily rain-fed agri economy like our's, rainfall signals better prosperity of the rural economy (70% of the Indian economy) and filtering in of the same into the industrial (higher production of consumer durables) and service sectors (banking and insurance).

    Free trade policies:  The recent Comprehensive Economic Partnership Agreement (CEPA), a bilateral agreement signed between India and Singapore, is a combination of Free Trade Agreement (FTA), a bilateral agreement on investment promotion and protection, an improved double taxation avoidance agreement and a program of cooperation in tourism and other fields. The same augurs well for the Indian economy given that Singapore is India's largest trade partner in the ASEAN. This is because, while it is difficult for these singular developing nations to manifest their economic muscle in bilateral economic negotiations (on platforms like the WTO), a combined effort will lend them better momentum.

    Arguments not in favour

    Interest rates looking up:  With the government's Rs 80 bn borrowing programme on the anvil, the excess liquidity may soon be sucked out. The fresh G-Sec offerings are also expected to be at a premium coupon rate compared to the current benchmark 10-year G-Sec yields. The same may trigger an upside to interest rates thus paving the way for inflationary pressures.

    Oil price hike on the anvil:  The 40% rise in crude oil prices over the past 6 months has caused the doomsayers at US$ 50 or even US$ 60 (per barrel of crude oil) run for cover. Yet, thanks to subsidies, Indian consumers have been helped to maintain their apparent resilience to this full-blown energy price shock. The standard rule of thumb suggests that every US$ 10 increase in oil prices should knock off about 0.4% from the GDP growth rate during the following four quarters. Couple this with the fact that most of our domestic energy giants are in the red. The ministry's proposal for price hike also seems to be finding few takers. However, it is undeniable that there is limit to which the government can dig into its pockets.

    Left is not always right:  Most of the government's proposals, be it disinvestments, higher FDI limits or oil price hike, are invariably met with 'stiff opposition from the Left'. The worrying factor is that if every time reforms are put on the backburner due to the Left, nothing may finally turn out to be right!

    Relying on the 'strength' of the US economy:  Like most other economies, the resilience of the Indian economy to macro-events is also aided by the strength in the US economy. In the US, personal consumption growth continues to track a 5.5% gain in 3QCY05. The Fed also seems to be content with the fact that the contained inflation shows signs of economic 'revival'. Nevertheless, the noteworthy fact is that the stellar accomplishment has been at the cost of personal savings rate hitting rock bottom (0% levels), accelerating debt burden and property bubble. Courtesy surging oil prices, inflationary concerns also are not to be sidelined. While the US' penchant for spending may make sense in normal periods, it is seemingly reckless in the face of an energy shock.

    To put things into perspective, in the two oil shocks of the 1970s, the personal savings rate in the country averaged about 9.5%, whereas in the oil shock prior to the Gulf War of 1991, it was around 7%. This means that in each of those earlier instances, US consumers had a cushion of saving they could draw upon in order to maintain existing lifestyles. Today's 'zero' savings rate underscores the total absence of any such cushion. The only support available now is the savings embedded in their over-valued homes.

    Given this, if the US bubbles were to 'burst', India's illusions about capitalising on the 'US potential' for IT outsourcing, pharma and auto sectors, will also not see the light of the day.

    To conclude...

    It requires no genius to conclude that the disturbing arguments clearly outweigh the comforting ones. However, the 'greed factor' in the market seems to be too tempting to keep the retail investors out of the insane rally. We therefore chose to put forth the above facts to help investors take an 'informed' decision.



    Equitymaster requests your view! Post a comment on "On fire!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)