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Sensex Continues Momentum; IT Stocks Witness Buying
Thu, 22 Jun 11:30 am

After opening the day on a positive note, stock markets in India have continued their momentum. Sectoral indices are trading on a positive note with stocks in the IT sector and banking sector witnessing maximum buying interest.

The BSE Sensex is trading up 218 points (up 0.7%) and the NSE Nifty is trading up 54 points (up 0.6%). The BSE Mid Cap index is trading up by 0.6%, while the BSE Small Cap index is trading up by 0.7%. The rupee is trading at 64.45 to the US$.

In the news from global financial markets, Philadelphia Federal Reserve Bank President Patrick Harker said the US central bank could begin trimming its balance sheet in September this year. He also said the central bank will defer its next rate rise until December.

Most Fed policymakers now think that the Fed should take steps to trim its balance sheet later this year as long as the economic data holds up. However, trimming the balance sheet would tighten financial conditions.

Normalising the balance sheet could also impact emerging markets.

Only time will tell how this all pan out. Meanwhile, we'll keep you posted on the latest developments.

For domestic markets, the Fed's decision may bring some concerns in the short run. However, a crash can be an ideal time to bet on solid Indian companies that are well-shielded from adverse developments in global markets. As these companies can turn into bargain buying opportunities.

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While the Fed is looking forward to shrink its balance sheet, the People's Bank of China (PBOC) said it will not take any such action as it does not face the same pressure due to its use of different policy tools.

A director-general at the China's central bank said that PBOC's assets are mainly foreign exchange-based. The balance sheet structures of China and the US are very different and the PBOC does not have the huge portfolio of securities assets that need to be dealt with.

One shall note that while the Fed's balance sheet expanded rapidly during the financial crisis, from less than US$900 billion before 2007 to US$4.5 trillion in 2014, the PBOC's balance sheet less than doubled in size during that period.

That said, there also remain many concerns for China.

China is staring at a rapid domestic credit growth. Also, as per ratings agency Moody's, China's structural reforms are not enough to arrest its rising debt.

One shall note that Moody's Investors Service has downgraded China's sovereign ratings by one notch to A1. The agency expects the financial strength of the world's second-largest economy to erode in coming years as growth falters and debt continues to rise.

Many economists are also of the view that central bank stimulus measures are masking the deeper problems of industrial overcapacity and high levels of corporate debt in China.

A recent issue of Vivek Kaul's Inner Circle (requires subscription) takes a closer look at the Chinese economy and explores how America and China are on the verge of swapping their economic ideologies.

In the news from IPO markets, the initial public offer of leading securities depository Central Depository Services (CDSL) got oversubscribed 170 times on the last day of its subscription period. This makes the IPO the most subscribed issue in over a decade.

Market participants are now tracking the IPO of GTPL Hathway which started accepting bids from yesterday.

The company has set a price band of Rs 167-170 per share for the IPO. The offer will see the firm raise Rs 2.4 billion through a fresh issue of shares and a secondary share sale of 14.4 million shares by the promoter group.

Should you consider participating in this IPO?

Here's our view on the GTPL Hathway IPO.

Speaking of IPOs, primary markets have caught the frenzy of investors. Looking at the performance of IPOs listed in 2017, one could see the reason why. Almost 75% of the IPOs listed in 2017 till date have given positive returns. Although we are nowhere near the euphoria of 2007, we are slowly but surely getting there.

However, according to Hindu Business Line, till June 2016, only 40% of the IPOs launched between 2004 and 2011 were trading above their issue price, as can be seen from the chart below.

Are IPOs a Sure Shot Way to Make Money?

We, at Equitymaster, have always recommended IPOs cautiously. Here's Rahul Shah, co-head of research at Equitymaster, explaining our rationale behind the approach:

  • 'We know what a dirty game the IPO business is. We've seen it over and over again: It's a game where the odds are stacked against investors. So for us, the equation is simple. We'd rather face criticism in the short run than see our subscribers lose money over the longer term. We weren't afraid to do this during the hot IPO days of 2007, and we're not afraid to do it today.'

The Bottomline: You need to evaluate each IPO on its merits by considering its fundamentals, and most importantly, the valuations. And this is particularly important when the hype surrounding IPOs is at its peak.

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