Mixed signals leave markets directionless

Sat, 12 Dec RoundUp

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The performance of major stock market indices around the world was a mixed bag this week as the world grappled with both positive and negative economic data emanating from various countries. India's benchmark index, the BSE-Sensex ended the week marginally higher by 0.1%. As far as global markets are concerned, the Brazilian markets led the gains this week, with its index ending higher by about 2.5%. It was followed by Japan and the US which ended higher by about 0.9% and 0.8 respectively. The Hong Kong and Chinese markets saw the biggest declines this week. France, Germany, and the UK were the other markets to see losses.

Source: Yahoo Finance

Coming to the performance of BSE indices, capital goods stocks were in favour this week as the BSE-Capital Goods index ended higher by about 4%. This was on the back of the healthy 12.2% growth in capital goods as per industrial production data for the month of October released during the week, suggesting a revival in investment activity. It was followed by the BSE-IT and BSE-Consumer Durables indices which recorded gains of about 2.2% and 1.6% respectively. Smallcaps stocks were in demand this week as well, with the BSE-Smallcap Index recording weekly gains of about 1.5%. This was a comparatively better than the performance of its larger counterpart the BSE Sensex which ended almost flat for the week. Stocks forming part of the metal, pharma and banking stocks were amongst the least favoured by investors as they saw declines of 2.7%, 2.1% and 1.4% respectively.

Source: BSE

Moving on to the key corporate developments during the week - Tata Steel witnessed a robust 35% rise in sales in the month of November 2009 to 4.98 lakh tonne as against 3.70 lakh tonne in November 2008. This is mainly on the back of improved demand from the construction and whitegoods sectors. During the month, the company has seen a 56% increase in the sale of its flat steel products and a 13% increase in sales of long steel products. The company also saw its saleable steel output rise 16% to 5.25 lakh tonne compared to 4.51 lakh tonne during the same time last year. Its crude steel and hot metal production rose by 2% YoY in November to 5.26 lakh tonne and 5.88 lakh tonne respectively. The rise in the demand for the company's products has a lot to do with the recent buoyancy in auto and whitegoods sectors as also the rising demand from the infrastructure sector.

Having said that, the Indian auto sector that has seen one of its best quarterly performances in the third quarter of FY10 may have to brace up for lower margins. While the commodity prices that have been beaten down may not go up in a hurry, adoption of greener technology may entail higher costs. The climate change negotiations at Copenhagen are expected to result in increased costs for Indian businesses as a whole and Indian auto sector in particular as automakers will have to provide technology to accommodate the intermediate changes.

Wind turbine major Suzlon's German subsidiary REpower expects wind turbine orders to rise next year (2010) on the back of climate change talks that are underway in Copenhagen. This it feels may increase demand for renewable energy and consequently wind turbines. The industry has been pretty low on order inflow in 2009. But the company is now seeing the first signs of that scenario easing up a bit. According to the company's management, the decisions taken at Copenhagen will provide important signals for the industry. Negotiators from 192 countries at Copenhagen may agree on a framework to curb emissions from power plants and factories blamed for global warming, which could potentially provide a big fillip to the wind power industry. Suzlon's stock has seen substantial gains on the back of a spate of orders won by the company and its key subsidiary REpower Systems in the last one month. Suzlon owns 91% in REpower. Suzlon's stock is up roughly 28% in the last one month.

In what came as a relief to the telecom sector, the government has announced that the 3G spectrum auction will begin on schedule i.e. on 14th of January 2010. There has been a lot of uncertainty about the same over the number of slots to be auctioned. According to the latest decision, government will auction only 3 slots of the 3G spectrum amongst private telecom providers as against the previous plan of 4 slots. This implies that only 3 telecom private vendors will be accommodated in the auction. 1 slot is already reserved for state-owned BSNL and MTNL. The Defense Ministry's reluctance in vacating a part of its spectrum for commercial use has resulted in this move. The government previously was expected to gain atleast Rs 250 bn from the stake sale. However, this decision might deprive the government of more than Rs 50 bn of revenues. Moreover, this can mean that there can only be 3 winners in this race for riding the 3G wave.

In a key strategic move, Bajaj auto decided to completely exit the scooters markets in the next three months. Currently it manufactures the automatic scooter, Kristal, in small numbers. It also plans to drop the brand "Bajaj" from its three-wheelers and call it just 'RE'. These moves are part of Bajaj's strategy to focus on the lucrative motorcycle segment. In fact, its aim is to become the number one motorcycle company in the world. Bajaj auto's decision is based on the fact that motorcycles are more profitable and are growing faster. Moreover, the rapidly emerging high-end bike segment requires focus on the company's part.

The industrial production (IIP) data for the month of October was out this week. The growth at 10.3% has been helped by stimulus measures and robust domestic demand. This then raised the question of how long the RBI will wait before raising interest rates. As reported on Bloomberg, RBI Deputy Governor Ms. Usha Thorat has said that India's exit from a loose monetary policy will be difficult as the economy's expansion remains dependent on government stimulus. Having said that, if the government considers postponing its policy of raising interest rates, it may happen at the cost of stoking inflation. Food prices in India in the week ended November 28 have soared due to weak monsoons and its adverse impact on agricultural production and it seems likely that the government might look to tighten interest rates in FY11.

Talking about food prices, in the twelve months to 28 November, India's food price index rose by 19%. The main culprits being potatoes, onions and pulses. Weak monsoons this year have wreaked havoc on agricultural output and the same has had a huge bearing on food prices. For the government this poses a dilemma in the form of higher inflation going forward. So far, it has refrained from tightening interest rates given the fragile nature of the economic recovery. However, if food prices continue to remain persistently high then the government will certainly have to rethink its strategy.

As a retail investor, what should be your strategy to counter inflation? Although commodities in general do well in times of runaway inflation, Gold is traditionally the most favoured anti-inflation play. In our opinion, businesses with strong franchises will also be able to counter inflation. Those rare businesses that have the ability to raise prices without losing volumes.