• OUTLOOK ARENA
  • VIEWS ON NEWS
  • AUGUST 31, 2004

Markets: The year so far

During FY04, the Sensex had been successful in outperforming major global benchmark indices such as the Hang Seng, NASDAQ, Nikkei and the Dow. This was on the back of a robust performance from India Inc. riding the benefits of a low interest rate regime, increased demand (due to normal monsoons) and increased outsourcing.

However, a lot has changed since the turn of the last fiscal and FY05 has been a different story as far as the comparative performance goes. To put things in perspective, Rs 100 invested as on April 1 2004 would have turned out to be Rs 87 as on August 27. The below mentioned chart indicates the same.

Reasons for underperformance

  • Change at the helm: The 'shock' defeat of the incumbent NDA government resulted in the largest fall ever witnessed by the Sensex in a single day. The NDA government was known for its so-called reformist measures and the change brought about at the helm, which saw the Leftists in the government, led to pessimism resulting in selling activity. This led to the downfall, after which the Sensex has almost failed to recover.

  • Crude oil shock: The over US$ 15 per barrel rise in crude oil prices and India's over-dependence on imports has put the country in a vulnerable position. To put things in perspective, the Indian crude oil mix averaged nearly US$ 29 per barrel in FY04, while it touched US$ 44 recently. During 1QFY05, the newly elected government continued with the previous government's policy - not to hike petro-product prices. This resulted in corporate performance being affected.

  • Rising interest rates: During the period, interest rates in the global markets changed. For instance, the US Fed increased short-term rates by 25 basis points each, two times in quick succession. While on the other hand, interest rates in India continue to remain unchanged. For a developing economy, it is given that to attract foreign capital, interest rates have to be reasonably higher, as the risks faced by a developing economy are higher than that in a developed economy. Since that did not happen, India witnessed some flight of foreign capital, thus leading to added pressure on the equity markets.

  • Inflation: Last but not the least, rise in global commodity (like steel and aluminium) prices coupled with crude oil prices have led to robust inflation in the economy. As last reported, inflation has crept to 7.96% in August. Inflation has many negative impacts on the economy. For instance, many projects, which had earlier seemed attractive, might turn out to give negative real returns as a result of higher inflation.

Taking these factors into account, recently, CMIE has downgraded India's GDP growth to 6% from 6.5% to 7% for FY05. However, we believe that with global crude prices now softening and the government taking steps to curb inflation (duty cuts), the Indian growth story still has some steam left in it and in the long term, prudence shall prevail.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
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