The market takes a breather

25 FEBRUARY 2012

After sprinting uphill from 15175, the level it closed at on December 20, to 18428, its closing on Feb 21, a 21% gain in 3 months, the sensex paused to catch its breath. The week ended Feb 24 was the first in 2012 when the BSE-Sensex closed lower, losing 365 points to end at 17923. The NSE-Nifty ended 135 points lower, at 5429. The rally had been driven by global liquidity, and the fall was due to profit booking. Interestingly, in the whole of last week, domestic mutual funds were net sellers whilst foreign institutional investors were net buyers!

With the economies of the developed world in a moribund state, institutional investors are looking to increase allocations to emerging markets, and India offers enticing opportunities. Citi, e.g. has made a killing in its investment in HDFC, which it just sold for $ 2 b. last week, multiplying its investment made 5 ½ years ago, three times.

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More delighted, however, were State Bank Of India (SBI), Bank of Baroda and Corporation Bank, whose investment in MCX, a commodity exchange that made a successful IPO last week, multiplied their investment a whopping 125 times in six years. MCX's IPO received bids for 54 times the number of shares offered, totalling some $ 7b. This, at a time when the Government, fearful of investor response for its own public sector companies, yet desperate to raise resources to plug the gaping hole in its balance sheet, is arm twisting other public sector companies to buy the shares.

LIC has bought 5% each in Allahabad Bank and Punjab National Bank (PNB), for Rs 5000 crores, and is expected to buy 5% each in IOB, Central and Punjab & Sind, for another Rs 800 crores.

Shares in one of India's most valuable company, Oil and Natural Gas Corporation Limited (ONGC), would be picked up by sovereign wealth funds of Abu Dhabi and Kuwait. The Government would get Rs 12,000 crores for its 5% stake.

The Prime Minister's Economic Advisory Committee (PMEAC) has forecast GDP growth for 2012-13 at between 7.5 - 8%. Its track record at predicting GDP growth does not warrant confidence; it was quite off the mark predicting this year's GDP growth. The forecast is based on certain assumptions, which may not pan out. For example it requires credible fiscal consolidation, which is doubtful since the agenda on fiscal spending is driven by political compulsions of getting re-elected than on national compulsions of building for the future.

We have not learnt from the lessons of other countries who have overspent in good times and are facing enormous hardships now. Greece is the latest example, where austerity measures are being forced in order to obtain a 130 b. euro package, which they did, last week. Yet youth unemployment is at 50% and the cuts in pay and pensions would lead to enormous hardships and, probably, revolt. The biggest economy in the world, the US, is unable to meet past commitments on entitlements, and is the world's largest debtor nation.

Entitlements, or social welfare schemes, have a noble purpose, so no political party wants to be seen to oppose their introduction. But most of the money is siphoned off for purposes other than the noble ones, thereby causing the continuing fiscal problems that result in starving the country of spending on areas where it needs to spend. As a nation we are near the bottom in spending on education, healthcare, infrastructure and on innovation.

Ultimately reality catches up. We still, for example, continue subsidising diesel, which was with a view to help poor farmers in operating their gensets to pump water. Yet most of the subsidised diesel goes into the trucking industry, into commercial and private electricity backup generation and into private transportation. This has attendant environmental and health consequences. One hopes that in this year's budget, to be presented mid March, after all state election results are declared, the Government will have the courage to hike diesel prices, thereby cutting subsidies and reducing environment and health problems.

This becomes all the more imperitive as prices of crude oil have shot up, thanks to the Iran imbroglio, and are likely to go up to $ 150/b. in the event of Israel deciding to take military action in order to remove the threat of nuclear weaponisation. As per this article the Israeli Defence Minister, Ehud Barak, feels that Iran may soon move into a 'zone of immunity' as it is shifting its facilities to an underground mountainous location. This can lead to a further spike in oil prices.

That, in turn, would derail assumptions made by the PMEAC on which it forecast a 7.5-8% GDP growth this year.

India's private corporate sector had issued foreign currency convertible bonds (FCCBs) in which the interest rate was very low but the bond holder had an option to convert the debt to equity, at a predetermined price, at a future date. Some $ 7b. of FCCB bonds are due for repayment. Holders would not opt for conversion, since market prices are significantly lower. Rating agency Fitch estimates that 20% of these face a default risk.

Reliance Industries Ltd., though flush with cash after selling a 30% stake in KG gas blocks to BP, has raised $500m. at 325 bps over 10 year US Treasury bills. It has finalised a JV with Russia's Sibur Elastomers to set up manufacturing facilities for butyl rubber, which would make it the world's 4th largest supplier of it.

With inflation seemingly coming under control the Reserve Bank Of India (RBI) may go in for further cuts in CRR which would be good news for the stock market. The Budget is also likely to consider a lowering of the securities transaction tax (STT), which, by adding to transaction costs, makes Indian markets less competitive. Were that to happen, long and short term capital gains tax rates would rise and investor reaction to both would depend on the quantum by which capital gains tax rates are raised. The election results of 5 states would also influence investor sentiment. If the Congress does not make much of a headway, its ability to push economic reforms would be further eroded.

The downward drift can thus be expected to continue. At least till the presentation of the Union Budget in mid March.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "The market takes a breather"

Dalip Singh

Mar 1, 2012

I agree entirely with Mr. Sulatan's views as he has rightly pointed out the weird ways of politicians.America to my mind is the culprit as its economy is based on war supplies,hence the race to nowhere but destruction.Population control is a must as we are sitting on a population bomb.But who will bell the cat.No political party has the will to impliment saner reforms.Rather they go for populists measures to garner votes by waving off loans and selling India for their seats.



Feb 28, 2012

Dictator Jayalalitha is killing us. Bus fares increased overnight(literally ).More power cuts in TamilNadu !
I tell you - the voters have made the worst mistake in the history of voting in Tamilnadu.



Feb 26, 2012

all is well but we are not to well because i will not invest in any stock


sultan fazelbhoy

Feb 25, 2012

No one in the world is focusing on WASTE of resources on military expansion. Why are India and Pakistan arming themselves more and more when peace could give multiple benefits to both countries. Einstein said wisely that " only two things are eternal: the Universe and the stupidity of man, and I am not too sure about the first" // Where is Anna and the anti corruption brigade? The Opposition agenda seems to be to get the UPA to resign with no indication of how they will implement for growth. Advani vows to build the Ram Temple as the panacea for all ills, and perhaps his release from the cycle of rebirth !!!!!// Monti,the new Italian PM has spoken a lot of sense. NOT enough though, as the world is not giving up old habits as yet. They say too much auterity leads to shortage of demand, and therefore less employment, which in turn leads to more shortage of demand for goods. There are two answers: population control and defence expense control. Till this happens on a war footing, we are only tinkering with the basics. Even the rescue act for Air India is such a misguided waste, but the BJP is not agitating against it -- WHY ??? More next week after reading your illuminating HIP SHOOTING ... sultan fazelbhoy

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