Sensex, 355, beats Sehwag, 309 - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Sensex, 355, beats Sehwag, 309 A  A  A

31 MARCH 2008

On Friday investors who are cricket fans wished they had PIP (picture in picture) TV sets, so that they could simultaneously watch the stockmarket, where the sensex was blazing hot, on one, and watch Sehwag, who was blazing fours and sixes, on another. It was a close finish, with the sensex having ended the day with a score of 355 points, compared to the 309 Sehwag totted up (but which was more appreciated). Continuing with such incomparable analogies, India's forex reserves came third with $ 304 b.

The week was a good one for global markets, and especially for India. The BSE-Sensex ended the week at 16371, up 1376, which included the highest but one single day gain of 928 on Tuesday. Reliance Industries was the major contributor, with 200 points of this gain, whilst HDFC, Infosys, L&T and ICICI scored more than 100 each. The only two negatives were Tata Motors (-1) and Ranbaxy (-4); the former on fears of the short term impact of debt raised to acquire Jaguar Land Rover, the latter on legal challenges filed against it in the US by entrenched pharma companies.

The question uppermost in investor's minds is whether this rally will sustain, or whether the market will go down to test the bottom again.

For answering this, it is best to look at what spurred the rally. Primarily it was the actions taken by Ben Bernanke, US Federal Reserve Chairman, attempting to stave off a credit crisis. He has cut interest rates (an aggressive 75 basis points last time, to 2.25%), has opened a lending window to investment banks and has created an SPV to take off some distressed assets from Bear Sterns. Will these steps work?

To understand this one must understand what's wrong with the US economy. First off, it is a consumption led economy; to grow the economy consumers must spend. To encourage consumption, monetary supply was eased and interest rates lowered. Part of this increased supply also went into investment in assets with ever dubious quality as liquidity kept increasing. In order to meet this hunger, the financial community created secondary assets (derivatives) like CDOs (collateralised debt obligations), securitised mortgages and others. These were then sliced and diced and offloaded. No one knows where the pieces are, hence which institution is tainted, which makes banks reluctant to lend to others.

Since there was no well developed market for these secondary assets, and since accounting principles required holders to mark them to market, once prices for these assets started falling, the institutions started reporting huge provisioning, because the market was not well developed. It may just transpire that only a small part of the assets default and that the provisions made now would be written back when the instruments mature. That, at least, is what Ben Bernanke hopes for when he set up the SPV to trade more acceptable Government bonds for such distressed assets. JP Morgan also raised its offer for Bear Sterns from $2 to $ 10 which cheered US markets.

Unable to reduce its consumption, for that is what drives its economy, the US must find ways to increase its income. To do this it must come up with things it can excel at, and therefore, charge for. It once excelled in automobiles (now overtaken by Japan), in computers (China and Taiwan), in aircraft (France) and other industries. It may still come up with the new new thing. Such as the new life form discovered by Craig Ventner (one of the two teams that cracked the human genome) which takes in carbon dioxide and converts it into fuel. If this becomes commercially viable, it would shake the petroleum industry. Other things such as robotics, nanotechnology and genomics could, when they become viable, give the US economy its fillip.

That, though, would take time. Till then the US would have to face its structural deficiencies and fight them (and hopefully correct them) as best they can. And its actions will impact its stockmarkets and global markets, given its dominance in the global economy.

The current rally in the Indian stock market could thus continue awhile, perhaps taking the sensex between 16,500 to 17,000 levels. Some other financial time bomb could then be set off, creating a fresh round of panic and pulling the sensex down perhaps to the 14,500-15,000 level. In short, it seems as if we are in a trading zone. One should exit at whatever level one considers comfortable exiting (it is foolish to wait for the peak unless you are have the ability of a Tenzig) and to bottom fish when the sensex falls.

Corporate India seems to be on a roll, though. Corporate tax collections are up 60% in Mumbai, announced a beaming Finance Minister whose smile was a tribute to his dentist! A few companies announced acquisitions abroad, showing their confidence in the future.

The biggest of them was the acquisition of Jaguar/Land Rover (JLR) by Tata Motors, for $ 2.3b. The stock market greeted this with scepticism for fear of the burden servicing the additional debt taken for the acquisition will impose, and CRISIL promptly downgraded it. Tata Motors closed in the negative in which 28 other sensex stocks were Sehwaging joyously. But then, the stock market had also greeted with scepticism the acquisition of Corus by Tata Steel, a deal which it now appears to welcome. The Tata group is foremost in its global ambitious and has a game plan to achieve it. One World Trust, in its 2007 Global Accounting Report, ranks the group # 3 in the top 10 trnasnational firms in Global Accountability.

With this acquisition, Tata Motors will get accepted as a serious contender and will have a range starting with the Nano at the low end to Jaguar at the luxury end. It will, over time, bring down costs of producing luxury cars by increasing the component from low cost destinations like India, of components. Simultaneously, it will absorb technologies and ultimately develop design and manufacturing capabilities for high end autos. Kudos to Tata Motors!

Religare Enterprises is close to acquiring the oldest British broking firm, Hichens Harrison & Co, for around $ 100 m. It is emerging as a serious player, with global ambitions, in the financial world, with tie ups with Aegon and Macquerie.

The Future group (Kishore Biyani) is tying up with Cisco to introduce RFID which are chips embedded in things with data that can be read remotely by sensors. Imagine not needing to stand in queue at malls but simply pushing your trolley through and getting an itemised bill thanks to RFID. Maybe even getting your Future card automatically debited.

A thought. Why can we not use RFID in automobiles and obviate the need to waste time at toll booths on highways? Or, for that matter, why not put them on trucks and do away with octroi checkpoints and all the corruption that goes on there, with a criminal waste of time and fuel?

In macro economic news, inflation has gone up to 6.7%, a 13 month high. This may lead to a tightening of interest rates, which would be viewed negatively by stockmarkets. The Sixth Pay Commission has recommended an increase in pay of around 40 % for Government employees (I wonder why they are called Government servants when we see almost everyone bowing to them?). The Commission has made some sensible suggestions, such as reducing the number of gazetted holidays, reducing the grades of Government employees from 35 to 20 and seeking to introduce a variable increment component linked to performance. If accepted, the net increase in wage bill would be under Rs 8000 crores. It is hoped that the better pay, plus the comfort of job security (in Government, love means never having to say- you're fired) would attract better talent and, maybe, less dishonesty.

The Government also issued Rs 9300 crores worth of oil bonds to PSU oil and gas companies (IOC, HPCL, BPCL and ONGC) to compensate them for losses due to subsidising petroleum products. Now this is interesting. The subsidy is misdirected; very little of it reaches the intended beneficiary. Subsidised kerosene finds its way to adulterate diesel in trucks and benefits the oil mafia. Subsidised LPG finds is used by urban rich and hotels/restaurants. Subsidised petrol goes to drive fuel guzzling SUVs.

Here's another thought. Why not change the delivery system to, say smart cards (as the Finance Minister mentioned in the Budget as being attempted in Haryana) or through coupons given to the deserving, and save on the subsidy. Just compare the subsidy bill of Rs 9300 crore with the increased wage bill of Rs 8000 crore (at least this is a more meaningful comparison than sensex and Sehwag, for Chrissake!). The increased fuel costs would also lead to desired conservatism and spur the introduction of alternatives which is much needed.

Since the oil bonds have been issued only to PSUs, private companies like Reliance are suffering. RIL has decided to close down its petrol outlets because it cannot compete with PSUs in selling subsidised products. This is how policy affects competition, and performance.

The Government also issued bonds to SBI against its contribution to equity. Gentlemen may prefer blonds but Finance Ministers prefer bonds! They don't go into the Budget, allowing him to claim better fiscal health than is actually so, and they defer the liability to a future Finance Minister who may be from an opposition party and who can then be criticised for allowing the fiscal deficit to slip!!

The market is moving in a trading zone and one could think of getting lighter at whatever is one's comfort level. It ought to go close to, maybe above, 16,500 on the sensex, with some luck. There would, however, be some more shocks in the US financial system which could impact markets. Perhaps investors should start paying more attention to the footwork of Tendulkar and become nimble.

Have you read the latest Honest Truth by Ajit Dayal?

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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