As any mountain climber would tell you, after an arduous climb, a pause for breath is needed. So it is with stockmarkets. The BSE-Sensex had climbed from 8047 on March 6 to 11367 on April 16, a spurt of 41% in a little under a month and a half. It paused for breath, going down on the first three days of the week, but found support above a crucial 10,500 level and rallied to end the week at 11329. The sensex gained 305 points over the week, contributed mainly by RIL, with 73 and Bharti with 64. This, despite a fall of 9% in Q4 net profits by RIL, to Rs 3546 crores, on expectations that the $15b it has invested in oil and gas will start to contribute big time in 2010, now that gas deliveries from KG6 have started. The NSE-Nifty ended the week up 96, at 3480.
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Part of the reason is election spending, which probably includes moneys being brought back into the country to fund it. Part of the reason is that corporate results for the first 50 companies for the quarter ended March, are not pleasantly undreadful. Aggregate sales for these 50 companies are up 16% in Q4 09 over Q4 08 (compared to a 22% growth Q4 08 over 07) whilst adjusted net profits are up 19%.(compared to 14.8%). Accounting rules have been tweaked for mark to market losses for foreign exchange losses, which may account for some of the apparent improvement in net profits.
Having found support above 10,500 it seems that the market may want to continue its rally. Perhaps to a level between 12500 to 13000, where it would find resistance. This columnist then expects the market to decline.
Although the Prime Minister optimistically opines that a 9% GDP growth rate would be quickly achieved were the Congress to be elected to head the next Government, one cannot share his enthusiasm. This columnist has no desire to be voted into office, (though a strong desire to be voted on www.equitymaster.com most popular list). Moody's feels that a 5% GDP growth is more likely.
Election results would be declared by mid May and are expected to throw up yet another unwieldy coalition of strange bedfellows. In any such grouping, economic reforms would take a back seat and, were the Samajwadi Party to have a say, we would ban English and computers (I wonder how I would write this column?) and machines and stockmarkets (ah! If stockmarkets are shut I would have nothing to write about, would I?).
Also, the next Budget is likely to be a nightmare. The Government's fiscal deficit is around 12% for both Centre and States combined. The lower GDP growth than expected has meant a drop in revenues, which, when combined with an increase in expenditure to bolster the economy (and, by State Governments, to pander to the electorate), means that, sooner or later, inflation would rear its ugly head again. To fight which, interest rates would then be raised.
One factor that could halt the bear in its stride and convert it into a bull with raging hormones would be the introduction of an amnesty scheme for Indian money held abroad. Were this to happen, it would be the Indian, not the Swiss, economy that would benefit. The money (estimated to be $ 1.5 trillion, or one and a half times our national income) could be used to fund badly needed infrastructure projects. For example, a scheme could give the option to a declarer to pay an upfront tax of 50% of the amount brought in, and use the balance, no questions asked. Or, to deposit 100% in a 5 year bond with an infrastructure company, paying no interest, and take the money after 5 years, drycleaned and ironed to perfection. Were such a scheme to be announced, the market would run wildly amok. Else, there would be a significant dip.
The global financial crisis is far from over. The IMF feels that total losses could be of the order of $ 4.1 trillion by 2010, of which 61% would have to be in the books of banks. It is likely that there could be more bank failures, globally. That would freeze lending for industry and trade, and hence have an impact on global economic growth. The global financial crisis is far from over and the pain not yet fully felt.
Talking of infrastructure, Reliance Power has achieved financial closure for its 4000 MW ultra mega power project in Sasan, Madhya Pradesh, costing Rs 19400 crores, or a highish Rs 4.85 crores per MW. Of this Rs 14,550 crores would be debt and the balance equity.
Power Grid plans to raise Rs 9000 crores through debt (6000 crores) and a follow on equity issue (Rs 3000 crores) by the end of the year, to expand its grid. Quite a few other power projects have not achieved financial closure; hence the capacity addition planned for would not arise.
The market thus seems to be on a roll, at least till the polls. After that, it is hard to see how any combination of the Rubik's political cube could result in a Government that could sensibly carry economic reforms forward. Selling in the rally would be a prudent course to follow.
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