Bulls and Bears and now, Swine! - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Bulls and Bears and now, Swine! A  A  A

2 MAY 2009

No, swine flu does not mean the helicopter ride taken by George Bush departing from the White House; it is a virus that has crossed over from pigs to humans and is alarming, both for its health, and its economic, implications. Besides bulls and bears, global investors would now have to factor in swine! Swine flu has affected 11 countries, and the WHO has raised its alert to one level below pandemic. The flu comes at the worst possible times, when the world is still reeling from a global economic crisis.

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Last week was a short one, of only 3 days. The markets were closed on Thursday, for the second phase of voting, and on Friday, for Labour Day. The BSE-Sensex rose 74 points over the week, to close at 11,403, whilst the NSE-Nifty fell 6 points, to end at 2,473. The divergent trend is because the sensex is weighted by free float, giving lower weightage to companies in which promoters have a larger holding (such as ONGC or Wipro), whilst the Nifty is weighted by market cap. without adjusting for float. The Nifty is to move over to a free float basis.

The market is now poised at a piquant level. The sensex has rallied a whopping 42% in less than two months, from its recent bottom of 8,047. FIIs were net buyers in both March and April but domestic funds, which were net buyers in March, were net sellers in April. Leading economic indicators compiled by firms like Nomura, UBS and ABN Amro show a revival of confidence. Globally, too, markets are rallying and consumer confidence is also returning.

Election results are to be declared by May 16 and the market expects a hung Parliament, so announcement of that fact will not be bearish. What would be bearish is if the political musical beds throws up a Government which has absolutely no idea of the sort of economic reforms needed to keep it booming. More so when the new Government will inherit a fiscal deficit running into double digits. It is strange how the Finance Secretary claims that there is still room for another fiscal stimulus. The RBI Governor, on the other hand, opines that there should be a reversal of fiscal policy. Perhaps the Finance Secretary is factoring in the increased revenues that will accrue from the KG basin oil and gas flows, and to the lower international price of crude oil. Even so, the new Government would have to curtail expenditure (always a tough job for a politician not paying for freebies from his own pocket) and increase taxes. Expect an obnoxious budget, especially if the third front has a say in making it.

The global financial crisis is still unfolding. As per the IMF's Global Financial Stability Report the deleveraging that must take place, as part of the cleansing process to remove the toxic assets, would mean lower availability of credit, especially for emerging markets. The IMF expects credit to emerging markets to be at 4% this year and at minus 13% next year. The RBI, in its policy, expects a credit growth of 20% in India. Part of this is explainable by the fact that the IMF figures include Eastern Europe's emerging markets, which will face the brunt of the credit crunch. But partly it is also overexuberance on the part of RBI.

Companies on the growth path, or those requiring to retire debt, are doing so through a variety of routes. With the equity IPO market having dried up, the fixed deposit market has been revived, and the corporate bond market. Last week the Tata group made bond issues of Rs 2,000 crores each in Tata Sons and Tata Steel; the latter made a 10 year non convertible debenture issue with an 11% coupon. This is 4.7% premium over Government paper yield of 10 year duration, which is expensive for a group of its lineage, especially after considering the report of Worldsteel stating that demand for steel in India will rise 2% in 2009, the only major economy to see rising demand. Others will see falls in steel demand; China by 5%, Russia by 22%, EU by 28%, and US by a whopping 36%. (Construction is down and so are auto sales, Chrysler has filed for bankruptcy).

Besides, an 11% coupon is nearly 10.5% real return, with inflation under 1%. Would part of household savings not be diverted from bank deposits to debt instruments issued by reputable companies with higher yields?

Corporate results for the first batch of 169 companies show that sales fell in Q4 ended Mar 09 by 6%, and net profits by 13%. Bharti Airtel came out with encouraging results for Q4, with a 21% growth in net profits on a 26% growth in sales. Reliance Communication, in contrast had a fall of 3% in net profits on a 15% rise in sales. The former had better ARPUs (average revenue per user) at Rs 305 compared to Rs 251 for R Com. The real estate sector is going through tough times as evidenced by the 93% fall in net profits of its leader, DLF. Bank of Baroda's net profits in Q4 were up 72% to Rs 752 crores.

The global meltdown is still unfolding. A stress test of 19 banks is being carried out by the US Government, to see how many would require additional capital; results are awaited. Shareholders of Bank of America are not waiting for the results but have jettisoned its Chairman, Ken Lewis. Banks continue to hold a lot of toxic assets, many of them fancy derivative products that were rated by rating agencies who did not fully understand the animal. Ratings provide investors with a level of comfort and agencies are under the scanner for their apparent laxity in rating these instruments.

Now an investor, Ron Grassi has sued all three rating agenices for failure in properly assessing risks. Together with his wife he owned $ 40,000 of bonds issued by Lehman Brothers which, until it filed for bankruptcy on Sep 15, were rated at least A by all three agencies. These columns had earlier talked of an article in the Economist which stated that "of the $59 billion of AAA-rated securities that Moody's cut between January 29th and February 2nd, an astonishing 91% went straight to junk". Rating downgrades are supposed to be a step exercise, not a bungee jump. How is it possible that bonds rated AAA went to junk status in a 5 day period? Unless the triple A rating was incorrect ab initio.

The situation, thus, is piquant. On the bullish side is the revival of confidence in the market and of consumer confidence in buying. On the bearish side is the thought of our next Government not knowing what moves an economy, or not caring about it. On top of which is the shrinking of global bank balance sheets leading to a shrinking of credit. On top of which is the swine flu.

Its better to get two masks. One to cover the mouth with. The other to cover your cheque book with. Selling on rallies is advisable.

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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1 Responses to "Bulls and Bears and now, Swine!"
Sunil Doshi
May 2, 2009
The last says it all !! Like 
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