Liquidity bar open, party continues - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Liquidity bar open, party continues A  A  A

27 JUNE 2009

Developed countries have been pouring in liquidity in order to counter the effects of the global financial crisis and to bring back consumer and investor confidence. It has worked, at least for investors. Consumers are still running scared; the rise in retail sales in the US was more the result of higher petrol prices than an evidence of increased spending. Last week the US Fed kept its rates unchanged, in the under 0.25% range. In India, SBI cut its PLR by 0.5% to 11.75%.

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It is for this reason of increasing liquidity that Russell Napier, of CLSA, opines that it is dangerous for investors to stay out of equity markets. For the nonce, the party continues. Revellers rarely recall the angst of previous hangovers when the booze is freely flowing.

Barclays Global Investors, the world's largest ETF (Exchange Traded Fund), which was recently sold for $ 13.5b. to Black Rock, started marketing its India ETF aggressively, and bought some Rs 700 crores worth of stock in 28 companies forming part of the sensex, on which the ETF is based.

Worldwide, ETFs have become very popular. The two largest pools of money (Barclays Global and State Street) each manage over $2 trillion in ETFs. ETFs are passive investment vehicles, which only mirror the underlying index and do not attempt to beat it through active management, as mutual funds seek to do. Because of this, their costs are lower than managed funds, leaving more on the table for investors. Moreover, there being over 6500 mutual funds in the US, more than half of them do not beat the index performance. The fact that the top two funds in the world are both ETFs indicates that investors are now trying to ensure that they perform no worse than the market, rather than try to better it. In India, two ETFs have been launched, Spice, based on the BSE sensex, and Nifty Bees, based on the Nifty, which was the pioneer.

By itself the investment of Rs 700 crores by Barclays, on Friday (when the sensex rose 419 points) is no big deal, unless it is a pointer to the better marketing of the ETF. This ETF, called i shares, was listed in Hong Kong in 2006, now that Black Rock has taken it over. Black Rock, now associated with DSP in the mutual fund business, may, perhaps be more appreciative of India as a market and more willing to bet big on it. Should that be the trend, it would be hugely significant for India. For, through an ETF listed in Hong Kong, it would be retail investors who could participate in the India story, not just FIIs.

Another hugely bullish piece of news last week was the appointment of Nandan Nilekeni, who was Co Chairman and founder of Infosys Technologies (and who, in best standards of governance, has stepped down from the Board of a company he help start), as the person in charge of setting up a National Identification card project. If this project is successfully implemented, it would have multiple benefits. For one it would help direct subsidies to the truly deserving, thus avoiding an unbelievable amount of leakage and corruption. For another it would help curb black money. The id card would have to be biometric, in order to weed out the possibility of multiple cards issued to one person.

Also bullish was the announcement by LIC, that it would invest Rs 50,000 crores into equity. That, combined with the money that will come in from new pension funds, would provide more liquidity.

The BSE-Sensex was weak for most days of the week, but ended strong on Friday, with a 419 point gain. It ended the week at 14764, up 242. The NSE-Nifty ended the week up 42, at 4375.

ONGC has recently announced 3 successful finds of oil and gas, one of which, in the KG basin, is the equivalent of the find by RIL. The two gas finds can work wonders for the Indian economy. The burden of fertiliser subsidy can be virtually eliminated. Our energy mix would be altered in favour of gas, obtained domestically, rather than oil, imported (and running out). ONGC had a slight dip in its profits, at Rs 19,795 crores, on a consolidated basis, thanks to having to share a subsidy burden which should go to the Budget.

Finding all this gas is wonderful, but the Government, with the players, must jointly take steps to ensure that the system is ready to use it. Sadly, public governance is abysmal and planning for the future invisible. RIL is complaining that though it has the capacity to produce 37 mmscmd of gas from D6 field, only 28 mmscmd is being consumed as power plants, which use the gas, are not ready. The dispute between the two groups will also put a spoke in the wheel, for until the power projects for the ADAG group are ready, it would be tough for RIL to market this offtake to others, who would be equally desirous of a long term commitment.

The two Tata flagship companies are paying the price for their global acquisitions. The worst off is Tata Motors, whose acquisition of Jaguar Land Rover appears to be a white elephant. It has made a loss of Rs 2500 crores! This threatens to swamp its other good initiatives such as the Nano and its work on a car which will run on compressed air! Tata Steel's consolidated net profit fell 60% to Rs 4950 crores.

In its liquidity driven stupor, the stockmarket has ignored the weather forecast by the Met department, of it being 93% of long term average. Given that all India rainfall to date is 43% of long term average, there would be a lot of catching up to do! It seems rather like having a person lie with his head in the freezer and his legs in the oven and maintaining that the average temperature is ok.

This sort of fluctuation in rainfall would not help Indian agriculture, which would impact GDP growth. Countries are putting a spin on economic data. Venkatasan Vembu asks, in DNA, whether China is faking economic recovery because power consumption figures do not match the GDP growth numbers put out. The US has also been putting a spin on economic data.

Investors would need to be nimble, buying stocks on dips but exiting quickly. The Union Budget is around the corner but should provide about as much excitement as a chess game between two constipated snails. Expect no shocks or surprises in it.

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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3 Responses to "Liquidity bar open, party continues"
J Mulraj
Jul 7, 2009
Mr Saxena, I, too, wonder why ETF's have not caught on. the reasons could be that they have not been marketed well enough; there is not enough investor awareness, or that the Indian market is yet undeveloped, and gives opportunities for managed, mutual, funds, to outperform.
Prashant, both NSE and BSE are good.
Jul 2, 2009
hi sir
how is nse cash market sir
Sanjay Saxena
Jun 29, 2009
So when can we expect to see a Nifty and Midcap ETF in India with some real trading volume?

I am aware of the Benchmark ETFs which have virtually no volume... wonder why?
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