Markets at an interim decisive point

10 JULY 2010

Charles Dickens' opening words in his epic, a Tale of Two Cities, aptly sums up the situation in stockmarkets today - it was the best of times, it was the worst of times, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us....

On the one hand the Indian economy is doing well, with the IMF upping its forecast for GDP growth to 9.5%, higher than the forecast of 8.5% by the Government, 8% by RBI and 9.2% by CMIE, a respected independent research firm. The Government has shown that it is willing to take politically tough decisions, such as the long overdue increase in petrol and diesel prices. Not only from a fiscal but also from an environmental perspective, this was inevitable. Refiners would be given the freedom to change petrol prices every 15 days. There is now talk of freeing up the sugar industry, perhaps the industry which is most controlled. The Government controls the price of its raw material, cane (which it will continue to do even if the industry is decontrolled), the monopolistic supply of cane within a certain radius of the sugar mill, and both the price and quantity of sugar released in the free market. It has also been emboldened to contemplate permitting foreign direct investment into multi brand retail outlets.

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Good news also came from increased indirect tax collections, which are up 43% in Q1, with customs duty collection up 60% and excise duty collection up 55%. Also in good news is the normal monsoon, with Agriculture Minister Sharad Pawar saying that he expects a bumper crop this year. Perhaps that is the reason for IMF to have upgraded its GDP forecast for India.

Yet there is a flip side too, mostly from external threats. This is evidenced by the extremely low yields on Government bonds, indicating that investors are paying increasingly higher prices for the safety and liquidity they provide. Citi's composite world bond yield is 1.8%. Short term yields in US Treasuries and Eurozone are just 0.6%.

The Indian rupee has been weakening, and is being shorted in the NDF (non deliverable futures) market, reportedly in a big way by legendary investor George Soros. A weakening rupee reduces returns for foreign investors, who are the ones currently driving up the Indian market (on Thursday July 8, e.g., the sensex went up 180 points, with FIIs net buyers of Rs 1191 crores and domestic funds chipping in with Rs 1 crore).

According to a research report, Indian stocks are not cheap. They trade at a 12 month forward PE multiple of 15.2, which is a 45% premium over the PE multiple for emerging market peers. The silly season is now upon us, with quarterly result announcements commencing July 13 with Infosys. According to ET of July 9, due to increased costs, the net profits of the Nifty companies will rise, in aggregate, by 16%, though sales growth is expected to be up 34%. This may not justify the PE premium and could lead to a correction.

Also very worrying is an article in the Economist of July 3, 'The Return of Wheat Rust'. Wheat rust is capable of destroying wheat crops; it was thought to have been wiped out, but has not. It has already migrated from Africa to Iran and South Africa and, the article says, cannot be kept out of Punjab, which is the world's bread basket. That spells disaster!

In Indian corporate news, Reliance Power and RNRL are to merge, in the ratio of 1:4. RIL may bid for the polyester plant of Bombay Dyeing.

Last week the BSE-Sensex gained 372 points to end at 17,833, while the NSE-Nifty gained 115 to end at 5352. Of the 372 points sensex gain, Infosys with 89 and Bharti with 73 were the main contributors.

Back to Dickens. Will it be the best of times, or the worst of times? Are we in the spring of hope or in the winter of despair? Tough questions, because the good India story contrasts with the poor story in the developed world. Any crisis there would cause foreign investors, who, as pointed out, are the main drivers of the market now, to seek safety. They are already doing so, as witnessed by low bond yields. The developed countries are going in for fiscal consolidation through an austerity drive. The interest rate cycle is at a low, and will keep rising. European banks are going through a stress test, results of which will be announced end July. By that time, leading Indian companies would have declared results for the quarter ended June. If they disappoint the high expectations of investors (witness the 45% premium over emerging market peers in PE multiples), that could also lead to a correction. So it seems, all in all, that waiting for one (perhaps after the sensex barrier of 18,000 is crossed) could be a sensible policy.

Alternatively, switch to Shakespeare!

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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7 Responses to "Markets at an interim decisive point"

r j

Jul 17, 2010

R Cdesai

It is Hamletian not Hemletian !!


rekha mehta

Jul 12, 2010

so Mulraj what do you advise should we sell some of our stocks and buy later when the market is down, Even if we are long term investors


K. Balasubramanian

Jul 11, 2010

Dear Mr. Mulraj, ' Markets at an interim decisive point ' is well-written. A more apt caption would be 'interim indecisive point'. This is suggested not for alleterative purpose, but to reflect the point that our Economy is governed not by the powerless Min of Finance, not by RBI, SEBI, Money-Supply, GDP etc ,terms not understood by ill-informed investors, but is governed by (1) unimaginable quantum of blackmoney, generated by deeply embedded systemic corruption in Govts,Centre & States, (2) generous supply of counterfeit currency from neighbors (3)a decadent CBDT & its tax-systems. All three will never change ,and so our markets also will ever be indecisive, the small-investors being losers forever.


J Mulraj

Jul 11, 2010

Jasminebhai I have not ever predicted that the sensex will reach 21000 by July 2010 in my column.


akkiraju srinath

Jul 10, 2010

after a very long time, i have read something which is
both logical, and pleasing to read. Mr.Mulraj could have
been an excellent jounalist. Hope to read much more of
such good pieces Mr.Mulraj.


jasmine bhai

Jul 10, 2010

dear sir,

this is the month of july 2010.
you have projected with authentic voice that in july 2010 sensex will reach 21000. now3 weeks to for to comlete july. is it possible still that sensex will reach 21000? i am doutful very much.
please reply.

- jasminebhai


R Cdesai

Jul 10, 2010

It is Hemletian dilemma "To be in the market or not to be in the market is the quesition"

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