The Pamplona bull run coming to Dalal Street! - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The Pamplona bull run coming to Dalal Street! A  A  A

25 JULY 2009
The San Firmin festival, held in early July, is a festival in Pamplona, Spain, in which the most popular event is the Pamplona bull run. In late July/early August this is likely to come to Dalal Street. The BSE sensex level of 15,750 poses as the last restraint to a crazy bull, one that can be expected to break without difficulty. The bull would then run amok.

This would be excellent for a fiscally strapped Government to raise resources through stake sales in their companies. Early entrants would be NHPC (which is to raise Rs 1850 crores in a price band of Rs 30-36) and OIL India, both of which should be attractive. The Government could, simultaneously, provide a conducive atmosphere for a bull run, by announcing the economic reforms everyone expected in the Budget but which didn't come. Perhaps it was a matter of timing the announcements, much like corporate managements sometimes do. Everyone, it seems, is becoming market savvy!

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Somehow, Manmohan Singh's Government has petitioned the weather Gods, for the monsoon, which were hugely deficient, especially in grain growing areas of Punjab and Haryana, have almost caught up. Growth in 6 core sector industries (coal, cement, steel, power, crude and refineries) is up in June, at 6.5%; only the refinery segment showed a fall.

The Ministry of Roads is embarking on a huge, $ 70 b. project to extend the road network. This would provide a huge economic boost and lead to a spurt in demand for cement and steel. With the monsoons also having caught up, foodgrain production ought not to be too badly affected.

Corporate results for the June quarter are, generally, encouraging. Barring companies like ONGC, whose net profit declined 27% following the collapse of crude oil prices (which have now picked up to $63), of RIL, whose profit was down 21% on a fall in refining margins (down from $15.7/b to 7.5) and GAIL, whose profit was down 27%, the other companies showed encouraging results.

Canara Bank's net profit was up a whopping 353%, thanks largely to treasury income, Ultratech was up 58%, Bharti Airtel 27% and Maruti 25%, amongst others. With prices of petrol and diesel having recently been raised (and likely to be raised again once this hike is digested) the drain on ONGC and GAIL's profits for subsidising OMCs, will reduce. A study by Mint, of the results of 137 firms, shows an average profit increase of 33%. Investors in the developed countries would salivate.

A report by the Nobel group opines that the markets will rise, thereby forming another bubble. The risk factors mentioned are a) lack of economic reform b) poor credit availability c) return of risk aversion in the developed world and d) too many IPOs in India.

The post budget fall was primarily a disappointment on a) perceived lack of economic reform. However, in order to plug the fiscal hole, it would be in Government interest to accelerate the pace of economic reforms. One could, therefore, expect a spate of announcements that would enthuse the market.

There is a real concern about poor credit availability, with the Government hogging the lion's share and borrowing some Rs 4 lac crores this fiscal. One would need to see how the RBI and the new debt management authority of the Government, deals with this. The return of risk aversion in the developed world cannot be ignored. The global crisis perpetrated by irresponsible lending and investment, has been tided over, with dollops of liquidity. The price for this would be paid, in some way or another. GDP growth of the developed world economies will remain sclerotic, especially in the Euro zone, which is less responsive. The UK economy will shrink 4.4% this year. The US is quicker to respond, with flexible labour policies, and would be faster to come out of the economic crisis. Re-sale of homes in USA has reached the highest level since October, and are running at an annual rate of 4.8 m homes.

The likely flood of paper in the primary market, as secondary market rises, remains a risk, albeit one that is distant. For the nonce, however, the bull is likely to run amok, on financial steroids.

The BSE-Sensex level of 15,750 is a crucial resistance level. Last week the sensex ended at 15,378, up 634, and NSE-Nifty ended at 4568, up 193. The sensex is just a tad below the resistance level and can be pierced either in this attempt or in a subsequent one. Once that happens, investors can expect the Pamplona bull run to move to Dalal Street.

Ultimately all bubbles burst, and create problems. All countries have taken huge bets, pumping up their economies through fiscal and monetary stimuli, betting that when their economies improve, the increased taxes would allow them to pare down the debts taken for the stimuli. Alas, in India, once spending schemes are launched, they can very rarely be retracted. No political party has the courage to do so. So the fiscal deficit problem in India would be tough to resolve. But that's tomorrow. For now, its party time!

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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Jul 25, 2009
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