Markets getting Shanghaied


The Chinese Shanghai composite index has fallen 23% from its August 4 peak, acting like an anchor to global stockmarkets, which seem to be wanting to burst upwards. The reason, as per an article by Prieur du Plessis is the large share issuances by Chinese companies and the slowdown in bank lending after the regulator asked banks to increase provisioning for NPAs. The Chinese Government permitted, on Friday, foreign funds to invest upto $ 1b. in Chinese stocks, up 25%. This was after the Shanghai market closed, but Hong Kong rose 3.2% and the BSE-Sensex went up 1.9% on Friday, over Thursday, reversing a 4 day decline. The sensex ended the week at 15689, down 233 points over the week but provocatively close to the 15,750 level it tries hard to breach. The NSE-Nifty ended the week at 4680, down 51, once again, seductively below its resistance level of 4700. Will it breach the resistance shortly?

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If only the Government gave investors reason to be enthusiastic, by picking up the pace of reforms and by taking sensible decisions. The continued imbroglio between the brothers Ambani over gas, for about 5 years now, is a case in point. No responsible Government ought to have allowed such a lapse of time, because the impact on the economy of the flow of gas from the KG basin is humungous! There are estimates that the economic impact would be 2% of GDP!

An increase of 2% of GDP year after year can actually lift millions of people from their below-poverty-line status. So allowing this resource, which can do the populace so much good and can reduce the fiscal deficit, to lie unutilised for so long, is the medical equivalent of allowing a suppurating wound to turn gangrenous. The law minister is now setting up separate commercial courts to fast track trials of national importance.

Look at some of the absurd consequences of prolongation of the dispute. NTPC, the largest power producer, has been reluctant to sign a gas purchase agreement for the 2.67 mscmd of gas allotted to it for other projects (not those in dispute with RIL), at the Government mandated price of $ 4.2/mbtu, for fear that doing so may harm its case. But it buys imported gas, as per a news report, at a price of $ 11.2 versus a comparative delivered cost of $6.5 for KG gas at the Government determined price. At weekend, NTPC has signed the agreement, fearing it would lose the allocation of the 2.67 mscmd gas.

Other than the economic impact, increased use of gas is necessary, indeed imperitive, for environmental reasons. In power production, gas emanates half as much carbon as coal does.

Thus it is hoped that the Supreme Court will take up the matter for final argument in third week of October, and have a fast track decision. There are signs of recovery in the developed world, and, as these, larger economies start to grow, oil prices are bound to rise again. India has to rebalance its energy mix to include more gas.

India has also been slow to curtail the use of petrol/diesel by laying increasingly tighter fuel efficiency norms. These columns have suggested a tax neutral excise structure that would lower the excise for vehicles that deliver higher than a mandated level of fuel efficiency, and increase it for the gas guzzlers (penalise those who own the Hummer, a criminal ego massaging luxury which should be banned). The mandated levels should increase over time. In contrast, several developed countries have introduced a cash-for-clunkers programme under which owners of gas guzzlers get a financial incentive to trade in the guzzlers for fuel efficient vehicles. The old cars are junked and not surreptitiously sold, as would happen in India.

In telecom, the Government has postponed, till end December, introduction of mobile number portability, the one thing that would introduce competition for customer retention, instead of just customer acquisition with attractive offers, as is the case now. This would improve customer servicing, which is poor now; much of the customer interface is outsourced to outside agencies with little ability to escalate the complaint to a senior person in the telco. Introduction of MNP would thus benefit those companies which have taken care of customers, to the detriment of those that have neglected them. One hopes TRAI does not make the portability so unaffordable as to be a non starter; it has a duty to customers not to telcos.

The two recent power sector issues, one from the private sector, Adani Power and the other from the public sector, NHPC, have gone below their offer price. The Government ought to be a bit concerned, as it has plans for disinvesting through IPOs (such as Rural Electrification Corporation, Coal India, Hindustan Copper etc) and FPOs (such as NMDC, NTPC etc). If IPO investors are not left money on the table, they would be reluctant investors in the next IPO. Dhirubhai Ambani was clear from the start, of the need to leave money on the table for investors, which helped the group grow to where it did.

The market is interestingly poised just below a resistance level. Would it pierce through, as this columnist felt it would, last week? What would be the trigger for it to do so? In domestic factors, one can only think of some major economic reform to act as a trigger. In external factors, perhaps the Shanghai index will reverse the August fall and give an august rise!

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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6 Responses to "Markets getting Shanghaied"


Sep 12, 2009

well informed.congrats to all concerned. keep it up.



Sep 7, 2009

I have a doubt & its a personal feeling. Why are the Reliance brothers displaying a fight when the fuel prices are at the lower end. Are they waiting for the gas prices to increase for better profits & till that time engage the entire nation into an illusion of an internal fight. Since they have good hold with politicians, might have taken their help to create such a scene. Finally it might be a business tactics & we the common people would realize it too late.



Sep 5, 2009

The chart for shanghai composite for 4th Sep, 2009 on yahoo, shows that that index is making new lows. And after outperforming all the Asian indices by a long shot, it seems to be the harbinger of a severe downturn, unless there is a miraculous upturn in it.
So looking to Shanghai index as the trigger to break out of our top would be far-fetched in my opinion.
The Dow and its cohorts did not even make it to 75% of their intermediate upper ceilings which were easily reached by the front line Asian indices. And that is hardly surprising since the uptick in those economies is nowhere in sight.
So the conclusion "straight from the hip" ought to be that we are in for a dismal spell around Diwali, or soon thereafter following one last hurrah!



Sep 5, 2009

The Draft Direct tax Code is dangerous for the health of equity market. It cancells the difference between Long term and Short tem gain and want to put all Capital Gains under 25% Income Tax. Please understand the gravity and oppose on such darconian draft else it will be too late.


sanjoy mitra

Sep 5, 2009

I dont think that the our market strong or any global market. It was the hope that investors are investing at recent volatile market. I belive that our market will stuck into 14500-15800 levels for one or two months.


arvind rupani

Sep 5, 2009

excellent article. It is indeed misfortune of India that two brillient son of an illustrated father are fighting in public for reasons best known to them.If money is the matter let us pray to god not to give them more.Both are exceptionally talented in their field and working seperately with respect to eachother can do India a lot of good I wonder why mother kokilaben is not doing anything as she was and is supreme authority in the family. why spiritual gurus guiding the family like Rameshbhai Ojah,family friend kamat and whole lots of congress politicians allowed this to linger on for five years? I wish that both go to supreme court with folded hands saying we have erred,we have settled and we will work towards better India .

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