Even FM cheers Sensex 20k!

Markets threatened to close below the 20,000 on the Sensex during the closing stages of today’s trade. But it was not to be. A small spurt of buying activity at the fag end ensured that the index closes a fraction above the coveted mark. Thus, the Sensex edged higher by around 100 points (up 0.5%) while the Nifty closed around 30 points higher (up 0.5%). The mid cap and small cap indices however, failed to find favour today and lost in the region of 1% each. The number of advances nearly matched the declines on the Sensex today.

Most Asian indices closed higher today whereas Europe is also trading in the positive currently. The rupee was trading at Rs 45.7 to the dollar at the time of writing.

Indeed. The manner in which the Sensex has gone from 8,000 to 20,000 must has taken even the most optimistic of the lot by surprise. But now, euphoria is pouring in from all quarters. Even the finance minister could not hold himself back. Speaking to reporters, Mr Mukherjee opined that he is happy that the Sensex is above the 20,000 mark. However, we hope Mr Mukherjee does not lose sight of the fact that a lot more needs to be done on the economic and fiscal deficit front if this rally has to be made more sustainable from a long term point of view. FIIs have proven to be quite demanding in the past and they may not take lightly in the future as well, any major letdown on the policies front.

It is not just the Sensex that is setting new records every day, other sectoral indices are also having their days in the sun. As per a leading daily, four of the thirteen sectoral indices on the BSE have reached their all time highs, while two others touched a one-year peak in the early trade today. Bankex, Healthcare, FMCG and auto indices are the ones that have touched their all time highs whereas capital goods index and the technology index broke their yearly records. Important to add that these indices are well diversified in terms of consumption, investment and exports theme and are not just concentrated in one particular segment of the economy. With the India growth story still in its nascent stage, it will not be surprising to see these indices touching new all time highs every few years from now.

Engg, IT stocks keep Sensex afloat
01:30 pm

Although trading in the positive zone, the Indian markets saw some volatility during the previous hour of trade. At the time of writing, stocks from the capital goods, IT and healthcare spaces were leading the pack of gainers, while those from the FMCG and realty spaces were amongst the top losers. The market breadth seems to be pessimistic at the moment as there were 2.6 losers for every gainer on the overall BSE.

The BSE-Sensex is trading up by around 60 points (up 0.3%), while the NSE-Nifty is up by about 16 points (up 0.3%). Midcaps and smallcaps continue to see pressure with the BSE-Midcap and BSE-Smallcap indices trading lower by 0.9% and 1.1% respectively. The rupee is trading at 45.78 to the US dollar.

Hotels stocks are trading weak led by Hotel Leelaventure, Taj GVK and Indian Hotels. However, the stock of EIH is trading firm on the back of news of the company considering a rights issue. While the size and ratio will be decided after the board meeting on 23rd September, this has sparked speculations that the promoters as well as the Reliance group, which recently bought over 14.8% in the company, could buy unsubscribed portion of the issue to raise their holdings. This would give the Oberoi's and the new shareholder an opportunity to strengthen their holdings in the company and help minimize the possible risk of any hostile takeover bid by ITC. On the other hand, there are indications that ITC is not interested in subscribing to the rights issue. This is because getting control of EIH looks difficult as Reliance is now a stake holder in the company. The proceeds from this rights issue are expected to be utilized to reduce the company's debt and finance its expansion.

Auto stocks are currently trading firm weak led by TVS Motor, Ashok Leyland and Bajaj Auto. In an attempt to cut costs, Tata Motors UK-subsidiary Jaguar-Land Rover's (JLR) is considering launching new vehicles on fewer platforms. This would help it keep costs under control as well as simplify manufacturing lines. It would also allow the company to increase its flexibility as well as improve the efficiency levels as well as a reduction in product development time. A leading business daily has reported that Tata Motors is planning on having only four platforms (as against nine) over the next two to three years. This would be an effect of new technology. As per the company, Tata Motors is also initiating joint development programmes with its UK subsidiary for engines, vehicles and platforms. JLR was acquired by Tata Motors in 2008 for two key reasons – technology and brand. If one were to go by news and developments in recent times, it does seem that the companies have increased their efforts towards capitalising on the synergies that will arise out of Tata Motors and JLR working together.

Smallcaps and midcaps lose favour
11:30 am

After opening in the positive, Indian indices have seen some volatility in the last couple of hours of trade, but are now trading strong. Other key Asian markets are mainly trading positive with Japan being the only exception, down 0.3%. Currently, heavyweights in the Sensex are in the green with stocks from consumer goods and IT space witnessing strong buying activity. However, consumer durables and realty stocks were trading negative.

The BSE-Sensex is trading up by around 55 points, while the NSE-Nifty is up by about 16 points. Midcaps and smallcaps have lost investor favour with the BSE-Midcap and BSE-Smallcap indices trading down by 0.7% and 1.2% respectively. The rupee is trading at 45.71 to the US dollar.

NBFC stocks are trading mixed with HDFC, and Mahindra Finance leading the gains. Rural Electrification Corporation (REC) and Power Finance Corp (PFC are trading in the red. Rural Electrification Corporation (REC) announced recently that it has been granted infrastructure finance company (IFC) status by the RBI. This will enable the company to mobilize more funds for the power sector. With its new IFC status, REC can now take additional lending exposure of up to 5% of its owned funds for lending to a single borrower and up to 10% of its owned funds in the case of a borrower group, upto a maximum of 40% of owned funds in the case of a group.

REC is also now eligible for the issuance of infrastructure bonds and for raising funds up to US$ 500 m (Rs 25 bn approximately) through external commercial borrowings (ECBs) in a year. REC is the second company after Power Finance Corp (PFC) to be accorded the IFC status by RBI.

Auto stocks are trading weak with TVS Motors and Ashok Leyland leading the pack of losers. However, Hero Honda and M&M are trading strong. With arch rival Bajaj Auto gaining ground in the entry level bike segment, Hero Honda's leadership position has come under pressure. Hero Honda's market share in the 75-125 cc segments has declined to 68.9% in the April-August period this fiscal compared to 81.8% in the same period last year. It is believed that Bajaj Auto's re-entry into the volume driven 100 cc segment last year has impacted Hero Honda's sales. It should be noted that Bajaj Auto's share in the segment has increased to 19.5% in the last five months. Besides Bajaj Auto, Hero Honda's market share is also being affected by the entry of Honda Motorcycle & Scooter India (HMSI) with 'CB Twister'. Further, capacity constraints are also a major concern for the company.  Right now, the company has three production facilities with total installed capacity of 5 m units and is scouting for locations to set up a fourth one in order to ease capacity constraints.

Peak 20k captured!
09:30 am

The Indian markets have started today's session on a positive note. The BSE-Sensex has crossed the 20,000 levels for the first time since January 2008. Other key Asian markets are also in the green with Japan (up 0.4%) leading the pack of gainers. The US markets ended higher by 1.4% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with FMCG majors attracting investors' interest. The BSE-Sensex is trading higher by around 145 points, while the NSE-Nifty is up by about 40 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.5% and 0.4% respectively. The rupee is trading at 45.59 to the US dollar.

Food stocks have opened the day on a positive note. Gainers here include GSK Consumer and Britannia. As per a leading business daily, Nestle India has cut the price at which it buys milk from farmers in Punjab. From Rs 355 per kg of fat, the company has brought the procurement prices down to Rs 340 per kg. It may be noted that there was a record supply of milk this summer. Nestle is the biggest buyer of milk in Punjab processing over 900,000 litres of milk per day. Another large consumer GSK consumer, which processes 300,000 litres per day, is also likely to cut procurement prices. The Punjab government had imposed an entry tax of 5% on milk procured from outside the state, which was reducing the margins of companies. This acted as another trigger for reducing the farmers' rates.

Energy stocks have opened the day on a strong note. Gainers here include Indian oil and Gujarat Gas. As per a leading business daily, Indian Oil will increase the price of petrol by 27 paise from today. This will make it the first among the public sector oil marketing companies (OMCs) to exercise the pricing freedom given by the government on June 26. BPCL and HPCL are likely to follow suit soon. It may be noted that the government has not yet empowered the OMCs to fix the price of diesel due to political opposition and its impact on inflation levels. Ultimately, the pricing of diesel must be freed for genuine price deregulation. It constitutes about 41% of the total petroleum products sales.

What separates India from China

The one common factor that entwines through India and China is that both have both recovered strongly for the global economic slowdown. Yet despite the future prospects looking healthy both have different dilemmas to deal with.

Take the case of China for instance. Because its economy has been largely exports dependent, the global slowdown hit its economy hard. The company since then has been trying to focus more on domestic consumption. But that is a structural shift that will take some time to bear fruit. In the meanwhile, a prolonged recession in the US and Europe would once again start to have a negative impact on the Chinese economy. Already after reporting strong growth in the first half of 2010, experts are of the view that growth in the Chinese economy will be much lower in the second half of the year.

China also has another problem to deal with. That of a bubble forming in asset classes. Readers would recall that China had introduced a massive stimulus package to fuel its economic growth after it slowed down as a fallout of the global crisis unfolding. This was followed by indiscriminate lending by banks to the property market. This led to property prices reaching unjustifiable levels. Since then the Chinese government has introduced measures to cool down the property market. But at present the two issues that threaten China is a prolonged recession in the developed world and formation of asset bubbles.

India is a different matter altogether. The big problem that is hampering India currently is persistently higher inflation. Especially on the food front. This has led the RBI to continuously adopt tightening monetary measures. And this is likely to continue till the inflation levels come within the central bank's comfort zone. The other problem that the Indian government faces is the burgeoning fiscal deficit. The government has laid a roadmap for reducing the deficit but it remains to be seen whether it will be able to stick to its agenda. The good thing for India though is that domestic consumption has been healthy. This has then insulated India better from a slowdown in the West than China.

But stock prices in India have been zooming. Although the Indian growth story remains intact, valuations are beginning to look rich. This is even as a flood of IPOs are hitting the market and FIIs are pumping money into the markets in droves. It is important for investors to not get carried away by the tide but do some independent thinking that will help them generate returns most suited to their risk appetite.