Markets continued their one way move upwards with
barely a pause showing scant regard to the rain caused
disruptions in Mumbai. Even the trading holiday on Thursday
after banking operations came to a halt in Mumbai, could
not upset the indices much.
Banks
led the way throughout the week even as more cautious
market watchers termed the surge in stock prices as crazy.
Robust FII inflows and massive short covering ahead of
the monthly derivatives settlement saw the indices seeking
new life time highs on most of the days.
The
fire in one of the production facilities of ONGC and losses
reported by 2 of oil marketing companies did not dampen
the market momentum. Lower than expected first quarter
results from frontline steel companies like Tata Steel
and SAIL also could not rein in the market surge, though
these stocks corrected during the week.
The
Sensex crossed the 7600 mark comfortably during the week
and touched 7700 on Friday before selective selling forced
the index to close below that mark. Gains on the Nifty
were lower as weakness in ONGC and the sideways movement
in some of the technology majors held its gains.
Mid-caps
underperformed the frontline stocks throughout the week
as many momentum stocks saw deep correction. Poor first
quarter numbers from some of these companies added to
the pain in smaller caps. The CNX Mid-Cap 100 index closed
the week on a weak note on Friday.
Domestic
economic and regulatory action
- The
quarterly review of the RBI's annual credit policy left
all benchmark rates unchanged. The central bank may
have been encouraged by the stable price levels despite
the modest hike in fuel prices effected in June. Besides,
the policy makers definitely do not want to derail the
recovery in manufacturing growth by reining in credit
growth.
While
describing the credit growth as very strong and beyond
expectation, the RBI governor stated that the growth
is well diversified and healthy. In two of the sectors
were the early signs of froth is visible, commercial
real estate and capital markets, the central bank
has increased the risk weightage on bank exposures.
RBI
expects the economy to grow within the range 6 to
7.2 per cent during the current year as the monsoons
have been good and industrial production has surged
ahead. Inflation has been pegged at between 5 and
5.5 per cent.
- The
monsoons have in fact been too strong this week, sinking
most of Mumbai under water. It was not a pretty sight
to see the commercial capital of the country and an
aspiring regional financial centre completely shut down
for more than 2 days. Despite all the talk of converting
Mumbai into another Shanghai, the ground realities remain
depressing.
We
first heard of these grand plans in the nearly nineties
and the city does not even have a good drainage system
even after a decade and half. The city is left to
pride itself on the efficiency of its local rail network
and forget the fact that the network is grossly inadequate
and so uncomfortable to commuters. Delhi, where travel
by public transport is considered as demeaning unlike
Mumbai where everybody travels by local train, got
a swanky new metro system. A similar one is only being
considered for Mumbai!
The
left parties and sections within the congress party
expect Mumbaikars to feel proud about the only slum
in the world which has an international airport within
it. Their efforts to block the eviction of encroachers
on airport land cannot be justified in any other way.
- Coming
back to monsoons, despite the rain caused calamities
in Gujarat and Mumbai, the rest of the country has much
to thank the rain gods for this year. Andhra Pradesh,
which did not receive sufficient rainfall even last
year when most of the country received enough, is all
set to bounce back after years of drought. The 2 week
delay in arrival of monsoons and the subsequent shortfall
in June have been more than compensated.
When
the monsoons were delayed in June, one of the most
respected economic think tanks in the country jumped
the gun and predicted a bad year for agriculture.
The institution went a step ahead and lowered their
economic growth projections for the current year,
stating that manufacturing would find it difficult
to come up with a repeat performance after last year's
excellent showing. Thankfully for the country and
our economy, both their prognosis have been proved
incorrect within 2 months.
- Inflation
for the week ended 16 July inched up marginally to 4.18
per cent from 4.14 per cent reported for the previous
week. The rise was mostly on account of increase in
prices of food articles, manufactured goods and energy.
- Once
again the stock market regulator seems to be blind to
the huge run up in the stock prices of a company belonging
to a prominent industrial group before a major announcement.
The stock price of Tata group company VSNL has been
going up for some weeks now seemingly without any reason.
It is now obvious that at least some of the large operators
were aware of the impending acquisition announcement
while ordinary investors had no clue about it.
The
VSNL case comes after similar run ups in counters
like Reliance Energy, Reliance Capital etc before
major announcements. The periodic surges in Reliance
group stocks before the final settlement between the
brothers are still fresh in memory. In these cases
also, SEBI has not initiated any enquiry. They have
not even checked the trading patterns with the stock
exchanges. The regulator is after hapless FII's for
causing the market crash on Black Monday as it is
more convenient.
If
the regulator cannot control these unhealthy and unfair
practices at least in frontline stocks, such practices
could eventually lead to a disaster. Even these days,
nothing prevents a group of operators from spreading
a rumour about a possible acquisition and rig up stock
prices. And this is a country where people get killed
because of rumours, like this week in Mumbai about
a tsunami and a dam breach! While our systems have
improved much, some of our market practices have hardly
changed from the bad days before nineties.
Industry
update
- The
first two quarterly results from PSU oil marketing companies
were on expected lines, with both Indian Oil and BPCL
reporting losses. It was certain that these companies
would report losses as the fuel price increase in June
came in too late and too less. With crude prices refusing
to cool off from the $60 per barrel levels, the oil
marketing companies would continue to bleed in the current
quarter as well unless the government decides to raise
prices further.
More
than a couple of quarters in the red, the impact of
price under-recoveries on the long term plans of these
companies are considerable. For an energy hungry growing
economy like India, it is very important that the
frontline energy sector companies have the capability
to make large scale investments in building capacities.
As
India does not have enough hydrocarbon reserves, the
energy sector needs to acquire more and more oil and
gas assets abroad. The competition to Indian companies
in this quest comes from Chinese companies which are
all financially sound. The Chinese government is also
willing to financially back them like in the recent
bid by CNOOC for US oil company Unocal.
However
in India, the government is adopting the policy of
milking the oil companies to score political points
by providing subsidised fuel. To make matters worse,
the government often force them to make large dividend
payouts to improve government finances. Companies
which need to make large capital investments are forced
to part with internally generated funds by way of
additional dividends! At the same time, the government
expects them to take up large scale investments too.
Indian
Oil has already stated that its poor financial performance
would affect its ability to take up large investments,
both in the domestic market and abroad. The company
has bid for a 51 per cent stake in a large Turkish
refining company and also has plans to set up a massive
export oriented refinery with a capacity of 60 million
tonnes per annum.
Even
ONGC, which has the most financial resources among
all oil sector PSU's, would find it difficult to take
up large projects if the current situation continues.
Apart from the higher subsidy burden forced on it
this year, ONGC will also have to make investments
to bring back the facilities destroyed by this week's
fire.
The
oil minister was seen bragging on television that
ONGC has the ability to raise up to $25 billion to
finance its future plans. This is not an empty claim;
the company indeed has the capability to do so. The
worry is about its future repayment capacity, if crude
oil prices were to remain at these levels and the
company is forced to pay for the subsidies. Besides,
is $25 billion enough to finance our entire hydrocarbon
related acquisitions and capacity build up?
- The
huge rally in bank stocks over the last 2 weeks has
taken most analysts by surprise. What struck the most
was the speed with which the frontline banking stocks
surged. Three of the largest banks, SBI, ICICI Bank
and HDFC Bank led the charge from the front, all of
them posting new life time highs.
The
decision of the RBI to leave short term interest rates
unchanged added fuel to the rally in banking stocks.
Most analysts were betting on a 25 basis points rise
in the reverse repo rate which would have led to a
decline in bond prices. A decline in bond prices would
have in turn led to some losses on bond portfolios
of those banks which have not shifted their holdings
to the held-to-maturity category.
Traders
are betting on improved interest spreads for banks
as many of them had raised the interest rates on some
categories of lending recently. The rate hikes had
come mostly on retail loans which is the fastest growing
category even for SBI. Since short term interest rates
were left unchanged, the belief is that there would
be no need to raise deposit rates and hence interest
spread would go up.
Though
this may be true in the short term, the situation
may change dramatically. As mentioned in this column
earlier, growth in bank advances is running way ahead
of growth in deposits even in absolute terms. Banks
are currently meeting the credit requirements by running
down their bond holdings which obviously cannot go
on forever. Sooner than later, banks would be forced
to make deposit rates more attractive.
Another
negative in the medium term is the introduction of
Basel 2 norms which would force banks to improve their
capital adequacy. Most of the frontline banks would
have to raise fresh capital to meet the requirements
under Basel. Equity dilution is generally not good
news for stock prices. But strange things happen in
a bull market and the markets may bid up bank stocks
ahead of such issues as was seen in the case of the
PNB public issue a few months back.
US
markets, economy and oil
The
US indices closed the week on a low note but gains for
the month on all 3 widely followed indices like the Dow,
NASDAQ and S&P 500 were impressive between 3 to 6
per cent. For the week, the major indices were little
changed.
Though
economic numbers were strong, the stock markets were affected
by falling bond prices. The decline in bond prices has
pushed up bond yields to a 3 month high and traders have
started worrying about a diversion of investments from
stocks to bonds. Robust economic growth may also lead
to further short term interest rate hikes. The US markets
were also affected by the rise in crude prices.
The
US economy expanded 3.4 per cent during the April-June
quarter as against 3.8 per cent reported for the Jan-March
quarter. This is the ninth straight quarterly growth of
over 3 per cent for the US economy. If not for a decline
in inventory build up, the second quarter growth would
have been much higher.
The
International Monetary Fund expects the US economy to
grow at the rate of 3.5 per cent for this year and the
next. In its annual review of the US economy, the IMF
said higher inflationary pressures may lead to more aggressive
hikes in short term interest rates. Stable growth in the
US has helped global economic growth over the last few
years and the IMF expects the situation to remain unchanged
in the medium term.
The
IMF continues to be worried about the huge fiscal imbalances
in the US and has urged the government to correct them
through tax adjustments. The institution also believes
that the US Dollar continues to be overvalued despite
the 12 per cent depreciation over the past 3 years, adjusted
for inflation.
Crude
prices bounced back during the week and closed well above
the $60 to a barrel mark for September futures on NYMEX.
The latest upsurge was caused by a blast at a Texas refinery
owned by British Petroleum. Another US refinery of BP
had been severely damaged earlier this year.
Crude
gained more than 3 per cent during the week and closed
at $60.57 to a barrel, within striking distance of all
time high of $62.1. The commodity is expected to rise
next week as no signs of an economic slowdown are visible
in any of the large consuming markets like US, China and
India.
*Disclaimer:
The author doesn't have any position in the stocks
specifically mentioned above at the time of writing this
article. This analysis/report is only for the purpose
of information and is not an investment advice. Readers
are advised to consult a certified financial advisor before
taking any investment decisions. While efforts have been
made to ensure the accuracy of the information provided
in the content the author or publisher shall not be held
responsible for any loss caused to any person whatsoever.
Other
articles by Rex Mathew
List
of general reports on markets
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of general reports on finance
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