Market Roundup: Abhi Karo Intezaar – Rajesh Agarwal Jindal

stock marketThe month gone by has witnessed one of the major events – the presentation of the Union budget by the Finance minister Mr. Arun Jaitley. Expectations have been sky high on the back of the hype created by the Bharatiya Janta Party (BJP) and the media during the elections. The phrase “Acche Din Aane Wale Hain” was lapped up by the electorate, although there was no time horizon attached to the phrase, people at large expected “Acche Din” to come as soon as the new government takes over. This has started creating a sense of dissatisfaction among people, and some of them have really started doubting that whether this “Acche Din” was for the Party or for the people at large. The budget which aimed at recovery in investment and fiscal discipline, in our view was the best one can expect from a mere 40 days old government and any material impact to be visible would need some time.

Investor sentiment and confidence improved after the BJP, which is perceived as a pro business and an investor friendly party, came to power. The stock market has given a standing ovation with almost all the indices at their highs and midcaps delivering handsome returns in some cases more than 100-150 % in a very short span of time. Indian markets has been by far the best performing market across the world on the back of large FII inflows of around Rs.72,919 crore since January 2014 and Rs.13,124 crore in July 2014.

Now with markets touching new highs, not so encouraging economic numbers, erratic monsoon, high inflation, geo political problems – the investor at large is in a dilemma – whether he should book profit / reshuffle portfolio / pour in new money / switch to other forms of investments before the market witnesses another round of correction.

While some of the problems such as Fiscal Deficit and Current Account Deficit have already been taken care of, the major cause of concern remains “Inflation” which unless tamed can be catastrophic.

We have been positive on equity as an investment class and have recommended stocks in the worst of times, many of them have turned multi baggers. The focus should always be on quality of stocks and a long term horizon rather than chasing stock prices. One should try to look beyond daily volatility.

Globally, a number of member states of the World Trade Organisation voiced annoyance after India’s demands for concessions on agricultural stock-piling led to the failure of the first major global trade reform pact in two decades. India insisted that, a permanent agreement on its subsidised food stockpiling must be in place at the same time as the trade facilitation deal, well ahead of the 2017 target that was set last December in Bali.

On the macro front, after registering double digit growth for two consecutive months, India’s exports grew by 7.33 percent to USD 27.72 billion in July, while imports rose by 4.25 percent to USD 39.95 billion. Trade deficit marginally narrowed down to USD 12.22 billion during the month under review from USD 12.49 billion. In the April-July period, exports grew by 8.62 percent to USD 107.8 billion.

The Reserve Bank of India (RBI) in its third bi-monthly monetary policy has kept the key rates unaltered. The statutory liquidity ratio (SLR) of scheduled commercial banks have been reduced by 50 basis points from 22.5% to 22.0% of their NDTL with effect from the fortnight beginning August 9, 2014, which will release Rs.6500 cr into the system. With improvement in economic activity and revival of business and consumers’ sentiments, the RBI is hopeful that the GDP growth in the current fiscal could go up to 5.5% from 4.7% in last financial year.

RBI governor Dr Raghuram Rajan says global markets are at risk of a “crash” should investors start bailing out of risky assets created by the loose monetary policies of developed economies. “We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” Dr Rajan said he worried about the impact of investors exiting markets all at once after buying heavily into assets inflated by these loose central bank policies. “There will be major market volatility if that occurs. True, it may not happen if we can find a way to unwind everything steadily. But it is a big hope and a prayer,” Dr Rajan added. He later clarified that his statement was not aimed to “pre-empt” another crisis, but to highlight the pitfalls of using monetary policy to revive growth.

In a very encouraging statement, Finance Minister Arun Jaitley made clear that PSUs should comply with the minimum public holding norm as mandated by Sebi,  “listed PSUs which cannot follow the norm should get themselves delisted” he further added.

The month gone by witnessed a shocking incident of CMD of Syndicate Bank S K Jain being arrested by CBI in connection with a 50 Lac bribery case. Mr. Jain and 10 others were arrested on charges of accepting bribes to enhance the credit limits of Prakash Industries and Bhushan Steel.

Sectorally, The Securities and Exchange Board of India approved the setting up of real estate investment trusts (REITs), a move that may offer a lifeline to the ailing real estate sector. REITs are listed entities that mainly invest in income-producing real estate assets, the earnings of which are mostly distributed to their shareholders. They generally get special tax treatment. Sebi also approved allowing infrastructure investment trusts — A REIT-like structure that would allow developers to monetize their infrastructure assets through a stock exchange listing.

Online retail has been one of the sectors witnessing lot of buzz, While Flipkart raised $1 billion in fresh capital from new as well as existing investors, the amount being the single largest round by any Indian internet company and is among the largest in a single funding round for any e-commerce company globally, the company said. It puts the company in the league of companies such as Facebook and Uber whose funding rounds have equalled or surpassed $1 billion. Amazon on the other hand announced plans to invest around $2 billion to fund its rapid growth. Competition in the e-commerce space is heating up. The point to be noted is there are dozens of online retail players in India, but none of the players in the country are profitable as yet. With these mind boggling valuations and companies making losses, the sector is likely to witness consolidation. Flipkart acquired online fashion portal Myntra. Amazon, with its deep pockets, could also add some e-commerce players to its shopping cart.

Another sector making much noise is aviation, while almost all the players (with one or two exceptions) are reeling under huge losses and mounting debts, Indian skies are likely to witness many new players entering the arena. Even consolidation in the existing players would not be surprising. Two recent announcements have hinted at the big changes in the offing. By the end of the year, the entire domestic fleet of Jet Airways will revert to a two-class, full service configuration. Another announcement came from Tata Sons which announced the launch of “Vistara”, the group’s full-service airline venture. The airline brand promises ‘elegant and refined spiritedness’ and claims to redefine industry service standards. On the other hand, Spicejet is in desperate need of capital, with cumulative losses of around Rs 2,189 crore and the Directorate General of Civil Aviation (DGCA) having initiated an engineering audit; it would be tough for the company to get out of the mess.

Sugar industry is going through a major crisis, majority of private sugar producers in Uttar Pradesh may suspend cane crushing next season starting October unless the state government links cane prices to sugar rates. Private millers in the state owe about Rs 5,300 crore arrears to farmers for the season ending September. Millers claimed that they are incurring losses of Rs 5.5 per kg since the producing cost of Rs 37 is higher than the selling price of Rs 31.50. On the other hand the food minister had requested the UP government to initiate strict action under available laws on such defaulters who have not yet paid the money back to the farmers.

There might be lot to come from the domestic Mobile handset market, Micromax a recent entrant in the sector has ousted Samsung Electronics Co Ltd as the leading brand in all types of mobile phones in the April-June quarter, grabbing a 16.6 percent market share, a recent research report showed. Samsung had 14.4 percent market share, down from 16.3 percent in the first quarter, said the report by Counterpoint Research. In the Smartphone segment, however, Samsung still leads. The latest entrant in the lucrative Indian market is Chinese Smartphone manufacturer Xiaomi which has been selling its Mi3 Smartphone through flash sales on Flipkart, and in the 4th such sale stocks ran out in a mere 2.4 seconds.

The market so far has rallied on hopes of economic recuperation. Investors are waiting impatiently for implementation of key economic policies, to boost economic growth. Investment and capex cycles are likely to pick up once the policies start getting implemented leading to uptick in the growth. Under the circumstances, FIIs will get more confidence to pump funds into the Indian equity market. We believe FII flows will continue to remain robust. We expect the strong up move to continue, barring a few intermittent corrections on the back of profit booking, as is normal for any bull market. In the short term though, fear of crude prices increasing due to escalating tensions in West Asia and the movement of currency would take centre stage.

Resurgence of investments, clearing of held up projects, pick-up in external demand and stabilisation in global crude prices could help achieve the growth estimates. As per the Finance Ministry estimates, GDP growth in the current fiscal is expected be in the range of 5.4-5.9%.

To sum up, market is expected to face turbulence in the short term owing to certain concerns both on the domestic and global fronts. Continuing geo-political conflicts in the Gulf and other Middle Eastern countries have the potential to push up oil prices inflating the import bill, adding to pressure on the CAD. With monsoon rainfall still likely to be below average, food inflation is likely to remain firm. However, we believe that the underlying trend remains healthy as economic growth in the ongoing fiscal year is estimated to be between 5.4% and 5.9%, after remaining at sub-5% levels in the last couple of fiscal years. On the whole we expect the Indian markets to maintain it’s up move with intermittent profit booking, the long term view remains robust but it would take some time before the house is put in order …………………………………. Abhi Karo Intezaar.

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(Working as Head-Research at Eastern Financiers Ltd, am a post graduate in commerce from Calcutta University, and have gained wide experience in the last 18 years. Prior to joining Eastern Financiers, I have gained in depth knowledge of the Financial Markets while working with Capital Market Publishers, Lohia Securities & CD Equisearch. As head of the Equity Research Wing, I appear regularly as Guest Analyst at CNBC, Awaaz, CNN-IBN, NDTV Profit , Zee Business,Bloomberg UTV, ET Now & R Plus.)