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Sensex, Nifty will continue to make attempts to rally – Tuesday closing report

Nifty will make repeated attempts to move higher on positive announcements but the market is highly overbought

The market opened in the green today but immediately slipped into the red and within the first hour of the session hit the day’s low. But it gathered strength and marched up making a higher low on its path of recovery. The intraday recovery helped the indices close marginally higher today. The market sentiment was affected adversely after the Indian Meteorological Department (IMD) said late on Monday rainfall over the country as a whole for the 2014 southwest monsoon season (June to September) is likely to be below normal.

Sensex opened at 25,706 while the Nifty opened at 7,679. The indices hit a low at 25,347 and 7,579. The benchmarks recovery pulled them up to the level of 25,711 and 7,683. Sensex closed at 25,584 (up 3 points or 0.01%) while Nifty closed at 7,656 (up 2 points or 0.02%). The NSE recorded a volume of 166.95 crore shares. India VIX rose 2.53% to close at 16.6625.

Among the other indices on the NSE, the top five gainers were IT (2.41%), Pharma (1.65%), NI15 (1.22%), Consumption (0.61%) and Service (0.27%) while the top five losers were Realty (2.98%), PSU Bank (1.74%), PSE (1.60%), CPSE (1.47%) and Commodities     (1.13%).

Of the 50 stocks on the Nifty, 22 ended in the green. The top five gainers were Infosys (3.17%), Tech Mahindra (2.72%), Wipro (2.69%), Cipla (2.64%) and Cairn (2.28%). The top five losers were DLF (3.63%), Grasim (3.37%), Ambuja Cements (3.14%), Bhel (3.08%) and Tata Steel (2.91%).

Of the 1,605 companies on the NSE, 800 closed in the green, 766 companies closed in the red while 39 companies closed flat.

After IMD's forecast of below normal rains this year, agriculture minister Radha Mohan Singh on Monday reaffirmed government's seriousness in tackling any situation arising out of poor monsoon. He also mentioned that they are ready with the contingency plans, state governments have been suitably advised, sufficient food stocks are in place, and quick action will be taken to tackle any situation arising out of deficient monsoon, he said.

 Among the news today, the Essar group controlled by brothers Shashikant and Ravikant Ruia, are consider delisting of its publicly traded group companies. One of the group companies, Essar Oil (8.41%) was among the top three gainers in the ‘A’ group on the BSE.

 Recently Shree Cement came out with its plan to establish a three million tonne per annum (mtpa) cement grinding mill at Odapada in Dhenkanal district at an investment of Rs 452.55 crore. The cement maker has opted for the site as it can use fly ash generated from power plants concentrated in Dhenkanal district. Shree Cement (4.57%) was among the top six losers in the ‘A’ group on the BSE.

 Rupee weakened today against dollar. All the pharma and software stocks in the Sensex 30 pack closed in the positive today, Cipla (2.76%), Wipro (2.73%), Infosys (2.73%), TCS (1.98%), Dr Reddy’s (1.72%) and Sun Pharma (1.25%).

 Again today ONGC was among the top losers in the Sensex 30 stock, fell 2.74%.
US indices closed marginally in the green on Monday.

 Except for Nikkei 225 (0.85%), NZSE 50 (0.15%) and Straits Times (0.34%) all the other Asian indices closed in the green. Jakarta Composite (1.25%) was the top gainer.

 China's central bank said it will cut the level of deposits that banks have to keep with it by 50 basis points for some lenders.
China's inflation accelerated in May to the fastest pace in four months on food costs, while a decline in factory-gate prices moderated. Consumer prices rose 2.5% from a year earlier, the statistics bureau said today in Beijing. The producer-price index fell 1.4% after a 2% decline the previous month.

 European indices were showing mixed performance while US Futures were trading lower.


Equity market upside can be significant over the next 18-24 months

Modi government’s priorities and concomitant lift in the decision making environment have improved the chances of the removal of bottlenecks and a revival of the investment cycle, says StanChart in a report

India needs swift policy action to remove bottlenecks like increase the investment rate and reduce the incremental capital output ratio (ICOR) – a measure of productivity – to move towards the growth rate of 6.0%-6.5% in the near term. Though the immediate focus would likely be on improving productivity to the pre-global financial crisis levels, the stronger-than-expected electoral mandate has improved the chances of a quicker-than-expected recovery in the investment cycle as well, says Standard Chartered Securities (India) Ltd in a research report.

"The new government’s priorities and concomitant lift in the decision making environment have improved the chances of the removal of bottlenecks and a revival of the investment cycle. It will take time, but a sharper-than-expected recovery in GDP growth, to say 8% by FY17, is not inconceivable. We note that equity market upside can be significant over the next 18-24 months, which in turn should continue to fuel investor appetite for domestic cyclicals, reversing the four-year sell down trend," the report says.

The return on assets (ROA – net profit divided by total assets) for the Sensex and asset turnover ratio (revenues divided by assets) further vindicate the macro deterioration in productivity, especially in the past two years FY13-14. The decline in ROA is particularly steep among domestic cyclicals (viz. capital goods) and policy-dependent sectors (viz. utilities). StanChart feels, this could turn swiftly if there is a broad-based recovery led by the government’s priorities to accelerate decision making and breaking the resultant policy logjam. That can lead to a virtuous cycle which can improve consumer demand and sentiment besides reducing stress in the banking system.

According to the report, to support the recovery, external funding support is more forthcoming now. "We estimate that $80 billion per year of external funding support is required to achieve 8% GDP growth – the government’s original growth forecast under the 12th Five Year Plan (FYP) for FY13-FY17. This is based on external debt/equity requirements for infrastructure and other sectors. Reducing political risks and a stable currency can make the requisite external funding support easier to attain, thus aiding the process of economic recovery," it added.

In an optimistic scenario, StanChart says moderation in inflation and rate cuts can add further fuel, making the recovery broad-based and it that happens, domestic cyclicals will have much more legs. It says, "We forecast March 2016 valuation targets under these optimistic assumptions for the economy-centric sectors like banks, cap goods, cement, real estate, oil & gas, consumer discretionary, on a sample of key index and large cap stocks”. (see Figure below)

StanChart says under the bull case, there could be significant upside in banks, cement and capital goods. While material upside exists for reform driven sectors as well (viz. oil & gas), it is contingent on the government’s stance on pricing and subsidy phase-out, and hence largely delinked from the economic recovery theme.

"Upside would come not only from valuation re-rating (headroom to +1SD PER), but also from the potential for EPS growth uplift from both volume growth recovery, return of pricing power (viz. cement, consumer discretionary, capital goods) and lower credit costs (banks)," the report added.


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