Nifty could be headed towards 6,080. But the market is turning extremely risky
News of the government deferring the implementation of the General Anti Avoidance Rules by two years and December headline inflation falling to a three-year low enabled the market close near the highs of the day. The market is on a short new rally with the Nifty expected to touch 6,080. However, the benchmarks are turning extremely risky. The National Stock Exchange (NSE) witnessed a volume of 66.98 crore shares and advance-decline ratio of 987:688.
The market opened firm on buying in IT and technology stocks continued following the upbeat revenue guidance by Infosys on Friday. Most markets in Asia were trading with gains on speculations that the Chinese government would raise the cap for foreign investors in the country’s financial markets.
The Nifty opened 16 points higher at 5,967 and the Sensex started the day at 19,689, up 25 points over its close on Friday. The opening figure on the Sensex was its intraday low while the Nifty dipped to a low of 5,962 in opening trade.
The market continued its upmove on brisk buying in IT stock continued ahead of the announcement of TCS’ quarterly earnings later in the day. However, the benchmarks pared a small part of its early gains following the release of the retail inflation numbers for December.
Retail inflation breached the double-digit mark at 10.56% cent in December compared to 9.90% in November and 9.75% in October. In urban areas, retail inflation rose to 10.42% in December from 9.69% in the previous month. The CPI (Consumer Price Index) for rural population increased to 10.74% during the month from 9.97% in November.
On the other hand, inflation based on wholesale prices declined marginally to 7.18% in December from 7.24% in November. It was 7.74% in December 2011. The third successive fall in inflation may prompt the Reserve Bank of India to cut interest rates in its policy review on 29th January 29.
The benchmarks, which were trading sideways in subsequent trade, gained fresh momentum in noon trade as finance minister P Chidambaram deferred the implementation of the GAAR (General Anti Avoidance Rules) by two years to 1 April 2016. A firm opening of the key European markets also supported the gains.
The market continued its northward journey and hit its intraday high toward the end of the trading session. At the highs the Nifty touched 6,037 and the Sensex scaled 19,949.
The benchmarks closed near the highs with the Nifty gaining 73 points (1.22%) to settle at 6,024 and the Sensex surging 243 points (1.23%) to 19,906.
Among the broader indices, the BSE Mid-cap index advanced 1.20% and the BSE Small-cap index gained 0.74%.
The top sectoral gainers were BSE Realty (up 5.01%); BSE IT (up 2.57%); BSE TECk (up 2.37%); BSE Consumer Durables (up 1.80%); and BSE Oil & Gas (up 1.58%). BSE Auto (down 0.46%) and BSE Healthcare (down 0.06%) were the only losers.
Twenty of the 30 stocks on the Sensex closed in the positive. The chief gainers were ONGC (up 4.28%); Infosys (up 3.49%); Jindal Steel & Power (up 3.34%); TCS (up 2.14%) and HDFC (up 1.93%). The main lowers were Maruti Suzuki (down 1.72%); Cipla (down 1.23%); Bajaj Auto (down 1.14%); Tata Motors (down 0.65%) and Mahindra & Mahindra (down 0.64%)..
The top two A Group gainers on the BSE were—DLF (up 7.72%) and HDIL (up 5.80%).
The top two A Group losers on the BSE were—Jaiprakash Power Ventures (down 4.72%) and Pidilite Industries (down 2.65%).
The top two B Group gainers on the BSE were—Gujarat Automotive Gears (up 20%) and Nagreeka Exports (up 20%).
The top two B Group losers on the BSE were— Bhanot Construction & Housing (down 18.21%) and Beryl Drugs (down 14.81%).Houh
Out of the 50 stocks listed on the Nifty, 37stocks settled in the positive. The major gainers were DLF (up 7.75%); ONGC (up 4.84%); HCL Technologies (up 4.70%); Jindal Steel & Power (up 3.70%) and Infosys (up 3.61%). The key losers were Lupin (down 1.65%); Bajaj Auto (down 1.41%); Maruti Suzuki (down 1.38%); Cairn India (down 1.20%) and Cipla (down 1.19%).
Markets in Asia, with the exception of the Straits Times, closed in the positive on hopes that the Chinese government would raise the limits on foreign investment in the country’s financial markets. However, volume was lower-than-normal as the Japanese market was closed for a local holiday.
The Shanghai Composite jumped 3.06%; the Hang Seng gained 0.64%; the Jakarta Composite climbed 1.78%; the KLSE Composite rose 0.11%; the Seoul Composite advanced 0.52% and the Taiwan Weighted added 0.06%. Bucking the trend, the Straits Times declined 0.31%.
At the time of writing, the CAC 40 of France was up 0.58%; the DAX of Germany was trading 0.72% higher and UK’s FTSE 100 rose 0.10%. At the same time, the US stock futures were mixed with a positive bias.
Back home, foreign institutional investors were net buyers of equities totalling Rs825.18 crore on Friday while domestic institutional investors were net sellers of shares aggregating Rs516.08 crore.
Electrical equipment maker Crompton Greaves today said it has completed the acquisition of the Compact Fluorescent Lamps (CFL) business of Himachal Pradesh-based Karma Industries for Rs145 million. The acquisition will double the company’s capacity in the fast-growing CFL lighting segment. Crompton Greaves jumped 3.49% to close at Rs120.05 on the NSE.
Foreign institutional investors have pared their stake to a three-year low in UB Group firm United Spirits, which is currently awaiting regulatory nod for sale of a majority stake to global liquor giant Diageo. As per the latest shareholding pattern data of the company, FIIs held 45.81% stake in Vijay Mallya-led UB group firm United Spirits as on 31 December 2012. The stock declined 1.24% to close at Rs1,874 on the NSE.
Bangalore-based Sonata Software has inked a deal with Qatar’s MEEZA to enhance cooperation in the area of Information and Communications Technology service delivery across Middle East North Africa (MENA) region, with immediate focus being Qatar. The partnership will help MEEZA tap into a vast pool of highly experienced and knowledgeable IT professionals across different areas, including Oracle and SAP, MEEZA said in a statement. Sonata gained 0.84% to close at Rs24.10 on the NSE.
While the low interest rates have allowed many financially stressed municipalities to save money for new projects, they have created their own stresses in other ways. Many of them made generous retirement promises to civil servants, but what they never provided for were the actual funds to pay for the plans
In the fall of 2011 banking analyst Meredith Whitney caused quite a stir in the normally placid world of the US municipal bond market. These bonds or Munis as they are known are usually issued by local governments in the US. They can be issued by all sorts of lower political subdivisions including states, counties, and municipalities. They are also used for raising money for other infrastructure projects like sewers and roads. Some states also allow non-profit organizations like universities and hospitals to issue these bonds. The bonds are considered unusually safe. So when Ms Whitney predicted hundreds of billions of dollars of defaults in 2012, $19.1 billion funds flowed out of the $3.7 trillion market.
But then nothing happened. Instead of a massive meltdown, there were only $2.8 billion worth of defaults in 2011 and only another billion of defaults were added in 2012. Presently out of tens of thousands of projects only 204 deals are in default or about 0.55% of the total. So Ms Whitney’s prediction was way, way off. Or was it?
For several years now the Federal Reserve has suppressed interest rates. The result is that investors, especially institutional investors including pension fund managers have been searching the globe for any investment that pays a decent yield. The outflow of funds prompted by Ms Whitney’s prediction reversed with a vengeance. Over $50 billion flowed into mutual funds and ETFs specializing in Munis. The demand for the bonds was so high that yields for 20-year general obligation bonds were forced to a low of 3.29%, a yield not seen since 1967. The riskiest of these bonds were the most favoured. These high-yield bond funds account for only 11% of the funds but attracted 20% of the money.
It may be that Ms Whitney’s prediction may have been exaggerated and a little premature. In December ratings agency Fitch also warned about the safety of these bonds. Fitch expects to downgrade dozens or even hundreds of municipalities in 2013.
What is most interesting about the Muni market is that its problems are very similar to problems of bonds in other countries especially those in emerging markets. They are lightly regulated. They are subject to political influence and they lack transparency.
While most stocks and corporate bonds are subject to stringent listing and reporting requirements from the US investment watchdog, the Securities and Exchange Commission (SEC), the Muni market is exempt. Unlike stocks, Munis are not required to provide audited financial statements. Disclosures like a potential bankruptcy or a criminal investigation are immediately required for other investments, but are often delayed by issuers of Munis. Until recently rating agencies did not consider unfunded pension liabilities. A recent SEC report described the Muni market as illiquid and opaque.
While the low interest rates have allowed many financially stressed municipalities to save money for new projects, they have created their own stresses in other ways. Like their European counterparts, many municipalities made generous retirement promises to civil servants, especially to their politically powerful and connected unions. What they never provided for were the actual funds to pay for the plans.
Two examples stand out. Puerto Rico is part of the US but has a special status as a Commonwealth and has never asked for or received statehood status. It has problems that are similar to Greece—poor tax compliance, a shrinking population, political stalemate and a stagnant economy. Its main pension fund serving about 250,000 past and present government workers is only 6% funded and could run out of money as soon as next year. A fund for 80,000 teachers is only 20% funded. Nevertheless its bonds are widely held. They pay interest that is 2.5% higher than other issuers, because they are rated just one or two levels above junk. According to Standard & Poor’s there was a one in three chance of a downgrade in 2013. A downgrade could provoke widespread selling by institutions required to hold only investment grade bonds.
Puerto Rico’s case may be severe but it is hardly unique. The state of Illinois has an unfunded pension liability of $96 billion with problems that date back as long as 70 years. Rather than raise taxes it was simply easier to not fund the pension liabilities. Other states with similar problems include Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island.
The irony of the pension mess and its effect on Munis is that it has been made worse by the actions of the Federal Reserve. By lowering interest rates it has made it all but impossible for pension fund managers to get decent returns. The Fed has always maintained that a recession would be worse. By manipulating the market they may well cause what they sought to avoid.
To access other articles of William Gamble, click here
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)
The decision to postpone the implementation follows recommendations of the Shome Committee set up to look into investor concerns
“Having considered all the circumstances and relevant factors, the government has ...decided that provisions of Chapter 10A of the Income Tax Act (dealing with GAAR) will come into force from 1 April 2016 as against 1 April 2014,” Finance Minister P Chidambaram said on Monday.
The GAAR provisions, introduced by the then finance minister Pranab Mukherjee in the Budget 2012-13, were aimed at checking tax avoidance by overseas investors. The proposal, however, generated controversy, with investors expressing apprehensions that it would result in unnecessary harassment by tax authorities.
The decision to postpone the implementation, Chidambaram said, follows the recommendations of the Shome Committee which was set up by prime minister Manmohan Singh in July last year to look into investor concerns.
The government, Chidambaram further said, has accepted major recommendations of the panel with some modifications.
"The modifications that we have done are fair, non-discriminatory, just and strike a balance between interest of revenue and interest of investors. So, all apprehensions should now be set addressed," he said.
The GAAR provisions, the Minister also clarified, would override the double taxation avoidance agreement (DTAA) benefits if the arrangements were intended solely to evade taxes.
No investor, Chidambaram said, "should now have any apprehension about his investments in
He also clarified that investments made by non-resident Indians (NRIs) will not be covered by the provisions of GAAR.
About the applicability of the GAAR provisions, he said FII investments seeking benefits under Sec 90 and Sec 90 (A) of the I-T Act (dealing with DTAA) would be covered.
The Minister said only those arrangements which are aimed at only obtaining tax benefit would be considered as 'impermissible arrangement' and would attract GAAR.
As per the original GAAR provisions under Chapter 10 (A) of Finance Bill, 2012, the anti-tax avoidance provisions could be invoked "if one of the purposes" was to obtain tax benefit.
The Minister clarified that there would be a threshold limit of Rs3 crore of tax benefit for invocation of GAAR, as suggested by the Shome panel.
Moreover, Chidambaram said, that investments made before 30 August 2010, would not attract the provisions of GAAR.
On whether tax officials can look into cases between 30 August 2010, and the date for implementation of GAAR, he said: "They can go back is technically correct. But in order to go, you have to comply with a number of provisions in the I-T Act. If the assessment is completed, you can reopen the assessment only after very strict circumstances."
"This decisions (of GAAR rules modifications) have by and large addressed the concerns that were expressed by investors ... Most of the apprehensions I think have been removed now," Chidambaram said.