On Friday, 14th May, the Sensex fell 317 points, closing well below 17,000. All the talk of bullishness around us leaves us with a feeling that the market is gradually trending up. This is similar to the situation from September last year. The Sensex closed at 17,127 on 30th September, despite a huge post-Budget rally and thousands of crore of institutional investments having poured in for months together.
That is worrying. If the market cannot stage a strong rally from here, we will face another down-leg—towards 16,000. Long-term investors may assume that this does not change anything. They are confident that the India growth story is in place, corporate performance will be good and the market’s overvaluation is gradually getting corrected. This may be true in a normal situation. However, we are not even sure whether we are in a normal situation.
The market was up 1% over the week supported by a huge rally on the first day of the week on concerted efforts of the Eurozone to help the weak nations to come out of the debt crisis. This was followed by a correction on Tuesday, which can be termed as factoring out the measures taken. While trading was range-bound for the next two days, it sharply plunged on the last trading day of the week on concerns that the measures taken by the Euro nations to curb the fiscal deficit would impact the economic growth of these nations.
Among the top gainers on the BSE Sensex during the week, auto majors Tata Motors and Mahindra & Mahindra (M&M) jumped 6% each, HDFC Bank surged 6%, while DLF and Reliance Infrastructure (Reliance Infra) gained 5% each.
The top losers on the benchmarks were Cipla and Bharti Airtel, down 8% each, Reliance Communications (RCom) was down 6%, while metal majors Sterlite Industries (India) and Tata Steel shed 2% each.
In the sectoral space on the BSE, realty and auto indices were the top gainers, advancing 4% each. On the other hand, capital goods and metals ended flat with a negative bias.
India’s sugar output is likely to rise to 24-25 million tonnes in 2010-11. Domestic consumption was about 22-23 million tonnes while production was only 18.5 million tonnes in 2009-10.
The food price index rose 16.44% in the year to 1st May, above the prior week's annual rise of 16.04% on the rise of vegetable prices as a heat wave in the country damaged perishable foods, government data released on Thursday showed. The fuel price index stood at 12.33%, down from the previous week's annual rise of 12.69%, while the primary articles’ index was up 16.76%, compared with the previous week's reading of 13.93%.
The annual wholesale price index was 9.59% in April from a year earlier, which is lower than 9.9% in March’s data and 10% in February.
The chief economic adviser suggested the Reserve Bank of India’s (RBI) intervention to counter the rupee’s appreciation against the dollar. The rupee’s rise against the greenback has put huge pressure on the exporters. In 2009-10 the rupee has strengthened 12.6% against the dollar and 8.3% against the euro year-on-year.
India has secured a contract of buying 4.7 million tonnes of the soil nutrient at $370 per tonne for FY 2011 with an option to buy more, nearly 20% cheaper than the previous year’s price. The country also imports most of its di-ammonium phosphate (DAP) requirement and has tied up for 7 million tonnes DAP at $500 a tonne.
Industrial output grew slower than expected 13.5% in March from the year-ago period. The slow growth is because of the partial withdrawn of stimulus measures and an increase in interest rates. The Planning Commission however believes that the slowdown in the March industrial output will not affect the GDP of FY 2009-10. RBI said that the capital account will be opened gradually and there is no plan of imposing Tobin tax to curb currency speculation. Tobin tax is a transaction tax on currency conversions intended to curb volatility and speculation. The capital account convertibility is integrally attached with the broader goal of economic growth. However, RBI also expressed its preference for long-term equity flows over the short-term debt flows.
In the global arena, US market regulators and six major exchanges accepted the need for new safeguards to curb trading in plunging markets, an effort to address last Thursday’s mysterious market freefall.
The European Union (EU) agreed to a loan package, along with International Monetary Fund (IMF) support, to stop a credit crisis in Europe. The European rescue plan, valued at more than $900 billion (€720 billion), has three main components. The biggest provision at nearly $570 billion (€440 billion) takes the form of government-backed loans to regain confidence in the weak credit markets. A second measure is the expansion of a $77 billion (€60 billion) stabilisation fund, which will be available to Eurozone states facing exceptional circumstances. Finally, the IMF said that it would contribute $284 billion (€220 billion). The European Central Bank (ECB) will buy eurozone government bonds and private debt. The IMF said that Greece's public debt is sustainable over the medium-term; however, low growth could be a setback for the country.
A fresh downturn may have started
The market was down on concerns over the tough austerity measures taken by eurozone nations, which may slow down the global economy. The Sensex ended at 16,994, lower by 271 points (1.5%) while the Nifty shut at 5,093, lower by 85 points (1.6%). The bourses started the day with an initial gain. However, they pared their gains around noon with weak European equities dragging the indices lower. Bank, realty and metal stocks were down.
Asian stocks recovered from an initial fall triggered by an overnight decline on Wall Street. Key benchmark indices in Indonesia, South Korea and Taiwan were up by 0.02% to 0.24%. On the other hand, benchmark indices in Singapore, China, Hong Kong and Japan fell by 0.39% to 1.49%.
US stocks were down on Thursday as downbeat comments on the economy from Cisco Systems and retail chain Kohl’s Corp shadowed concerns over the economic recovery. The Dow dropped 114 points (1.05%) to end at 10,783.
The S&P 500 fell 14.23 points (1.2%) to 1,157. The Nasdaq lost 30.66 points (1.26%) to close at 2,394. US central bankers said that the promise to hold the interest rate lower for an extended period depends on the economic conditions.
Back home, India's foreign exchange reserves fell to $276.23 billion as of 7th May, from $279.63 billion a week earlier, the Reserve Bank of India (RBI) said in its weekly statistical supplement.
India has secured a contract for buying 4.7 million tonnes of soil nutrient at $370 per tonne for FY2011 with an option to buy more, nearly 20% cheaper than the previous year’s price. India also imports most of its di-ammonium phosphate (DAP) requirement and has tied up for 7 million tonnes DAP at $500 a tonne.
The chief economic adviser suggested that the RBI may intervene to counter the rupee’s appreciation against the dollar. The rupee’s rise against the greenback has put huge pressure on exporters. In 2009-10, the rupee had strengthened 12.6% against the dollar and 8.3% against the euro year-on-year.
Foreign Institutional Investors (FIIs) were net sellers, offloading stocks worth Rs15 crore. On the other hand, Domestic Institutional Investors (DIIs) were net buyers, purchasing stocks worth Rs222 crore. The rupee was down on the weak equity market and the greenback’s strength against the euro.
HDFC (down 1%) has extended its concessional home loan scheme till 30 June 2010. As per the scheme, the housing finance major would offer a fixed interest rate of 8.25% up to March 2011; 9% for the next one year and a floating rate thereafter. Reliance Industries (RIL) (down 2.6%) will join the ONGC-led consortium that may get rights to oil fields located in the Orinoco belt of Venezuela. RIL did not take part in an earlier consortium led by Indian State-owned oil companies, which won the $20-billion Carabobo 1 oil block in Venezuela as it was busy trying to tie up the LyondellBasell acquisition.
Infosys (down 1.6%), Mahindra Satyam and unlisted company Cognizant have been shortlisted by UK's National Grid, which manages the country's natural gas and electricity networks, for an outsourcing contract. Seven offices of Parsvnath Developers (down 2.6%) in Delhi and the National Capital Region (NCR) have been searched by the Income-Tax Department. Oil PSU stocks were in demand as crude prices are on the lower side. Light, sweet crude oil dropped $1.25 or 1.65%, to $74.40 a barrel on Thursday. Zensar Technologies (down 0.5%) has received a contract worth over Rs100 crore from a leading South African insurance company for a period of five years.
Many insurance companies are trying to empanel distributors whose earlier core business was mutual funds, especially after the ban on entry load on funds by SEBI
A few days back, a Chennai-based certified financial planner (CFP) allegedly received an email communication from Aviva Life Insurance detailing two business proposals from the insurer.
The first model is ‘Business Service Associate’ (BAS) under which one distributor has to refer at least one person to the company who can pass an Insurance Regulatory & Development Authority (IRDA) examination. The distributor who referred this person enters into an agreement with the company after which he gets a business code. The former gets an amount from all the business generated by the new agent.
Moneylife could not confirm from the company that such a communication emerged from their end. The Independent Financial Advisor (IFA) who received this proposal was not available for immediate comments either. Distributors contacted by Moneylife indeed confirm that various insurance companies have approached them with similar proposals in the past and they have refused to be part of such a deal. These distributors’ core business area was selling mutual funds (MFs). Since the ban on entry load by the market regulator Securities and Exchange Board of India (SEBI), smaller intermediaries who found it unviable to continue selling MFs have been gradually shifting towards insurance products, especially Unit Linked Insurance Plans (ULIPs), which offer better commissions.
“I sell only relationship and trust with my client. It will be very difficult to stay in the business if you start selling for the extra commissions. They had met me in my office. I have received several proposals like this, which I had refused,” said Thiru Murugan, CEO, Wealth Creation & Management Services.
The benefits of this business BAS model were detailed in the email are as follows: Distributor A gets an average 20% commission in the first year plus an additional overriding commission ranging from 30%-55% and around 5% from the second year onwards. The proposal also assured marketing and advertisement support for the scheme including reimbursements of stationery, phone and staff expenses.
The second proposal is ‘Corporate Alternate Database’ (CAD), also similar to the first plan. Unlike the first plan, here the distributor only has to refer a client to the company’s exclusive manager who advises the client. Here the IFA gets 20%-55% commission depending on the product bought by the investor. Financial advisors say that such business models are prevalent among many insurance companies.
While some intermediaries question the morals of such proposals, others say that if the business is done in a fair manner there is nothing to worry about.
Established distributors believe that they prefer not to work on a referral model as it can be detrimental to their long-term relationship with the client. Financial advisors say that insurance companies have been wooing them since more than a year and especially after the SEBI’s ban on entry load.
“These sorts of plans are business models with all leading companies with minor changes but the spirit is the same. I don’t see anything wrong as long as all people are properly licensed and you work as a team manager and licensed individuals work under your code,” said Vivek Rege, CFP, VR Wealth Advisors Pvt Ltd.
“It’s like you start a business and they fund it. They don’t want to manage a big team under them. Recruiting under payroll is becoming an issue. Since IFAs know the business well they want us to sell ULIPs. They want us to manage it because IFAs can motivate better,” added Mr Rege.
“They (insurance firms) have approached me for this. In fact, since the ban on entry load by SEBI in August, I started getting calls from insurance companies. I don’t agree with this concept. I don’t want to become empanelled just for the sake of business. When I told them about my view, they (insurance firms) never got back to me. Insurance companies are not interested in selling other products like term insurance. Commission is good but I run a risk of losing all my customers whom I know from quite some time,” said Harish Mohan, MD, Time Financials.