Keep a global watch

Markets may remain bullish over the short term, if global cues remain strong

The market ended on a strong note today, driven by firm global equity markets. It started the day with a gain. However, it slid soon after that and traded
range-bound till afternoon. It regained strength in the afternoon session and ended the day with a strong gain. The BSE Sensex closed at 17,692 points, up 164 points (0.94%) and the Nifty ended at 5,290 points, up 41 points (0.8%). The bullish sentiment may continue to play out over the short term, if global indices remain strong.

Asian stocks rose to an 11-week high on Thursday as China's manufacturing industry picked up and foreign buying boosted the technology-heavy markets of Taiwan and South Korea. The key benchmark indices in China, Hong Kong, Indonesia, Japan, South Korea, Singapore, and Taiwan were up by 1.23% to 1.74%.

European stocks were also up, buoyed by the manufacturing data from Europe and China. China's official Manufacturing Purchasing Managers Index rose to 55.10 in March from 52 in February. Meanwhile, a separate China manufacturing PMI released by HSBC Holdings Plc and Markit Economics also rose to 57 in March 2010 from 55.8 in the previous month. The Dow Jones Industrial Average dropped 50 points (down 0.47%) to 10,856. The Nasdaq Composite index slid 12 points (down 0.53%) to 2,398 and the S&P 500 shed 3 points (down 0.33%) to 1,169.

Closer home, the National Stock Exchange (NSE) on Wednesday, 31 March 2010, announced a reduction in market lot size of a number of stocks in the derivatives segment. In its bi-annual review, NSE revised the market lot size from a lot of 124 stocks to a lot of 59 stocks. The food price index rose by 16.35% in the week ended 20th March, higher than the annual rise of 16.22% in the previous week.

The fuel price index rose 12.75%, higher than an annual rise of 12.68% in the previous week. Manufacturing growth in March slowed down from the
20-month record high in February. The Reserve Bank of India (RBI) has reportedly kept the limit of State governments’ short-term borrowing from the central bank, called as ‘Normal Ways and Means Advances’, unchanged for the financial year started Thursday. The government announced a fresh package of incentives worth Rs635 crore for the exporters of garments, engineering, electronics and agricultural products. There will be no increase in the subsidised food price distributed to over 11.5 crore poor families till May. The government announcement was an attempt to refrain from taking any unpopular measures with a high inflation environment.

Prime minister Manmohan Singh has said that elementary education will be free which can be termed as a big-ticket programme from the government to consolidate its rural and poor voters. Foreign institutional investors were net purchasers of Rs433 crore. Domestic institutional investors were net sellers of Rs356 crore. Larsen & Toubro (up 1.4%) has entered to an agreement with Rolls-Royce to manufacture light water reactors in India. State Bank of India (up 1.1%) has said that it has extended the special loan scheme till 30th April. Reliance Industries (up 1.7%) is likely to increase its crude oil imports by about 22% in FY11 as the company plans to raise production in its Jamnagar refinery. IT stocks rose on bargain hunting after a recent slide triggered by a firm rupee. A firm rupee adversely affects operating profit margins of IT firms as the sector derives a lion's share of revenue from exports. Maruti Suzuki India (down 1.8%) said that sales in March this year were 95,123 units which is a rise of 11% over the year-ago period. TVS Motors (up 0.9%) had an increase in sales of 24.35% to 1,46,736 units in March 2010 over the year-ago period. Glenmark Pharmaceuticals’ (up 1.3%) US unit has received approval from the US Food & Drug Administration for a generic drug. The company made this announcement during trading hours today. Shree Ashtavinayak Cine Vision (up 4.9%) said that its board will consider a buyback of shares. State-run power equipment manufacturer BHEL (up 1.4%) announced a jump of about 37% in net profit for 2009-10 at Rs4,287 crore compared to the previous fiscal. The company has received orders worth Rs59,031 crore in 2009-10 compared to Rs59,678 crore in the previous fiscal and recorded the highest-ever orders from the private sector for 14,689MW capacity. The total order book of the company was at Rs1,43,800 crore.

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Investor wealth doubles to over Rs60 lakh crore in FY10

With stock markets taking a positive leap in fiscal 2009-10, investors' wealth almost doubled to cross the Rs60 lakh crore mark led by strong contributions from Reliance Industries and TCS, reports PTI.

Investor wealth, calculated from the combined market capitalisation (m-cap) of all the listed companies on the Bombay Stock Exchange, expanded by over Rs30.32 lakh crore during the reviewed fiscal to settle at Rs 61,65,618 crore. The combined market valuation of all the listed companies was Rs 31,33,086 crore at the beginning of the fiscal on 1 April 2009.

According to the analysis of the top 10 companies in terms of valuation, Reliance Industries emerged at the top with an addition of Rs1,02,872.17 crore to its m-cap during the financial year 2009-10. It added Rs1,02,872.17 crore to its market valuation, taking its total m-cap to Rs3,51,446.01 crore for the fiscal year ended 31 March 2010. Reliance Industries had a total market valuation of Rs2,48,573.84 at the beginning of the fiscal on 1 April 2009.

Top outsourcing firm TCS also saw its valuation swell by Rs99,552.98 crore to Rs1,52,818.18 crore in the same period.

For the entire financial year, the Sensex has registered a gain of 7,819 points, up 80.5% from 9,708.50 points as on 31 March 2009, to settle at 17,527.77 at the end of trade.

Two state-run firms—ONGC and NTPC—together added Rs86,645.05 crore to their m-cap during the said period.

ONGC saw its valuation surge by Rs63,021.81 crore, and NTPC by Rs23,623.24 crore.

Trading firm MMTC added Rs82,637.75 crore to its m-cap, while IT bellwether Infosys Technologies added Rs71,268.28 crore. The country's largest public sector lender SBI saw its m-cap swell by Rs63,808.61 crore.

Private telecom services provider Bharti Airtel added Rs1,693.40 crore to its m-cap and power equipment maker BHEL saw its valuation surge by
Rs44,712.76 crore.

Iron ore major NMDC saw an increase of Rs54,118.15 crore in its m-cap.

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Commodities markets, ETFs and emerging economies

Global commodity assets under management have increased to about $235 billion by late 2009 compared with a mere $6 billion-$10 billion in 2000

Diversification is one of the main tenets of safe investing.

Since different asset classes are not supposed to correspond, diversifying your portfolio should allow you to hedge against losses in one category or profit from another.

According to two American finance professors, commodities over the period between 1959-2004 were not correlated with the stock market.

Commodities did well when stocks did not and commodities did poorly when stock markets were rising. Of course, during the recent market collapse, diversification didn’t help, because all asset classes including commodities and stock markets collapsed together. What happened? Two things: exchange traded funds (ETFs) and emerging markets.

Commodities markets all have a central problem, inflexibility of supply. In rising stock markets when demand is high, companies do not seem to have problems fulfilling the demand by issuing debt or stock. Governments can issue mountains of debt and investment banks can issue derivatives with a few key strokes.

This is not true of commodities. It can take years to drill a new well, develop a new mine or plant new fields. So with supply being inelastic, even small changes in demand can send the price soaring and detach it from underlying economic projections.

One of the most recent changes to the commodities markets has been ETFs. ETFs solve some major problems with commodities investing. Before ETFs you had two choices: options and commodities companies like an oil or mining company.

Each had problems. ETFs are not perfect, but they do offer good solutions to these problems. So the money flowed in. Global commodity assets under management increased to about $235 billion by late 2009 compared with a mere $6 billion-$10 billion in 2000.

Commodities markets used to be the province of a few professional players. These included commodities producers and consumers trying to hedge and a few sophisticated speculators. Now it is a huge casino made up of every type of investor.

The ETFs went from tracking the market to being the market. Gold ETFs own more of the metal than China. Two ETFs have accumulated more than 100,000 ounces each of platinum and palladium.

In a market of only about 6 million ounces, a 100,000-ounce swing is big enough to result in large price swings. So speculative frenzies driven by cognitive biases can easily overwhelm economic realities.

The other change in the commodities sector has been emerging markets. It is not news that many of the major commodities producers have been emerging markets. Now many of the commodities consumers are also emerging markets. In time, commodities markets could probably adjust to this change in supply and demand except for one thing. Both sides are heavily dominated by State-owned companies. {break}

State-owned companies are creatures of the state. Regardless of the country, they all function for political reasons, not for profit. They are not, nor do they have to be, transparent. They are usually powerful enough to write their own laws. The result is a lack of timely, complete, or accurate information. Often there is simply no information at all and they can change the rules at any time.

China represents a particularly good example. Buying by Sinopec and PetroChina, and China National Petroleum Corp, massive consumers, most likely caused the oil price spike in the spring of 2008.

Massive stockpiling of copper by Chinese companies pushed up the price of copper in 2009.

ExxonMobil is the largest private oil company in the world, but it only ranks 14th among global oil companies. The rest of the producers, many of which are also consumers, are State-owned. Chile’s State-owned copper company might be required to sell more to pay for earthquake reconstruction.

So not only are commodities markets being changed by ETFs and emerging countries, now there is the combination of the two, which could potentially lead to some real trouble.

Often, emerging market countries have sovereign wealth funds (SWFs). Like many other investors, they have come to realise that ETFs are a good and cheap way to invest and diversify.

For example, China's SWF, China Investment Corporation (CIC), is the fourth-largest investor in the US Oil ETF and it recently also took a 0.4% stake in the SPDR Gold Trust, the largest physically backed ETF.

CIC is worth an estimated $300 billion and its mere size could distort the markets, but that is not the only problem. It is the connections between the government as an investor and the government as a consumer and producer. Through their control of large businesses, governments could and do create bubbles that would also be very profitable for their investments in ETFs.

The general assumption of most investors is that commodities and the ETFs, which are supposed to represent them, move according to general economic trends.

Both the reality and information about the real reason for price movements in this asset class could be quite different. This does not mean that commodities are not a good investment.

Money can be made by taking advantage of the volatility. It does mean that assumptions about economics and safe diversification may simply be untrue.

(The writer, William Gamble, is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])

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