That extreme Sensex low, has a 35% probability, says the brokerage.
Morgan Stanley Research (Asia/Pac) has come up with a detailed note, albeit with a level of caution, on the probable direction of the Indian stock market. It expects BSE Sensex to touch by 18,300 by year end. Worst case scenario (a 35% probability), it expects the BSE Sensex to touch 15,700 by year end. It sees a 15% probability of BSE Sensex touching 23,800 by year end. These outcomes are contingent to variables like outcomes of US growth (US yields and USD), Chinese growth, Indian elections, India’s policy response (the fiscal deficit and real rates) and oil prices. “Since real rates are high and rising relative to real GDP growth, the market cares about the equity yield gap and not multiples based on book value and earnings. The yield gap is negative, implying valuations are rich,” said the note. MS is underweight on banks and overweight on technology.
Apart from being underweight on banks and overweight on technology, they are also bullish on consumer discretionary and energy. Paradoxically, despite being underweight on financials, it is overweight on almost all the stocks on its focus list.
Morgan Stanley believes that a growth-oriented portfolio will trump over value picking portfolio. At the same time, they believe that quality stocks would be a better pick over junk stocks and it is a toss up between defensives and cyclicals, with bias toward cyclicals.
While Morgan Stanley believes that the markets will be header lower from this point, it also believes that recovery is likely to begin only in 2015 and sees broad earnings slowing down till 2014. The note says, “High real rates create downside risks to growth even as better farm output and an improving global economy put a floor to it. Broad market earnings growth may slow in F2014 with a mild recovery in F2015e led by margin compression. Sensex earnings could fare relatively better as large companies benefit from an undervalued INR.”
With the elections coming up next year, Morgan Stanley believes that the stability of macro-economic variables will be important, especially India’s savings rate which is crucial to containing inflation and interest rates. The note says, “Ultimately, India must lift savings via higher real rates and public savings, but the former is challenged by the growth cycle and the latter by the election cycle.” In other words, interest rates need to be high to contain inflation, but at same time government spending must be contained too to keep deficit in check. Raghuram Rajan surprised markets last week when it raised repo rates by 0.25 percentage points to 7.50%.
With US Federal Chairman Ben Bernanke not announcing a time frame for “tapering” or winding down quantitative easing, Indian investors rejoiced. However, it is believed that tapering decision could be announced in October. The note said, “India has received a temporary reprieve by the delay in the US Fed tapering.” Nevertheless, the uncertainty has been infusing a heady dose of nervousness to market participants.
The next Federal Open Market Committee (FOMC) is tentatively to be held in October end to decide tapering. Morgan Stanley analysis shows that October has been a seasonally bad month for markets.
Nifty has to break the range of 5,800 and 5,950 for a new trend to emerge. The bias is negative.
Today on the day of the expiry of the futures and options, the market witnessed a highly volatile session. On a higher volume on the National Stock Exchange (NSE) of 66.63 crore shares, the Nifty closed 8 points higher. The market opened in the positive and after a brief session in the negative at the beginning, the indices traded above yesterday close. The Sensex opened at 19,854 and moved up to 19,827 from 19,997 and closed at 19,894 (up 38 points or 0.19%) while the Nifty which opened at 5,873 move between the range of 5,864 and 5,918 and closed 5,882 (up 8 points or 0.14%).
The top five gainers among the other indices on the NSE were Pharma (0.86%); FMCG (0.61%); Metal (0.50%); Finance (0.47%) and Infra (0.32%) while the top five losers were Energy (0.87%); Realty (0.70%); PSU Bank (0.64%); MNC (0.42%) and Dividend Opportunities (0.37%).
Of the 50 stocks on the Nifty, 22 ended in the green. The top five gainers were BHEL (5.59%); Tata Steel (3.50%); Jaiprakash Associates (3.35%); Coal India (2.85%) and Sun Pharma (2.28%). The top five losers were Jindal Steel (3.27%); Ambuja Cements (2.59%); PNB (2.22%); Gail (1.94%) and Reliance Infrastructure (1.62%).
The Reserve Bank of India on Wednesday relaxed the minimum maturity tenure for banks' foreign currency borrowings' to one year from three years, in order to use the central bank's swap facility which was set up to support the ailing rupee. The RBI, however, said the relaxation is only applicable while the swap window remains open until November 30. Rupee traded at 62.18/19 versus its close of 62.44/45 on Wednesday and close to the day's high of 62.1225.
The risk of a sovereign downgrade risk has only intensified after international rating agency Moody’s downgraded State Bank of India’s senior debt and local currency deposit to ‘Baa3’, and now has a negative outlook. The market is viewing this as a proxy for the sovereign rating. The State Bank of India and group entities account for 25% of the country’s banking system.
India Ratings & Research said that the sharp slide in the rupee against the dollar would cause the oil subsidiary bill to swell and push the fiscal deficit to over 5% of gross domestic product as against the government’s target of 4.8%. The rating agency said the rupee may appreciate to 59-61/USD by end-FY14. In all likelihood, oil subsidy in FY14 will be higher than the budgeted amount of FY14.
US indices ended in the negative on Wednesday. US new home sales jump 7.9% in August to 421,000, biggest one-month gain since January. That comes after sales plunged 14.1% in July to a 390,000 annual rate. New-homes sales were 12.6% higher in August than a year ago. The pace remains well below the 700,000 consistent with a healthy market.
Asian indices were a mixed bag. Nikkei 225, top gainer, 1.22% while the Shanghai Composite, top loser, down 1.94%.
European indices were trading mostly in the negative while the US Futures were trading in the green.
The recommendations of Raghuram Rajan Committee, along with the allocation methodology, will effectively subsume what is now 'special category' status accorded to least developed states
The Raghuram Rajan panel report has made a case for ending the ‘special category’ criteria for providing additional assistance to poorer states, as it ranked Goa and Kerala as the most advanced state and Odisha and Bihar the least.
The committee, headed by the then chief economic advisor Raghuram Rajan (now governor of Reserve Bank of India-RBI) was set up by the union government amidst demand for 'special category' status by Bihar. The committee suggested a new methodology for devolving funds on states based on a ‘multi dimensional index (MDI)’.
Giving details of the report Finance Minister P Chidambaram on Thursday said the committee has suggested that the 28 states be split into three categories — least developed, less developed and relatively developed — depending upon their MDI scores.
Based on the MDI scores, the 10 least developed states are Odisha, Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Arunachal Pradesh, Assam, Meghalaya, Uttar Pradesh and Rajasthan.
The seven most developed status are Goa, Kerala, Tamil Nadu, Punjab, Maharashtra, Uttrakhand and Haryana.
As regards the allocation of funds, the report suggested that each state should get a basic fixed allocation and an additional allocation depending on its development needs and development performance.
The demand for funds and special attention of different States, Chidambaram said, “would be more than adequately met by the twin recommendations of the basic allocation of 0.3% of overall funds to each state and the categorisation of States that scores 0.6% and above as least developed states.”
According to the Committee, these two recommendations, along with the allocation methodology, will effectively subsume what is now 'special category' status.
Bihar along with some other states have been demanding “special category” status to get more funds from the centre.