Watch out for 5,340 on the Nifty for possible support
A couple of negative corporate news reports pulled down the indices in trade today. The State Bank of India and ONGC emerged as the top losers as the country's biggest lender reported a huge decline in profit and the oil explorer was hurt by buzz that it would have to share more of the subsidy burden to offset the losses incurred by oil majors.
As expected, the market opened sideways, tracking weak cues from bourses across Asia. The Sensex opened 29 points up at 18,374 and the Nifty resumed trade at 5,496, down three points from its previous close. Even though headline inflation for April was lower at 8.66%, investors are worried that the government and the Reserve Bank of India (RBI) will continue to take harsh steps to moderate prices. The market touched the day's high at around 9.45am, with the Sensex at 18,436 and the Nifty touching 5,524.
After staying in the green for almost an hour, the indices lost steam and slipped into negative terrain. The market was range-bound in the absence of any major trigger. Oil & gas was the biggest sectoral loser on reports that the government has increased the contribution of upstream oil companies towards sharing the subsidy burden of fuel marketing firms to 38.5% of the Rs77,922-crore estimate for FY10-11.
The benchmark indices slipped further in afternoon trade, on lacklustre results from the State Bank of India. The news pulled down the banking sector, which ended as the second-biggest sectoral loser. The indices touched the day's low in post-noon trade, as the Sensex fell to 18,085, down 260 points, and the Nifty lost 78 points to 5,421.
The market staged a minor recovery in the last hour, but still closed in the negative for a second day in a row. The Sensex closed 208 points lower at 18,137 and the Nifty ended the session down 60 points at 5,439. The advance-decline ratio on the National Stock Exchange was a negative 438:948.
The market is losing ground and is expected to fall further. The next support for the Nifty lies at 5,340.
Among the broader markets, the BSE Mid-cap index declined 0.66% and the BSE Small-cap index fell by 0.61%.
BSE Oil & Gas (down 3.23%) BSE Bankex and BSE PSU (down 2.24% each), BSE Auto (down 1.02%) and BSE Capital Goods (down 1.02%) were the top sectoral gainers. On the other hand, BSE Consumer Goods (up 0.97%), BSE Fast Moving Consumer Goods (up 0.53%) and BSE IT (up 0.15%) were gainers till worth mentioning.
The top Sensex gainers were Jindal Steel (up 1.97%), Hindustan Unilever (up 1.60%), TCS (up 1.30%), ITC (up 0.83%) and DLF (up 0.64%). SBI (down 7.78%), ONGC (down 6.71%), Hero Honda (down 3.39%), Reliance Industries (down 2.53%) and Reliance Infrastructure (down 2.17%) were the top losers.
The government announced today that the new Index of Industrial Production has been approved by the Committee of Secretaries (CoS). It will come into effect from 10th June and have the base year of 2004-05.
The production trend in a 100 new items, including ice cream, fruit juices and mobile phones will weigh on measuring the pace of industrial production, as per the new index series approved by the government.
Markets in Asia closed mostly in the red, on concerns about a slowdown in economic recovery worldwide. Ric Spooner, Sydney-based analyst, said investors would remain cautious in view of the global developments. Concerns about the debt issues troubling countries in Europe and weak economic data from the US is also weighing on investor sentiments.
Recovering from early losses, the Shanghai Composite gained 0.13% and the Nikkei 225 added 0.09%. On the other hand, the Hang Seng declined 0.26%, the Seoul Composite fell by 0.08% and the Taiwan Weighted was down 0.31%. Stock markets in Singapore, Malaysia, Indonesia and Thailand were closed for holidays.
Back home, institutional participation in the equities segment was meagre on Monday. Foreign institutional investors were net buyers of stocks worth Rs47.07 crore and domestic institutional investors were net purchasers of shares worth Rs3.41 crore.
If the Nifty is able to hold above 5,540, the market can expect some gains. On the downside the support is at 5,390
The steep hike in petrol prices which came into force on Sunday, rattled investors, and led to the market opening lower. Negative cues from the global arena also added to the woes. The Sensex opened 31 points lower at 18,493 while the Nifty opened at 5,542, three points off its Friday close. Nervousness ahead of the announcement of headline inflation data also added to the sluggishness, and saw indices range-bound in negative terrain. The market touched its intra-day high in the first hour of trade, with the indices around the opening levels.
The market pared some of its losses as inflation numbers were marginally lower. Concern is already building that despite easing headline inflation, high fuel costs could lead the Reserve Bank of India (RBI) to go in for further tightening measures in June.
The market dropped in the post-noon session on the possibility that the government may also increase diesel and domestic LPG prices. The indices touched their intra-day lows at about 2.30pm, with the Sensex at 18,320, down 211 points, and the Nifty off 57 points at 5,488. However, the market closed a little above these levels. The Sensex settled at 18,345, down 186 points and the Nifty closed at 5,499, down 46 points. The advance-decline on the National Stock Exchange was 413:992.
If the Nifty is able to keep itself above 5,540, we can expect the market to see some gains. The first resistance for the Nifty is at 5,650. But if the Nifty declines to below 5,472, we may see the market head for 5,390.
Among the broader indices, the BSE Mid-cap index declined 0.77% and the BSE Small-cap index fell by 0.74%.
BSE Healthcare (up 0.93%) and BSE Consumer Durables (up 0.22%) were the only gainers in the sectoral space. The losers were led by BSE Realty (down 1.47%), BSE Metal (down 1.45%), BSE Bankex (down 1.18%), BSE Fast Moving Consumer Goods (down 1.02%) and BSE Oil & Gas (down 0.97%).
Hero Honda (up 3.87%), BHEL (up 0.93%) and Bharti Airtel (up 0.83%) were the noteworthy gainers on the Sensex. On the other hand, Jaiprakash Associates (down 3.20%), Bajaj Auto (down 2.72%), Mahindra & Mahindra (down 2.71%), Tata Steel (down 2.64%) and DLF (down 2.58%) were the major losers on the benchmark.
Headline inflation came down marginally to 8.66% in April on the back of a moderation in prices of certain food items, in line with the government's expectations. Overall inflation, as measured on the basis of the Wholesale Price Index (WPI), has been revised to 9.04% for March, from the original projection of 8.98%. The revision was carried out as metal products were not incorporated earlier due to a programming error, the Department of Economic Affairs stated. In addition, the inflation figure for February has also been revised upward to 9.54% from the provisional 8.31%.
Headline inflation has been above 8% since January 2010. The apex bank has already hiked policy rates nine times since March 2010 to tame demand and curb inflation.
Markets in Asia settled mostly lower on the lingering debt crisis in Europe. Greece is expected to plead for a boost in its 110 billion-euro ($155 billion) bailout from European governments and the International Monetary Fund. European finance ministers are also likely to approve 78 billion euros in aid for Portugal. Besides, a Goldman Sachs downgrade of Japanese and Korean shares also hurt investor sentiment.
The Shanghai Composite declined 0.73%, the Hang Seng tanked 1.36%, the Jakarta Composite fell by 0.86%, the KLSE Composite was down 0.29%, the Nikkei 225 declined 0.94%, the Straits Times retreated 0.86%, the Seoul Composite ended 0.75% lower and the Taiwan Weighted tumbled 1.05%.
Back home, institutional investors-both foreign as well as domestic-were net sellers in the equities segment on Friday. While foreign institutional investors offloaded Rs161.35 crore, domestic institutional investors pulled out Rs11.53 crore from the stock market.
Some years ago when privatisation became the rage, many people predicted that state-owned firms would eventually be sold off. But that hasn’t happened. Even today, state-owned companies control the majority of resources and business. And they simply don’t make money
During the 1990s we saw a major change in the world’s economies. There was a major shift away from command economies and state-owned firms. Privatisation programmes, some successful, some less so, were the rage. Many firms that were sold off in those days have become quite successful, others, in the relentless creative destruction of capitalism, have gone out of business. What many people predicted was that the remaining state-owned firms would eventually be sold off. The reality has been quite different.
China is supposed to be the home of a billion capitalists. According to the National Bureau of Statistics, there are 40 million or so small and medium-size enterprises, which employ at least 75% of China’s workers. They produce 68% of industrial output, are responsible for 68% of China’s exports, 66% of the country’s patent applications and more than 80% of its new products; but they are definitely second class citizens.
State-owned companies probably make up all of the listed companies. Certainly the largest companies are. The 20 biggest stocks on China’s market include 12 state-owned financial firms and three state-owned energy companies. The financial firms alone make up 28% of the Shanghai Stock Exchange’s market capitalisation. Allowing private companies to list is contrary to the purpose of China’s stock market. State-owned companies anywhere are usually poorly managed. There is no incentive for profit and the managements are usually political hacks. So they often lose money. Allowing them to list gave them access to cheap capital.
Private companies in China are regarded with suspicion. During the recent slowdown, Chinese state-owned banks were required to make massive loans as part of a stimulus package. But this wall of money never went near smaller private businesses. Most went to large state-owned firms or local governments. Less than 10% was allocated to smaller firms.
China is hardly alone in the dominance of state-owned firms. Indonesia’s state-owned enterprises make up 40% of the country’s gross domestic product (GDP). Vietnam has the same concentration. According to official figures, the leading state-owned enterprises (SOEs) make up nearly 40% of the GDP.
In Brazil, the two largest companies, oil giant Petrobras and mining company Vale, are both majority-owned by the state and make up 26% of the market capitalisation of the Bovespa. Two large state-owned banks dominate Brazil’s finances. Banco do Brazil is the country’s biggest financial firm, with a fifth of total assets. The National Bank for Economic and Social Development (BNDES) accounts for 40% of the lending.
Despite mass privatisations in the 1990s, the Russian state still owns large sectors of the economy. Federal and regional governments control about 40% of the stock market capitalisation. These include various sectors: banking 64% of the market capitalisation, oil and gas 47%, and utilities 37%. In addition to the partially state-owned listed companies, the Russian state has full control of 19.2% of the manufacturing industry, 15.3% of the fuel production, 11.6% of the metallurgy and 25.7% of the chemical industries.
In India 246 enterprises are owned by the state. They employed almost 1.6 million people in 2008. There are more than 40 public enterprises already listed on India’s stock markets and these account for 37% of sales.
State-owned companies are not just small local companies. The largest corporations anywhere are in emerging markets. The 13 largest energy companies in the world, measured by the reserves they control, are now owned and operated by governments. Collectively, multinational oil companies produce just 10% of the world’s oil and gas reserves. State-owned companies now control more than 75% of all crude oil production.
Governments in emerging markets are not content with just owning the corporations; they feel that they should invest national wealth as well. Rather than returning the wealth to their population, either directly or through improvements in infrastructure, they created Sovereign Wealth Funds. With the exception of the Alaska Permanent Fund and the Norway Government pension fund, these funds are all in emerging markets. Most of them invest oil money, but the notable exception is China and Singapore. Together they control almost $2.5 trillion. They may make up only 2% of the world’s $165 trillion worth of listed securities, but the power is concentrated in a few hands. The funds in emerging markets are neither transparent nor accountable.
The main issue with state-owned enterprises is simply that they don’t make money. There are five incentives and disincentives that require managers of private companies to make a profit and none apply to state-owned enterprises. It is also unlikely that these things will go away as many people hoped. They exist because politicians want them to exist, and politicians never like to give up power unless forced to. Besides gorging on taxpayer dollars, the size of these companies and the lack of restrictions on their operations distort the rest of the markets and that impacts everyone.
(The second part of this commentary will be published next week. The writer is president of Emerging Market Strategies and can be contacted at firstname.lastname@example.org or email@example.com.)