Stocks
Share prices to open sharply lower in the Indian stock market: Tuesday Market Preview

Concerns about the pace of the economic growth following the quake in Japan rattled investors worldwide

The local market is likely to witness a sharply lower opening on the back of a massive decline all across Asia on Tuesday morning. US markets closed in the red overnight on concerns over the impact of the Japanese quake on the global economy. Concerns about the a slowdown in economic growth in Asia following the devastation in Japan last week led the markets in the region lower in early trade on Tuesday. News of another explosion at a Japanese nuclear reactor rattled investors worldwide. The SGX Nifty was down 83.50 points at 5,472 compared to its previous close of 5,555.50 on Monday.

Yesterday, the Indian market opened flat, tracking the weak Asian markets in the aftermath of the huge earthquake that struck the north-eastern region of Japan on Friday. Concerns over the Reserve Bank of India's (RBI) move on interest rates in its mid-quarter policy review on Thursday also kept investors on the sidelines. Metal, oil & gas and banking counters witnessed decent demand pushing the indices higher in mid-morning trade.

The marginal rise in headline inflation for February resulted in the market paring some of the earlier gains and trading was range-bound thereafter. The indices touched intra-day highs in late trade, on all-round buying support that began post-noon. The market closed a tad below the day's high. The Sensex (up 1.46% or 266 points) and Nifty (up 1.58% or 86 points) closed at their best levels in eight days, both in terms of percentage and points.

The market is trading close to its extreme levels, after which there is a strong probability of a reversal.

US markets closed lower on Monday on concerns over the impact of the devastating earthquake in Japan last week on the world economy. Nuclear power stocks were down following news of explosions at Japanese nuclear power facilities. Shaw Group plunged 9.2% while Cameco Corp tumbled 13% on the New York Stock Exchange. Both nuclear power companies traded on volume that was more than 10 times their 10-day average. General Electric Co, which has combined nuclear ventures with Hitachi, declined 2.2% and was the top percentage decliner on the Dow.

The Dow fell by 51.24 points (0.43%) at 11,993.16. The S&P 500 shed 7.89 points (0.60%) at 1,296.39 and the Nasdaq declined 14.64 points (0.54%) at 2,700.97.

Markets in Asia were in the red in early trade on Tuesday on worries about the slowdown in economic growth in the region. Production shutdown at Japanese factories due to power outages and damage to infrastructure also added to the pressure. News of a third explosion at a nuclear power plant on Tuesday led the Nikkei sharply lower for the second day in a row.

The Shanghai Composite was down 1.65%, the Hang Seng tumbled 3.65%, the Jakarta Composite declined 1.10%, the KLSE Composite was down 0.63%, the Nikkei 225 sank 6.45%, the Straits Times tanked 2.33%, the Seoul Composite fell 1.35% and the Taiwan Weighted was 1.49% lower in early trade on Tuesday.

Meanwhile, oil prices fell on Monday on the prospect of lower demand from quake-hit Japan, but losses were capped by mounting Middle East supply concerns as Saudi Arabia sent troops into Bahrain.

New York’s main contract, light sweet crude for April delivery, shed 99 cents to $100.17 a barrel, after earlier falling below $99 for the first time in two weeks. In London afternoon trade, Brent North Sea crude for April lost 63 cents to $113.21, after earlier tumbling to a three-week low of $111.16 per barrel.

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Share prices still directionless: Monday Closing Report

Despite the rally today, it is not clear which way the market will move

The Indian market opened flat, tracking the weak Asian markets in the aftermath of the huge earthquake that struck the north-eastern region of Japan on Friday. Concerns over the Reserve Bank of India's (RBI) move on interest rates in its mid-quarter policy review on Thursday also kept investors on the sidelines. Metal, oil & gas and banking counters witnessed decent demand pushing the indices higher in mid-morning trade.

The marginal rise in headline inflation for February resulted in the market paring some of the earlier gains and trading was range-bound thereafter. The indices touched intra-day highs in late trade, on all-round buying support that began post-noon. The market closed a tad below the day's high.

Both the Sensex and the Nifty opened with a negative gap at 18,167 and 5,437, respectively. However, immediately thereafter, the market raced higher. There was some hesitation for a while, but eventually the indices headed higher and closed near the highs of the day at 18,439 and 5,532 respectively. The Sensex (up 1.46% or 266 points) and Nifty (up 1.58% or 86 points) closed at their best levels in eight days, both in terms of percentage and points. The advance-decline ratio on the National Stock Exchange was 913:752.     

Today, the market was trading close to its extreme levels, after which there is a strong probability of a reversal.

The market breadth on the Sensex and Nifty was positive. The Sensex ended with 25 gainers and four losers, while one stock remained unchanged, and the Nifty had 46 advancing stocks and four in the declining list. The broader markets under-performed the Sensex with the BSE Mid-cap index gaining 0.49% and the BSE Small-cap index adding 0.26%.

All sectoral gauges settled in the green with the BSE Oil & Gas (up 2.24%) emerging the top gainer. Other major gainers were BSE Metal (up 2.01%), BSE IT (up 1.48%), BSE Bankex (up 1.36%) and BSE Power (up 1.27%).

Reliance Communications (up 4.36%), Tata Power (up 3.72%), Reliance Infrastructure (up 3.48%), Tata Steel (up 3.27%) and Jaiprakash Associates (up 2.68%) were the top performers on the Sensex, while Bharti Airtel (down 0.40%), Hindustan Unilever (down 0.16%), ONGC (down 0.14%) and Hero Honda (down 0.06%) ended at the bottom of the list.

India's headline inflation rose marginally to 8.31% in February, driven by high food and fuel prices, which may prompt the Reserve Bank of India (RBI) to hike interest rates when it reviews the monetary policy later this week. The inflation rate stood at 8.23% in January this year, whereas it was 9.42% in February last year.

Finance minister Pranab Mukherjee has expressed the hope that inflation should come down to 7% by the month-end. He pointed out that monthly fluctuations in inflation do not give a correct picture.

Markets in Asia settled mixed with the Nikkei 225 suffering its biggest single-day decline in two years, dipping to its lowest level since November 2010. Japanese automobile, electronics and oil refining companies led the index lower, as most facilities have shut down after the tragedy that has destroyed infrastructure in the northeast region.

Other markets in the region were stable, implying that the earthquake will not have an immediate effect in neighbouring economies. The South Korean market was lifted on speculation that steelmakers would have to cope up with increased demand from Japan.

The Nikkei 225 sank 6.18%, the KLSE Composite shed 0.02%, the Straits Times declined 0.26% and the Taiwan Weighted lost 0.56%. The Shanghai Composite gained 0.17%, the Hang Seng rose 0.41%, the Jakarta Composite advanced 0.78% and the Seoul Composite surged 0.80%.

Back home, foreign institutional investors were net sellers of equities worth Rs243.58 crore on Friday, whereas domestic institutional investors were net buyers of stocks worth Rs112.24 crore.

Diamond Power Infrastructure (down 1.35%) has bagged an order worth Rs85.37 crore from Power Grid Corporation of India to supply 3,216km of 400KV HV DC line overhead conductors associated with transmission systems for Krishnapatnam UMPP (Part A). The company has also secured an order from Gayatri Projects for supply of equipment for the MPPKVVCL project. The revised order book of the company stands at Rs1,650 crore.

Educomp EduReach, the ICT division of Educomp Solutions (up 1.43%) has received a letter of intent (LoI) from the government of Maharashtra for implementation of ICT Schools Project-Phase 2 in the Nashik and Latur regions, covering 540 secondary and higher secondary schools from class V to XII. The order is worth Rs67.93 crore and it will be implemented on a build, own, operate and transfer (BOOT) model over a period of five years.

Fortis Healthcare (up 0.88%) has signed a partnership pact with TotipotentRX Cell Therapy, a leading provider of cutting- edge technologies in the stem cell and regenerative medicine market to set up centres of excellence offering cellular therapies and stem cell clinical trials, across selected Fortis hospitals. The centres will undertake stem cell clinical research relating to diabetes, cancer, cardiovascular disease and hospitals for processing stem cells before transplantation.

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China squeezing out fast-growing private businesses?

Chinese small- to medium-size private companies that contribute nearly two-third of the GDP, are being starved of capital, which is monopolised by large state-run enterprises. If these businesses close down, can the Chinese economy remain unaffected?

According to the Anglo-American newsmagazine The Economist, "China's success owes more to its entrepreneurs than its bureaucrats." Is this true? Is the Chinese economy really dominated by dynamic, small- to medium-sized private companies that are responsible for its phenomenal growth rate? If so, what would happen if these companies did not exist?

According to China's National Bureau of Statistics, China has between 40 million and 43 million small to medium-sized enterprises. Depending on the statistic, 93% of them are private and they employ between 75% and 92% of the countries workers. They also produce 68% of China's industrial output. In theory, according to one study, private businesses grew by more than 30% a year between 2000 and 2009.

Statistics and China should be taken with a grain of salt. According to a WikiLeaks document, vice-Premier and potentially the next Premier, Li Keqiang "confessed to the US ambassador that he did not believe official figures for GDP. They were "for reference only". This is certainly true regarding statistics about private or public enterprises in China for several reasons. The main problem is that all of the statistics and documents are in the hands of the government. In a country where an Olympic gymnast's birthday can change and there are strict limits on journalists, the reality may be quite different.

There is also a question as to whether private businesses in China are growing. In 2008 a survey in Guangdong province estimated that 10-20% of the 70,000 factories had closed and another 10-20% expected to close within two years. Of the 3,631 toy exporters, 52% had shut down in 2008 even before the crash, which probably created more devastation. In contrast, in 2009 alone local governments set up over 8,000 state-owned investment companies in order to take advantage of the cascade of stimulus cash.

What does appear to be true is that private companies tend to dominate factory-assembled exports, clothing and food. Like Korea, this sector of the economy is highly fractured and filled with very small businesses. Large industries like finance, communications, transportation, mining and metals are under the control of the central government.

A paper by a professor at the University of Hong Kong estimates the profits of businesses owned by the state were only 4% and that small private firms accounted for 75% of profits. In contrast, the Chinese department that technically owns the largest state-owned businesses insists that their profits rose 22% from 2003 to 2009 and that their share of GDP has been rising.
 
Even if we assume that private firms in China are more efficient and profitable than public firms, their future is not necessarily guaranteed. The main reason is that they have very limited access to capital.

Over the past two years, a great wall of money has been lent by state-owned banks. Most of the money went to state-owned enterprises and local governments. Only 4% or less went to small and medium-size enterprises.

The only source of capital for these smaller companies can be found in the shadow banking system which covers everything from loans from relatives, to Mafia-style loan sharking. Interest rates can exceed 300% with the average between 12 and 15%. The size of this banking system is unknown, but estimates of its loans last year are approximately 6 trillion renminbi or slightly smaller than the 7 trillion renminbi loans by the state banks.

Capital starvation is not the only threat to private businesses in China. According to Prof Huang Yashang of MIT, there was a huge expansion of state-owned enterprises in 2009. In certain industries like coal and steel and rare earths, state firms have either taken over or bought out private firms often utilising the excuse of safety.
 
In 2006 there were eight private airlines in China, now there is only one. The other seven were run of business through a combination of a price war and other obstacles like the refusal of the state oil firm to provide jet fuel. According to an agreement with the World Trade Organisation, China is supposed to open its telecommunications industry. Eight years later, it has yet to issue one license and the industry remains 100% in state hands.

It is often assumed that inefficient state-owned enterprises in China and many other countries would simply wither away in the face of competition from more efficient and globalised smaller firms. This is not true, if only for the simple reason that state-owned firms everywhere are an extension of political power and the last thing a politician likes to lose is that power.

Which leads us to the final question, if Chinese policy is guo jin min tui: state advances, private retreats, or renationalisation, then will the Chinese economy retreat along with its entrepreneurs?

(The writer is president of Emerging Market Strategies and can be contacted at william@emergingmarketstrategies.com or w.gamble@alrroya.com)

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COMMENTS

Shadi Katyal

7 years ago

One should read The Economist article "Let a Million Flowers bloom"which contradicts this writer. It explains that small industry are unable to get loans from banks thus a side industry flourishes with interest running upto 400 percent even and yet people are flourishing as they take risks and borrow from such moneylenders.
The state indeed will like to keep most of the idnsutry in her hand yet demand is much higher than goods produced

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