Building a new economic theory based on behavioural economics won’t be easy
After the crash of...
The market ended with splendid gains in the week ended 1st October on positive economic triggers and across-the-board buying support by institutional investors.
The market opened strong on positive global cues on 27th September, the first trading day of the week, but gradually drifted lower and settled with meagre gains. It closed flat with a negative bias on Tuesday amid choppy trading. Huge selling pressure resulted in the indices closing below their psychological levels on Wednesday. The decline was led by Sterlite Industries, which lost over 8% after the Madras High Court ordered the closure of its Tuticorin plant on environmental issues.
The market bounced back in the dying moments on Thursday helping the benchmarks regain their crucial levels. Earlier in the day, the market touched its intraday low on reports of a rise in the weekly inflation numbers. It started the new month on a roll with the key barometers touching a 33-month high in intraday trade.
On a weekly basis, the indices clocked gains of 2% with the Sensex surging 399.86 points and the Nifty added 125.10 points.
The top Sensex gainers during the week were Hindalco Industries (up 7%), Tata Steel, DLF, Jindal Steel & Power (JSP) and BHEL (up 6% each.). The top losers were Oil and Natural Gas Corporation (ONGC), Hindustan Unilever (HUL) (down 2% each), ACC, Hero Honda and Reliance Communications (RCom) (down 1% each).
All sectoral indices ended in the positive territory this week. BSE Metal and BSE Realty gained 5% each while BSE Oil & Gas and BSE Fast Moving Consumer Goods (FMGC) were on the bottom of the list, ending flat.
Meanwhile, during the month of September, the Sensex gained 1,863.25 points (10%) to end the month at 20,009. The bellwether index touched a high of 20,267 and a low of 18,027. The Nifty raked in gains of 10% or 558.10 points last month settling at 6,029 on 30th September. The index touched a high of 6,073 and a low of 5,403 during the month.
Food inflation increased to 16.44% in the week ended 18th September, climbing 0.98 percentage points from 15.46% in the previous week. The rise in food inflation was due to a rise the cost of cereals, fruits, select vegetables and milk on account of supply disruptions due to heavy rains and floods.
This was the fifth consecutive week in which the rate of food prices has risen, after a spell of moderation in July and the first half of August.
The country's exports grew by 22.5% to $16.64 billion in August compared to the same period last fiscal. Imports, too, jumped by 32.2% year-on-year to $29.67 billion in August, according to the government data released this week.
During April-August this fiscal, exports posted a growth rate of 28.6% to $85.27 billion on a year-on-year basis. Imports during the same period grew by 33.1% to $141.89 billion.
Manufacturing activity in the country expanded at its slowest pace in 10 months in September, as per the Purchasing Managers' Index (PMI) data released on Friday.
The HSBC Markit PMI, based on a survey of 500 companies, slid to 55.1 in September, compared to 57.2 a month ago. This is the second month in a row that PMI has fallen. A reading above 50 indicates expansion in manufacturing activity.
The Asian Development Bank (ADB) earlier this week raised India's growth forecast for the current fiscal to 8.5% from 8.2% but expressed concern over persistent high inflation and the rising value of rupee, which could undermine future economic expansion.
The multilateral lending agency had projected a growth rate of 8.2% for 2010-11 in April. For the next financial year (2011-12), ADB has retained its earlier projection of 8.7%.
Two amendments moved by a US senator on restricted hiring of foreign workers and another aimed at preventing fraud and abuse of H-1B and L1 visas could not pass the Senate floor as they were blocked by the Democratic Party.
The two amendments moved along with the Creating American Jobs and End Offshoring Act, were blocked by the Democratic Party, senator Chuck Grassley, its author said earlier this week.
His first amendment would have prevented any company engaged in a mass lay-off of American workers from importing cheaper labour from abroad through temporary guest worker programs.
The second would have taken aim at fraud and abuse of the H-1B and L Visa programs, while making sure Americans have the first chance at high-skilled jobs in the United States.
Both amendments were being blocked by the Democratic Senate Majority Leader, the senator said in a statement.
Bullish consensus about emerging markets may cause the next bubble
In 1989, Japan was caught up in one of those bubbles that pop up regularly in different decades in different countries. Property prices in Tokyo's Ginza district were valued at over $93,000 per square foot (Rs41.85 lakh per square foot at today’s exchange rates). The Nikkei Index hit 38,957 in December 1989 sporting a PE of 78. If the Sensex were to hit that level of overvaluation, it would be at 80,000 now! The boom was fuelled by tariff protection that led to large trade surpluses that, in turn, led to easy and cheap credit from banks which pushed up all stocks and real estate. Almost 90 years ago, the world was in the grip of another mania. Surprise, surprise it involved ‘emerging markets’ like Argentina and Russia.
No two bubbles are alike but the way foreign investors have turned bullish on emerging markets, and especially on India now, it could mean that the overvaluation of the Indian markets we have been frowning at, could make us look foolish. The party has just begun for many. But since India does not have a pipeline of cheap credit, what would fuel the bubble?
A few weeks ago, the Open Market Committee of the US Federal Reserve issued its end-of-meeting statement. It said all of the usual things in its bland way about the economy but one sentence caught the attention of big investors. “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.” The Fed is saying that it wants to create inflation, when central banks are usually found fighting it. The Fed obviously believes that if rates near 0% have not been able to fight deflation, then the Fed is just going to do more of the same. It would print money to create inflation as part of quantitative easing part 2 (QE2).
This means that trillion dollars of new money could soon be injected into the US system. The question that traders are asking is that if a trillion dollars did little in the past two years, would another trillion be of any use? Doing the same thing repeatedly and expecting a different outcome is the definition of insanity but it leads to another question: If a trillion dollars cannot find much productive use in the US, where will it all go? Some of it will go into US stocks, some into commodities and a lot into emerging markets, which have now ‘proved’ beyond doubt that they are where the wealth-creation would be, in the coming decades. In short, if emerging market boom was merely a fanciful theory in the 1990s and became a plausible hypothesis in the 2000s, it is looking like a full-blown consensus in 2010. The issues that one associates with all emerging markets (corruption, poor governance, frequent policy shifts, mindless rules, a broken justice system…) are being brushed under the carpet. Watch a bubble take shape.