Market may keep climbing but in a halting manner
It looks like it will be a steep uphill climb for the markets. Despite thousands of crore of investment by foreign institutional investors and domestic fund managers, the bourses look like they are going nowhere.
The market registered its biggest weekly gain since early March, as it climbed 1.2% on Friday, with positive cues from the global markets triggered by bargain-hunting after China's assurance that Europe will remain a major investment market. On a weekly basis, the Sensex and the Nifty logged gains of 3% each.
The market tanked over 3% on Tuesday, its lowest in three-and-a-half months, as the Bank of Spain announced the takeover of small-sized savings bank CajaSur.
Besides, the growing tension in Korea also weighed on investor sentiments. However, the indices recouped a major portion of their losses the next day on assertion from China that it would stay invested in Eurozone bonds. The market continued its bounce-back for the next two days.
The top gainers this week on the BSE Sensex were Reliance Communications (up 11%); Jaiprakash Associates (up 8%); Reliance Infrastructure (up 7%); Sterlite Industries and Tata Motors (up 6% each).
The top losers in the index were ACC (down 4%); Tata Steel and Bharti Airtel (down 2% each) and State Bank of India and Maruti Suzuki (down 1% each).
In the sectoral space on the BSE, the realty index clocked gains of 4% while the oil & gas index advanced 3%. On the other hand, the consumer durables index shed 2% and the PSU index lost 1% on a weekly basis.
In a major corporate development over the weekend, the two Ambani brothers-Mukesh and Anil-on 23rd May decided to bury their differences and create an environment of harmony, co-operation and collaboration between their groups.
The truce comes within a few days of the Supreme Court declining to give any relief to the younger brother in the gas dispute.
The auction for Broadband Wireless Access (BWA) kicked off this week with 11 players, including Bharti, Vodafone, RCom and Tatas, in the race to acquire the two slots on offer. The reserve price is Rs1,750 crore for a pan-India BWA spectrum licence. After experiencing success in 3G spectrum auction, the government is now hopeful that the BWA auction would also bring in a revenue windfall. Earlier, the third generation (3G) spectrum auction, which ended on 19th May, ensured that the government would garner in excess of Rs67,700 crore, nearly double the base price of Rs35,000 crore envisaged in the Budget.
Food inflation eased to 16.23% for the week ended 15th May on account of a fall in prices of masur, fruits and vegetables. Inflation declined by 0.26 percentage points from 16.49% in the previous week.
The index for the broader primary articles group with a weight of 22.02% in the overall wholesale price index (WPI) declined by 0.1% to 298.9 from 299.2 for the previous week while the index for fuel, power, light & lubricants with a weight of 14.23% in the overall WPI increased slightly to 365.5.
The monsoon is expected to hit the Indian coast in early June. The Indian Meteorological Department (IMD) expects monsoon to be 98% normal this year, after a poor showing last year that hit crop output and fuelled rise in food prices.
Coming up with a bullish statement on the Indian economy, the Organisation for Economic Cooperation and Development (OECD) projected 8.2% growth in the gross domestic product (GDP) for India in 2010, saying domestic demand will continue to support a strong recovery. The growth is further expected to improve to 8.5% in the next year.
Tractor and sports utility vehicle (SUV) major Mahindra & Mahindra (M&M) has announced that it will acquire 55.2% stake in electric carmaker REVA, marking its entry into the alternative fuel-based passenger vehicle space.
The Reserve Bank of India (RBI) on late Wednesday allowed banks to draw additional funds from it by opening a second window, to meet the expected cash crunch in the system on account of Rs1 lakh-crore demand of corporates to meet their 3G fee and advance-tax payment requirement. The central bank also allowed banks to seek waiver of the penal interest if they have less government securities when they borrow more from the RBI.
The Planning Commission has pitched for linking of domestic fuel prices with those in the international market saying it is necessary for country's global "economic reputation." The government has already formed an Empowered Group of Ministers (EGoM) headed by finance minister Pranab Mukherjee on fuel prices deregulation.
The US Labor Department on Thursday reported that the number of newly laid-off workers filing claims for unemployment benefit in the US dropped last week by 14,000 to 460,000. The Commerce Department said that the requests for durable goods increased 2.9% last month. Excluding transportation, orders in the highly volatile manufacturing sector fell 1%. US companies are benefiting from rising demand both at home and in major export markets.
Neither a crash nor a rally… for now, at least
I had labelled the recent decline that started on 15th April as a short-term top. That still looks valid. By 25th May, the Sensex had lost about 9%. In the previous issue, I had also said that if the market cannot stage a strong rally from here, we will face another downleg-towards 16,000. This is exactly what happened. The Sensex hit an intra-day low of 15,960 on 27th May. Short- and medium-term investors and traders would have benefited from this call. These market calls (daily, weekly and fortnightly) are now posted on our website almost the same day. You can log on to the site and read them. You can also subscribe to our emailed newsletter and get these calls in your mailbox.
Following that decline, we have just commenced what seems like a powerful rally. Over two days, the market has risen by more than 650 points. It would be a third day of the rally at the time of writing (Friday, 28th May) and markets all over the world seem strong. Where are we headed? As of now, nowhere.
What we are witnessing now is a short-term bounce that always happens after a sharp decline. It means nothing. Within a broad range of 5,300 and 4,800, there will be small rallies and declines. There will be days when the market appears certain to have started a fresh long rally like the one we saw after the Budget.
Don't be fooled by it. If you are sceptical about my views, you have been watching too many bullish forecasters on television. If so, here are some numbers. After all, there is nothing better than to turn to some numbers to sober us down.
On 27th May, the Sensex hit a low of 15,960. Guess what was the high on 12th June last year? It was 15,600. In short, between the high of 12th June 2009 and low of 27th May 2010, almost a year apart, the Sensex was up just 2%! So what happened to the great rally of last year?
Here is another set of numbers. The Sensex closed at 17,127 on 30th September 2009. On 28th May 2010, the close was 16,863. Over eight months, the market was down 1.5%. Don't believe it? Just mention this to an average investor and watch the disbelief on their faces.
The simple fact is that almost all the gains you see from the bear market low of 8,047 in early March 2009 have come in just three-and-a-half months-March 2009 to mid-June 2009. A year has gone by and the market has not gone anywhere, despite thousands of crores of investments by foreigners and domestic fund managers. It will continue to be a steep uphill climb for the market. The short-term trend is up; but the medium-term trend is neutral until we have more evidence.
The country’s largest stock exchange is introducing a revamped system for short-selling in an effort to lure investors to the bourse. However, it may not bring in the volumes immediately
In a bid to attract more liquidity, the National Stock Exchange (NSE) is modifying the existing structure for short-selling of securities, and plans to introduce the new system in a couple of weeks.
Until now, the exchange was offering a one-month window for investors to settle short-selling transactions. It will now extend the window to a full year, after the Securities and Exchange Board of India (SEBI) issued new guidelines to that effect earlier this year.
The NSE’s official spokesperson clarified that it is modifying the existing securities lending and borrowing mechanism according to the new guidelines by SEBI in January 2010. “The new system is being set in place and will take a few weeks to be implemented. We will now facilitate tenures of up to a year, instead of a month.
So someone who wants to borrow or short sell can return the security or money to the seller according to a predetermined contract which could be anything between a month and 12 months.”
Speaking about how the exchange hopes to draw trading onto the bourse and away from the over the counter (OTC) market, the spokesperson said, “This new system will help because it will provide more liquidity to the system, which will attract Indian and foreign institutional investors. SEBI has issued these new guidelines to allow more liquidity in the system and it's only after the system is set in place that the results will start showing.”
But will the revised structure succeed in drumming up volumes on the stock exchange? With this move, the exchange hopes to shift some of the action away from OTC markets to itself. Explaining the dominance of the OTC markets, Alok Churiwala, MD, Churiwala Securities Ltd said, “We need to understand why FIIs deal in OTC markets. Those markets are perceived to be efficient by the FIIs.
They are used to dealing there. They may also not be comfortable with an exchange’s regulatory and disclosure norms. The OTC markets have been functioning fairly efficiently for them to consider shifting to exchanges.”
Mr Churiwala is cautiously optimistic about the proposed new system. “The current system is not a very big hit as of now. The fact that it is being extended to one year may lead to greater liquidity. It is definitely a step in the right direction. But we should be cautiously optimistic in this regard. It will take some time for the new system to work out,” he observed.
For any participant, a one-month horizon is more determinable than a one-year horizon. The people who take a call for a year are mostly the large players and FIIs. But to make a market, you need all sorts of participants, including retail ones.
“What the longer period will do is reduce transaction costs. It does make sense for someone who wishes to take a long call, as he does not have to keep rolling the trade,” commented Mr Churiwala.