Our long standing target of 18,300 on the Sensex is close but don't bet on the rally to continue much further
The market was up 1% on a weekly basis on the positive global cues. Sentiments also got a boost from 'in-line' corporate earnings reports and positive economic indicators. The market started the week in a subdued manner; however, it gained smartly over the passage of the week. On Friday (23rd July) the Sensex stood at 18,131 and the broader Nifty was at 5,449.
Tata Steel, Hindalco Industries, Bharti Airtel, Sterlite Industries (up 5% each) and Mahindra & Mahindra (M&M) (up 4%) were the top Sensex gainers during the week. Hindustan Unilever, Maruti Suzuki (down 2% each), Cipla, Jaiprakash Associates, and Reliance Infrastructure (R-Infra) (down 1%) were the top losers. In the sectoral space on the BSE, metal jumped 4% and capital goods added 2% while the healthcare index shed 2%.
The Asian Development Bank (ADB) expressed its confidence on the East Asian economy and said that monetary and fiscal stimulus should be gradually withdrawn. The multilateral lending agency noted that a strong first quarter had lifted the region's economies above peak pre-crisis gross domestic product (GDP) levels.
In the US, the National Association of Home Builders/Wells Fargo Housing Market index fell more than expected in July to its lowest level since April 2009 after a popular tax credit for homebuyers expired in April.
The government plans to present in Parliament a bill to implement the goods and services tax (GST). Finance minister Pranab Mukherjee on Wednesday (21st July) proposed a three-rate structure for GST - which will simplify the indirect tax regime - under which goods will attract 20% levy, services 16% and essential items a concessional 12%.
Mr Mukherjee proposed these rates to the state finance ministers at a meeting in New Delhi to evolve consensus over GST that is planned to be implemented from 1st April, next year.
Annual food inflation fell to 12.47% for the week ended 10th July from 12.81% in the previous week on the back of a decline in prices of vegetables, especially potatoes and onions. On a yearly basis, potatoes became cheaper by over 45% and onions by nearly 8%. Overall vegetable prices fell by 9.92%. Prices of pulses, however, were higher by 23.79% during the week under review over the same period last year.
India's annual monsoon rainfall was 17% below normal in the week to 21st July, improving after a 24% deficit in the previous week, the India Meteorological Department (IMD) said. Weekly rainfall in the key crop-planting period was above normal in north India's cane and rice-growing regions, but deficient in soybean-growing areas of central India.
US mortgage applications jumped last week and demand for home refinancing loans hit the highest level in 14 months, according to the Mortgage Bankers Association. The Labor Department reported that new claims for US unemployment benefits rose more than expected last week, after two weeks of sharp declines. Initial jobless claims surged more than 8% to a seasonally adjusted 4,64,000 in the week ending 17th July.
C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council (PMEAC) said that India's economy can expand at 8.5% in the current financial year despite monetary policy tightening. The prime minister's economic advisory panel said that inflation will be at 6.5% by March 2011. As such, the PMEAC's projection of inflation in its Economic Outlook for 2010-11 was a percentage point higher than 5.5% projected by the RBI. Mr Rangarajan attributed this to the impact of fuel price hike on inflation. It is widely expected that the Reserve Bank of India (RBI) in its 27th July monetary policy review will raise short-term key rates - repo and reverse repo - to tame inflation that has been in double digits for a fifth month in a row at 10.55% in June.
India's foreign exchange reserves rose to $281.901 billion as on 16th July, from $279.422 billion a week earlier, the central bank said in its weekly statistical supplement.
As per a UN report released on 22nd July, India was ranked the ninth most attractive investment destination in 2009 with a total foreign direct investment (FDI) inflow of $34.61 billion. The World Investment Report-2010, prepared by the United Nations Conference on Trade and Development (UNCTAD) said that India attracted sizeable overseas investment despite the overall drop in such inflows due to the global financial crisis.
After hawala and bank channels, remittances through online channels are expanding rapidly
The migrant population from India is pouring money into the country and while they do so, they are increasingly using online payment channels. Globally, the remittance or money transfer market clocks around $240 billion-$250 billion in revenues. India accounts for a major chunk of this portion and is the largest recipient of remittances globally, witnessing inflows to the tune of nearly $58 billion annually. Increasingly, more and more people are adopting the more advanced and efficient official money transfer channels, which has resulted in the industry growing at a compounded rate of 20% annually for the past few years.
While the overall remittance market is growing fast, the online remittance space can grow only when people who are habituated to do wire transfers through banks, start to adopt the new channel. Avijit Nanda, president, TimesofMoney, told Moneylife, "The challenge is to break the mindset and get the customers to adopt such superior services. If you are able to establish a proof of concept with these users and get them on board, they will never go back once they use the system."
Mr Nanda added, "Traditionally, customers were using bank cheques and bank wires, but with the emergence of online channels like ours, they chose to leverage on the technology benefits available in terms of transparency, efficiency of costs, pricing, convenience etc. Since there are no intermediaries or channels either on the sell side or receipt side, the cost of providing such services is significantly lesser than what a traditional money transfer operator works on. Hence, we have the ability to provide better pricing."
TimesofMoney is a digital payment services company and serves varied clients both in India and around the world. It offers services such as India Money Transfers, Global Money Transfers, E-Payments and Co-branded Cards. Globally, companies such as Western Union and Moneygram have a sizeable presence in this space.
Hawala networks as a channel for money transfer have been thriving for decades. The existence of such informal transfer systems are still a challenge for the official channels. Mr Nanda pointed out that hawala channels are the only alternative for the scores of illegal immigrants, who cannot approach banks since they would be immediately asked for their immigration status. Although hawala networks will never go away completely, he feels that the dependence on such channels is gradually coming down in favour of the more accessible official channels. "Banks and money transfer companies like ours have realised that there is a huge potential for making services available to more and more people by improving distribution reach, network and accessibility. Usage will come from these efforts. Gradually, people are adopting official channels which are more accessible. Hawala also comes at a significant cost. We have seen the dependence on hawala channels diminishing as we move ahead."
While the Baltic Dry Index (BDI) has been sharply down, the container rates for finished goods have been rising. Which of the two is a more reliable indicator of trade?
The BDI has long been considered as the most important shipping index as well as a global economic indicator. Since the index reflects the actual prices at which ships are being hired, it is supposed to be one of the most reliable real-time indicators of global trade. However, this index has been completely out of sync with the movement in rates for shipping's container segment recently. While the BDI has fallen sharply over the past two months, the index of container shipping rates has been stable and even rising.
The BDI fell to 1,700 points on 15th July, from a high of 4,209 on 26th May. Its all-time high was 11,689 on 5 June 2008. Container shipping rates, on the other hand, have been on a steady rise mainly because there has been a steady demand for containers. According to an international report, from a peak of more than 240 ships available in the container segment in March 2009, the availability has sharply fallen to 44 carrier-operated ships.
Container shipping from Asia to Europe rose 21% year-over-year in May 2010. Shipments from Europe were down 6.3%. Traffic from Europe to North America rose 15.8% in May after a 25.7% rise in April. From North America to Europe, traffic was up 13.2%, after a 14.8% growth in April. The trend in container rates is exactly the opposite of what the BDI shows.
The BDI has been a very volatile indicator of freight movement for the past few months because it has got completely linked to the Chinese economy, especially China's imports of iron ore. Another important factor is the BDI is highly dominated by the Capesize Index. The current fall in the BDI was mainly due to a fall in the Capesize Index. The Panamax and Supramax indices reported marginal falls compared to the Capesize Index.
The slump in the dry bulk segment has been mainly attributed to the slowdown in China's steel production. On the other hand, improvement in the container segment is due to the growing intra-Asian trade and to a large-scale cancellation of orders to build new containers during the 2008-09 crisis.
"There has been a considerable recovery in intra-Asian trade, leading to a significant growth in container volumes. The rate of idle tonnage has also reduced significantly," said Vinay Kshirsagar, CFO, Shreyas Shipping and Logistics Ltd. Commenting on the importance of the two indicators, he said, "Both the BDI and the movement in the container shipping rates are important. However, the BDI is much more volatile due to its sensitivity to the Capesize Index and dependence on China's trade. Even a change in China's government policy has an effect on the BDI. On the other hand, container rates are steadier as they reflect the diversified nature of the underlying demand."
S Hajara, chairman and managing director, Shipping Corporation of India (SCI), echoes Mr Kshirsagar's view on the BDI. "The BDI got a boost post the recession period, from the Chinese boom, which is now again on a downturn, due to the slowdown in China's steel production. The container segment on the other hand has done remarkably well," he said. "I don't expect any major revival in the BDI before 2011, but it should not go really low," he added.
Reflecting the improved business volumes, the German container shipper TUI AG recently raised its outlook for 2010, and Taiwan's Evergreen Group has ordered 10 new container ships. Danish shipper Maersk, the world's largest container shipper, has raised its 2010 earnings forecast, predicting that it would earn more than the $3.5 billion in profit which it earned in 2008.
PK Agarwal, chief general manager, western region, Container Corporation of India, India's largest container company, also agrees that there has been a steady growth in container volumes. He also pointed out to an increasing shift from break-bulk to containers. "In the past two to three years, a shift from break-bulk to container shipments for bulk commodities like fertilisers, iron ore and food-grains has also been witnessed. This also could be one of the many reasons for an increase in container volumes," he said.
So, should one rely on the highly lopsided BDI as an indicator of shipping trends or is it time to ignore it and look at container shipment rates as a more reliable indicator? We will keep a watch on this issue as it evolves.